Hey, this is Sasha Evdakov, Founder of tradersfly.com here to answer a few of your common questions about trading, investing in the stock market.
This week’s question is “Is there any way that we can predict earnings?”.
Earnings come to a handful of times for the year, and it whipped around the stock. It will be great if we can predict earnings or know which way the stock is moving and here’s some insight for you.
When you look at earnings or trading through earnings, I usually don’t recommend you trade through earnings unless you plan to hold the stock for multiple quarters or even years.
Just because earnings are good or bad, this does not always mean the outcome for the stock is the same for the next quarter.
For example, what I mean here is when you have good earnings even if you believe you have an advantage when it comes to the earnings report this does not mean that the stock will react favorably.
And the inverse is true is if you have bad earnings sometimes when the stock releases bad earnings stock can move up, in fact, due to the demand or the future outlook that they project for the next quarter based on some of the new products that they could be announcing.
It’s always important that you understand that just because the company has good or bad earnings that do not mean that the stocks are going to go up or down. Good earnings do not mean up, and bad earnings do not mean down.
When you’re trading earnings if by chance you happen to be in a safe position by the time earnings come around even then it would be wise to take 80% to 90% up the table to reduce your risk. What I mean by this is, for example, let’s say you’ve been in stock for six months or three months or one month and that stock exploded and you still maybe have not had earnings yet.
If you had a thousand shares, you can take seven hundred shares off because you already at such a profitable position and then let the remaining shares ride if you believe you have an advantage through earnings or if the company has been doing fantastically well. And in that case, you could risk a little bit of those remaining profits through earnings.
But in general if you are a new trader, if you’re just getting started, if you are a beginner trading through earnings can be very dangerous, it’s one of those things that will make your stomach churn unless you’re just holding that stock for multiple years to come. Otherwise, the way to trade it would be that if stock already moved so far and then you have earnings coming up, then you still take 80-90% of the table, and maybe let 10% ride.
But in general, I would recommend getting out before the earnings report, so that way you have a peace of mind. Because you can always get back into the stock later. Don’t play a guessing game with your hard earned money because that’s in the end what earnings, trading, or playing is all about.
It’s a guessing game, and it’s almost like gambling when you’re trading earnings. Again, unless you’re holding it for multiple years to come because you’re invested in the company for the long term. But if you’re a trader who trades within three months, six months, if you have three weeks that you hold a position then, by all means, you need to be out of those earnings. Because you don’t have enough profits and your outlook for the stock is a lot smaller regarding the time frame.
Looking at Charts
Let’s take a look at some charts and see how this plays out in individual stocks.
Here for example, as we look through Netflix, you can see probably where some of those earnings reports are. If I look at Netflix right here, you could see that right here there was an earnings report. Even though the stock was climbing to the upside, we had an upside move, the earnings report right here came out, and even though I can’t remember if earnings were good or bad, I know that between this one and this earnings right here, the earnings were okay and pretty good.
But the reason that the stock went down if it was either this one or this one right here was actually due to subscriber growth.
But earnings were fine. There was nothing wrong with the earnings, but it’s due to the subscriber growth that they projected. Just because earnings were good, that doesn’t mean that stock is going to go favorably.
Also, it depends on how far that run has come, so if you look at the overall picture, you can see the stock has been moving in quite an upward fashion, and maybe it’s overextended.
Even if earnings are significant, people at this high valuations all the way over here at this level are raising while the stock is probably a little bit stretched. And if it’s a bit spread, then the earnings need to be explosive to justify this high price.
For example, if you pay a premium price for a car, a premium price for a camera, you won a premium product, so the same thing here. If for that stock to continue moving to the upside even further to let’s say the 150 level or even higher, you need those earnings to be explosive to justify even higher prices.
But because we’re so far advanced already, the earnings no matter how good they are if they are just decent, it may pull the stock down. That’s always the case, but sometimes that happens.
Factors that traders look at
The same thing here, I like this example so you can see that here if we make a stair-step pattern, you can almost see where those earnings are, and sometimes if you take a look, you’ll be able to look at the earnings areas. For example, these Gap towns are typically earnings plays like this one right here, that’s an earnings play.
If you take a look at Apple, the same thing, you can see right off the bat where there’s some struggle or problems within the company right here. This potentially could have been earnings, I don’t think it was, but right here there were earnings.
So looking at it, the company overall is very well liked and very favorable in the community but just because Apple doesn’t mean that it’s going to continue moving higher. Because already if you look at the pattern in the extension, I’ve talked about his one before, multiple times we have an A to B, and then from B to C, and then C to D.
We’re already overextended, a little pullback even if it’s just to this B level right around this price level, and if we bounce here, that’s still fine.
At least the pullback is in session but because the stock is already extended to justify higher prices at those multiples and those price points it just becomes a little bit stretched.
It’s crucial for you to realize that even if earnings are good, that doesn’t mean the stock will continue moving forward.
And if earnings are bad, that doesn’t mean the stock will sail off. Because there’s a lot of other factors that traders look at between potentials for the future, between the international markets, between the currency problems that the company is having and some headwinds and other problems that could come about in the future for that stock.
As far as trading days goes, if you’ve been in let’s say Netflix here, and we take Netflix. If you were in Netflix the way that I would trade this unless you would say you were holding it for quite a while, let’s just say you had a little run up right here, if you’ve been in Netflix for quite a while and you have earnings coming up sometime in this area, then you get out of that stock, right there, 80 to 90% and you could take a chance.
And if you look at it like this, if we go more into the daily factor, here if you were fortunate enough in Netflix to buy it at the lows. So we’re here, we buy at the lows, and that stock moved up on you, right here it moved in your favor, you were maybe in the trade, maybe less than a month.
When you were up at those high price levels, right around here and you have earnings coming out, this is why you sell 80 to 90% of your shares. Because you don’t know if it’s coming back right here to where you got into the stock.
Even if you got it right here, you don’t know where that stock is coming back. As you climb this upward motion if you were able to value buy it, you take a little bit off, and you take another 10% or 50% off or 30% off. And by the time you get to earnings because this was earnings right there before that earnings you’re out 80, 90, 95% even a 100% of your shares.
Because you can always – now, what it would allow you to do is you got back in again at this price level. So why not, you’re getting back in at the same price point that you were in earlier. That’s what you want to do, and the same applies right here, take a look when you come back right here to this price point.
Again, if you got in somewhere around this price point at this support bar, stock climbs higher. You take a little off at this price level, and the stock rises higher. You take a little off before earnings you get out completely and then it would allow you to buy more shares around this price level, and then again, you could wait and based it and get more back where you were at this price point around this $87. And buy a little more, and then it bounces and then again get out a little bit, and then continue following the trend.
Here you don’t have earnings, there are no earnings at this price point, but that’s what you’re doing is if you have earnings coming around the corner like this one or even like this one over here then take 80, 90% of your shares off if you’ve already been profitable and probably 100% of your shares. Because you got to always get back into the stock at a lower price.