How To Make Fat Profits Off Earnings Reports

By Mark Shawzin

 

For the past several weeks, I’ve voiced my antipathy about trading during the July-September trading “season” in the FX markets.

If you’ve been following along, the reasons are obvious: there’s no follow through with trends, the trading volume is low and price activity is lackluster overall.

In fact, there’s not much at all going on right now in the forex markets. Just a lot of back and forth action. Sure, there are lots of small movements within ranges if you like to play those.

But I prefer to play the bigger moves, large trends, and even mini trends …

I’m not interested in range-bound markets which is why the U.S. Dollar Index (USDI) is not a good look for me and my followers at the moment.

Let me show you what I mean before I go to where the REAL action is right now during this summer season.

(Hint: from the headline, I bet you’ve figured out it’s in the stock market during the wild earnings season we’re seeing right now.)

I’ll get to that in a moment.

First, the USDI …

Here we can see prices have slowed to a crawl. The dollar is largely unchanged from the week before, and there’s been a very small range from high-to-low.

I’ve also taken the trouble to highlight the kind of action I look for: big trends and mini-trends. Those are where the action is, unlike now.

Unfortunately, last week’s USDI price action is consistent with my expectations. We’ll continue to see whipsaws and range-bound trading in most FX pairs. This could last through September in a worst case scenario.

That’s why I’ve shifted my attention to alternative asset classes, notably the (US) stock market.

While I think it is likely the stock market itself will be somewhat range-bound through the summer too, the diversity offered by the vast stock selection coupled with “earnings plays” and other strategies, offers a much more fertile sandbox to play in.

And right now we’re in peak earnings season.

Each day there’s 25-50 companies announcing their quarterly earnings before or after the regular stock market trading session.

Typically, the more volatile companies will move 5%-10% following the release of earnings. (Those are typically the tech companies).

And that’s why based on historical chart pattern price behavior, I’ve been successfully handicapping stock price actions following their earnings report.

Last week, I had two winners and two break-even trades where I predicted the stock would drop on earnings and shorted it accordingly.

I made $6 on MKSI and $3 on JNPR. I also broke even on PCAR and GPI. (And a couple of weeks ago, I made $25 on RHT too.)

So how am I doing it?

Let’s start with the break-even trades so I can show you how to handle things when they don’t work according to plan …

Here’s PCAR (Paccar Inc):

I decided to short PCAR the day before earnings based on the double top and a descending triangle pattern.

Unfortunately, the stock didn’t drop as I hoped. While it did fall during earnings day, the decline didn’t hold.

So how did I break even on my short sale?

The trick is to stay calm and wait for an exit if the market opens against you (which PCAR did). You see, you get an early warning with these trades: when the stock opens against you, your earnings trade likely hasn’t worked.

But remember, stocks can move 5-10% on earnings.

Movements are violent and this gives you a chance to pounce on an opportunity to get out at a break-even price the moment it happens. And that’s exactly what I did.

So even when the stocks “busts” the pattern you’ve identified earlier (i.e. the basis for your short), you can still break even if you’re careful and wait for a volatile movement to get you out without a loss.

And when it happens, just put it behind you and wait for the next opportunity.

Let’s look at my next trade that didn’t work …

Here’s GPI (Group 1 Automotive Inc):

I went short GPI the day before earnings too on the basis of the double top plus a historical double top (and subsequent decline) that are too far back in time to show on this chart.

But the result was the same as PCAR. GPI opened dramatically higher than where it closed pre-earnings … against our short.

With patience, we still got out at a breakeven point. In fact, we got out at $63 in GPI and made $1 despite the stock opening a huge $8 against our position. (Anytime you can be wrong on a trade and still make a bit of money is a good thing.)

As it turned out, $63 was the low, luckily enough.

But that’s why you need to stay cool if the stock opens against you post-earnings. Always look for the chance to get out at or near break even.

Be patient but don’t wait too long — take that chance to get out when it’s offered.

This results demonstrates the advantage that shorting a stock has over buying an out-of-the-money (OTM) put. An OTM put will pretty much go to zero and stay there when the stock gaps the wrong way. There’s usually not much of a chance to bounce back.

But going short can give you that break-even point if you don’t lose your cool.

And that’s enough of the tough trades that didn’t work

Now let’s look at a successful one: MKSI (MKS Instrument Inc).

As you can see, there were a lot of topping patterns in MKS. That was the basis for the short.

So we shorted at $98 and waited for earnings. The price gapped down nicely, and we pocketed $6/share post-earnings in what was basically an overnight trade.

Just like cutting losers to break-even size, you need to take a profit quickly in these circumstances too. Otherwise the price may retrace to fill the gap (MKS did this) and your profit is gone.

To protect myself, I often set my stop loss at the gap so the worst case scenario is that I make SOME profit even if I don’t get all of what’s on the table.

We did well with JNPR (Juniper Networks Inc) too …

We sold short based on the double top at a bit over $28.

Then the gap down gave us an easy overnight profit of $3/share.

So there we have it: last week netted us two break-evens (one was actually a small profit) and two nice gains.

And that’s how I’ve been making some serious cash utilizing my price analysis of stocks prior to their earnings release.

I’m not saying this strategy is without risk. You’ve seen what can happen when the gap goes the wrong way.

But by playing it cool, I can minimize my losses and keep myself ready for the next trade when it comes.

And that wraps up this week.

The forex summer doldrums are still here, but earnings season gives us lots of profit opportunities in the meantime.

Would you like to learn how to spot these kinds of plays yourself before more earnings come out?

Just as I’ve shown you today with MKS and JNPR too, the exact same profitable patterns show up in FX as well as in the stock market.

[Download my 21 power strategies here at this link]

The key point is that once you learn the ideas and concepts, they’re with you forever.

So if you’re interested, just check out that link.

Talk soon,
Mark Shawzin

 

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Hi, I'm Mark Shawzin. After working on Wall Street as a trader for 23 years, and managing private client accounts for the past 13 years, I've put together my 21 most powerful Forex strategies.

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