How to Jump Start a Trade

This article by Leo Fasciocco nicely summarizes the essence of trading earnings breakout.

There's nothing like taking an initial position and seeing it start to work for you immediately.

Many top traders advise that, if a new position starts to go against you right from the start, you are probably getting into trouble. For stock investors, it's been a tough year on the long side. As I looked over the market action of the past year, I asked myself the question: "What is 'working' for the bulls?"

The answer: "Stocks with significantly positive earnings surprises."

Some of this year's big stock winners were companies that came in with big earnings surprises.
An ideal scenario for playing an earnings surprise stock would go like this:
1. Earnings are reported and they are well above Street estimates.
2. The stock responds by moving sharply higher, sometimes gapping ahead.
3. You enter with at least a 50 percent position and then average up quickly.
4. The stock closes the day up several points. You set a protective stop.
5. Within the next few days, analysts raise their ratings and the stock rises further.
6. The stock continues in an up trend and becomes a big winner in a bull market.

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4 comments:

Anonymous said...: As you point out, this is an ideal scenario for earnings' play. A very small percentage of the stocks with major earnings' surprises will follow such path - a gap up and then continue to climb. The majority will gap up and then will go flat for several weeks or months. They might be building a bullish flag pattern. Some will gap up and then decline to the upper part of the gap. This might be a great new opportunity to enter. The technical pattern is not of great importance here. What is essential is the significant earnings growth. This fact by itself should put this stock in your watch list. Something is happening in that company and this earnings' surprise might be the beginning of multymonth upward move. It might be. The probability is high, but there is nothing sure.

Pradeep,
I have read multiple books for investing/trading stocks, but your ability to explain things in simple and easy to understand terms, is unique.
Thank you; Jun 27, 2007, 2:12:00 PM
Tom T. said...: Pradeep - can you suggest a good source for finding news about earnings - seems like the major financial sites report on earnings but usually it is the large caps that get the headlines - do you recommend trading earnings surprises on lesser known stocks - does it matter? How do you prepare your list? Tom T.; Jun 27, 2007, 3:40:00 PM
Pradeep Bonde said...: I only trade earnings surprise on lesser known stocks.They are the ones which make the large move. I like stock with no analyst and neglected stocks.

I use WSJ, IBD and Marketwatch to prepare my list.
Read my earlier posts, this has ben discussed many times.; Jun 27, 2007, 3:44:00 PM
Numerius said...: CHAP will surprise to the upside on July 11th. I know holding in anticipation is generally a stupid strategy and i dont play that game but this is a stock ive held for over a year and we are about to enter the end game for CHAP. Their gross margins are exploding, i dont think the street has taken that into account. This is no ordinary steel company.; Jun 27, 2007, 4:10:00 PM

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