As a trader, this is my favorite time of each quarter. I love it when earnings begin to roll out because the increased volatility generally sets up excellent trading opportunities. In early April, I wrote about the strong earnings report that Nike (NKE) enjoyed in March and I highlighted a strong reward to risk entry point. For a refresher, take a look:
NKE posted better than expected revenues and earnings, then buyers bid the shares up immediately on massive volume. I don't like to chase these moves, but once I see the accumulation, I wait for a pullback to relieve overbought oscillators and to test gap support. That came just a week later. There's a reason to wait past the opening bell to jump in. Normally when stocks gap higher, market makers are on the other side of the trade providing liquidity. Market maker activity is the primary reason that gaps usually fill back to the prior close. When demand is too great, however, we see what happened with NKE. Volume is massive and the gap fill to the bottom of the gap never occurs.
Here are two more recent examples - take a look:
In both cases, revenues and earnings blew away consensus estimates on Wall Street, volume exploded higher and market makers couldn't stem the tide of buying. Eventually, however, both of these stock returned to critical gap support areas, maximizing potential return for astute traders while minimizing risk. Throughout earnings season, these are the types of individual stock setups you can find. Believe me, they don't all work, but appropriate entry levels can certainly lessen risk significantly.
On Monday, October 7th, I will be hosting a FREE and LIVE event discussing how the combination of strong earnings and strong technicals can reward traders if they exercise patience to allow trades to set up for them. Earnings season kicks off on Tuesday with Alcoa (AA) reporting. I hope you can join me on Monday evening. For more information, CLICK HERE.
Happy trading!
Tom Bowley
Chief Market Strategist
Invested Central
