Red Light > Green Light

The first thing I want to highlight is the importance of being aware of the prior days High/Low/Close for all vehicles you trade.  If you are trading the Index or commodity futures, I highly recommend drawing on your charts a Red Line at the prior day’s high, a green line at the prior days low and a 3^rd color (I use Yellow) for the prior day’s close.   When adding these lines, you will be amazed at how often these prices act as intraday support and resistance.  This is very easy to do in ThinkorSwim and I imagine most trading platforms should have drawing tools on the charts.  I would do the same for your top few ideas and “in play” stocks for that trading day.  Keeping too large a watch list will make this task very time consuming.  You will also put yourself at greater risk of missing your top ideas.  I have learned the hard way and recommend:  KEEP A MANAGEABLE AND FOCUSED WATCHLIST!   

  

The focus of this post will be on trading reversals on stocks that have reported earnings that morning or the prior evening.    As a trader who primarily trades on the long side, I would often disregard companies that I saw trading sharply lower following an earnings release.  BIG MISTAKE!  The initial reaction is often wrong and “if” these reverse they can offer some of the best trading opportunities for that trading day and beyond.   This same play works for companies announcing secondary offerings or other fresh news that is perceived as bad.  

Now the following suggestion is not for all companies that report but for a select few that you may have traded in the past or have been stalking an entry in recent trading sessions.   Many traders make the mistake of taking names off their watch list at the first site of bad news.  This is not meant for the Coca-Cola’s (“KO”) of the world but more for names that would likely appear in the IBD 100 (“Cloud Computing”, Solar & Lower Float Energy stocks).

Take note of the stocks making big moves after hours or pre-market.  I focus primarily on mid & large caps so for me this eliminates a bunch of potential targets.   After finding a few potential ideas, I would make note of the after-hours/pre-market highs and low for the stocks as these levels can show you whether the buyers or sellers are in control once regular market hours commence.

I would recommend setting an alert at prior days close and pay close attention when these alerts fire off.   I am not saying just immediately buy the stock but watch how the stock reacts at the flat line level of the day.   The point of this is to recognize that the stock has absorbed bad news.  The shorts got the earnings miss, bad guidance or miscellaneous bad news to support their thesis yet the stock would not stay down.  The buyers showed up and sent the shorts scrambling.   

You can also add a line for the opening range (first 30 minutes) high to your charts as this often acts as a key level or inflection point for entering the gap and starting its price recovery.   

Of Note: This also works for shorting a stock that was up sharply on good news but was met with immense selling pressure.    Same concept but in reverse when setting your alerts and watching the price action.     

Below are charts and commentary for a few stocks that initially traded sharply lower following an earnings release.

First up is Cypress Semiconductor (“CY”).   CY had missed its sales target and issued downside revenue guidance sending the stock significantly lower on the open.   The 6% of the float that was short must have been patting themselves on the back for their bearish bet on the stock.  The stock prints its daily low between 9:35-9:40 and takes out its opening range (blue line) high after the start of its earnings conference call just before Noon.  You will notice the importance of the prior day’s high/low/close on this chart.  CY runs into the prior days high before flagging out at the prior days close setting up a strong run to close out the session.      

CY 5 Minute

I have also included the daily chart to display how these types of days become sentiment changing inflection points for the stock often sending it on a sustained advance. 

CY Daily

Next up is Juniper Networks (“JNPR”). The Stock trades significantly lower in post market trading after reporting an in-line quarter and slightly missing consensus revenue estimates.  At its lows the stock was trading off by almost 12%.  The short base (5% of float) must have been ecstatic as “in-line” is just not enough for these growth technology stocks.  However, after the conference call it became clear that the Company was on track to achieve 20% revenue growth for the year and the weakness in the current quarter was simply a timing issue not a slowing of demand.  

The stock catches an upgrade from Oppenheimer, opens green and never looks back.  Notice how it struggles with the red line (prior days high), once that level has been taken out she is free to go.