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I want to review a common scenario investors come across as they wake up to their portfolio in the morning:
The Dow is up 100 points; it's going to be a good day.
Stock A is up 1.5%. That was a good pick!
Stock B is up 2.3%. What a beast!
Stock C is down 10% and falling fast! What the heck???
It turns out stock C reported earnings above expectations, but investors are not happy. So what happened?
And why is this stock going down when they had a good quarter above everyone's expectations?
There are many reasons why a stock might go down after a solid earnings report. It could be profit taking, margins are weakening, competition or maybe the CEO is leaving. But more often than not, computer-driven trading is forcing investors to sell when they don't want to. Some of the aggressive moves lower in stocks are scaring investors into selling, when they actually should be buying for the longer run.
What is earnings season?
Earnings season happens four times a year and is typically the busiest around weeks four through seven of the quarter. This is when the majority of the S&P 500 companies will report how their business has done in the previous quarter. A company will report revenue and a bottom line number called earnings per share, or EPS. This number is basically the company's profit for each outstanding share of common stock.
Often the company will have a conference call and issue guidance for the month or year ahead. This gives analysts, traders and investors a clear picture of what to expect in the coming quarter.
Why do stocks move so much after earnings?
Traders will quickly react to the news, buying or selling the stock based on whether that outlook is positive or negative. If the news is a surprise, the market can be shocked and react in a major way. This is why a stock can move over 10-20% in one day.
In today's modern markets, computers can actually read headlines and trade off of them in a heartbeat. Computers can react quicker than humans, often causing irrational moves higher or lower. The big moves can lead to human panic as they see their stock dropping fast and their losses adding up.
It's hard for humans to win the speed game, but with patience and a little discipline, investors are taking advantage of the irrational moves the computer traders create.
If you've been in the market for any length of time, you've probably seen a perfectly good stock nosedive in price for no apparent reason. You may be looking at the aftermath of high-frequency trading activity. Their favorite tactic is to trigger panic selling on a strong company. They buy as it bottoms and collect big gains as price returns to a normal level.
Zacks Counterstrike portfolio scans the market for these "manipulated price drops" - and turns them into profit opportunities for human investors.
Right now, this strategy has detected a selection of stocks that appear to be on the verge of their comebacks. The goal is quick and consistent double-digit gains. Don't delay. Access to these stocks closes midnight Sunday, February 25.
Whether you are trading earnings before or after the number, knowing who is reporting is key. Paying attention to the list of companies reporting every week can be found via the Zacks earnings calendar.
Use these steps below to find ripe opportunities after a stock has reported earnings.
1) Watch for Moves in the Zacks Rank -- The first step I take is to check the recent Zacks Rank #1 (Strong Buy) stocks every morning. When I see a fresh stock on the list that has recently moved lower in price due to earnings, I get interested. I then check the EPS numbers and guidance to make sure there was no big negative signal. If not, I go on to the estimates page for the stock and see if analysts are taking the numbers up or down.
Why would investors sell a stock, when analysts are raising estimates and still bullish? Well, this makes me think there is some manipulation brewing and the stock has moved irrationally lower.
2) Check for Technical Support -- After the fundamentals check out, it's time to look at the chart. Moving averages, trend lines and Fibonacci levels are used as support levels by computer and human traders alike. If I see a level tested and support is confirmed, it's time to buy.
3) Entry Price, Target and Stop Loss -- Entering the stock takes patience, but its paramount you get in at a decent price. When entering a trade, you should have a target, or even multiple targets, where you will sell and close out a winning trade.
Capital preservation is paramount. Stop losses are important for investors and traders so they can live to fight another day. You must not get married to a stock! Taking losses are just as important as taking winners and stop loss orders assist in that discipline.
How to Capitalize
The end of earnings season presents investors with opportunities to take advantage of irrational moves whether the markets go higher or lower.
Counterstrike is designed to sniff out when High-Frequency Traders have manipulated a stock's price. We take advantage by buying the best of these unfairly beaten-down stocks. Then when price moves our way, we lock in gains and look for the next opportunity.
We're currently holding 8 stocks and getting ready to trigger 1 new trade from my watch list Monday morning. Our goal is to generate quick and consistent double-digit gains.
Get in today and as an added bonus you may download our just-released Special Report, 5 Stocks Set to Double. It spotlights 5 companies Zacks experts predict could grow +100% or more over the next year.
To maximize the profit potential of our recommendations, we must limit the number of members who have access to these picks. So if you're interested, be sure to look into Counterstrike right away. The portfolio closes to new investors midnight Sunday, February 25.
Jeremy Mullin has been a professional trader for more than 12 years with specific expertise in profiting from patterns set by High-Frequency Traders. He is the editor of Zacks Counterstrike portfolio recommendation service.
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