Hi freeus,
Selling before earnings depends on the specific stock, how it has traded going into earnings, and what has happened historically going into earnings. History tends to be a guide to the future; the trading patterns are noted by the market, and so tend to repeat themselves as scalpers and momentum players become significant participants.
So, the first thing I would look at is how the stock has traded during the week or two leading into earnings. If there has been a strong ramp going into earnings, that usually indicates a "sell on the news" phenomenon will occur, regardless of what the reported figure is. I would then look back at previous quarters, and see if a similar pattern occurred, and check how the reported earnings differed from consensus. The market will most often anticipate a repeat performance from a stock that has consistently beaten expectations over several quarters, and that rally will tend to occur more and more before rather than after the actual report. So the stock will ramp strongly up going into earnings, only to sell off despite beating the Street. Also, this pattern tends to become more pronounced in subsequent quarters. OTOH, if a stock has consistently beaten Street expectations, yet has rallied into earnings in a decidedly lukewarm way, this sets the stage for a prolonged rally on the news.
I think it is also important to check not just the consensus expectation, but also the whisper number. Sometimes a stock will consistently beat the Street and the whisper, and this comes to be expected. In that instance, if the reported figure beats the Street, but not the whisper, the stock will most often sell off on the news. However, if such a stock instead beats the whisper, then the stock will likely rally strongly. A recent case in point is AMCC:
askresearch.com
Going into earnings, AMCC was forming an ascending triangle, with the base at a horizontal trendline of about 80, and the hypotenuse forming the rising trendline below. Most often, such a formation will break to the to the same direction as the overall trend which leads into the formation (in this case, down). However, AMCC began to rally some going into earnings, while still within the triangle formation. When earnings came out, the figure beat the Street and the whisper. AMCC proceeded to immediately break out of the formation to the upside.
Next time earnings are reported, the market will remember that AMCC did this, even after a prior topping formation and strong selloff with a gap down. So, the market will come to expect big things from AMCC, and you will probably see a more pronounced ramp going into earnings (sometimes called "anticipatory upswing"). If the whisper is not then beaten, the stock will sell off hard, even if it beats the Street, much to the puzzlement of those long the stock. For these types of stocks, I think it better to not hold through earnings. If you can't decide, or the situation seems equivocal, at the very least I'd have a tight stop in place. Alternatively, you could sell half the position, and place a stop underneath the other half that gives you a bit more "breathing room", enabling you to take advantage of a possible post-earnings rally, while minimizing the chance that your stop gets gunned.
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The comment about "building a bridge" referred to the island in CPN's chart which formed in December.
askresearch.com
An island formed after an extended run (up or down) usually indicates reversal, so in this case, it might be part of the topping formation in CPN which began forming in October. But false signals from island reversals are not uncommon, and so I was wondering whether CPN might be filling the gap, and thus creating a "bridge" to the "island."
I am puzzled by this chart, because the candle that was formed on Friday is a "hanging man", usually a bearish indication of a change in trend. So here, it would most probably indicate that CPN would reverse to the downside. But this hanging man occurred above resistance at the previous peak, partially filling the gap, and this would have bullish implications.
So it is hard for me to make a compelling case for CPN either way at the moment, since I can't tell what the significance of this candle is, bullish or bearish. If CPN trades down from here on strong volume, that would indicate a confirmation of the island reversal, however. The probabilities would favor a downside reversal here I think, because of
1) The recent topping formation
2) The fact that CPN is trading below its moving averages, which now represent overhead resistance
3) The island reversal seems to be part of the topping formation, and may well represent confirmation of that formation
But, it is hard to disregard where the last candle sits, i.e., above short-term resistance, and in the gap. Also, it is hard to disregard CPN's position with respect to the power crisis, from which they stand to gain, since they are the largest independent supplier of power in the country, they are acquiring power generation capacity like there's no tomorrow, and most of their power plants are "green", and therefore politically favored.
So, I'll watch this one with interest. Hopefully, there's a lesson for both of us here.
JMVHO, as always..................
WS |
