As I have pointed out in past articles, discipline is an important part of successful trading or investing. That means sticking to a plan and not selling out in reaction to a market decline or a negative comment in the financial media.
It is often a tough decision on whether you should sell a stock you are holding before it releases earnings. In the past few years, double digit moves have become more common in a reaction to earnings.
I have held stocks through earnings but often will sell part of the position to reduce the overall risk. That was the case for Autodesk (ADSK), as longs as it traded up over 14% in reaction to its earnings as longs from $89.26 were sold at $109.80.
If the technical readings are not very strong or if there was not a considerable open profit in the position, then I will often exit before earnings. I pay little attention to downgrades by Wall Street analysts but sometimes they provide opportunities.
In fact, a bearish commentary can provide opportunities when the technical outlook is positive. After the close on May 5, my review of the Viper Hot Stocks scan favored Micron Technology (MU) which had closed at $28.20.
In my May 8 Viper Hot Stocks analysis, I said “MU traded in a tight range last week but turned higher on Friday. The weekly starc+ band is at $31.38 with quarterly pivot resistance at $32.01. The daily RS moved above its WMA in late April and appears to have completed its bottom formation. The OBV is in a positive trend and is above its WMA. Traders go 50% long at $28.04 or better and 50% long at $27.60 with a stop at $26.19 (risk of 5.8%).”
The positive weekly RS and OBV analysis also favored the long side. Just before the open Goldman Sachs downgraded MU from buy to neutral. Jim Cramer commented that, “I agree that the downgrade from buy to hold is a rational, reasonable move.”
As it turned out, MU opened down 2% at $27.56 so both of the buy levels were hit on the open. The mid-May decline in the tech stocks took MU slightly below our entry level but the stop held by a comfortable margin.
By the end of May, MU was testing the daily starc+ band and approaching quarterly pivot resistance. In the May 30 Viper Hot Stocks Report, I recommended selling 50% at $30.89 or better for a 12% profit. It opened on May 31st at $31.01 (point 1) as 50% of longs were sold. The stop was then raised to just under the entry point.
On June 12, MU had a low of $29.21, which made the next rally important. The volume weakened as MU moved higher as the OBV dropped below its WMA at point 2. On June 23, MU moved up to $31.73 but the OBV was still negative.
I recommended selling the remaining 50% of the position on Monday, June 26, as I felt the risk on the long side had increased. As it turned out, MU opened higher at $32.45 (point 3). The average exit price for both positions was $31.73 for just over a 15% profit.
The lower close on Tuesday, June 27 triggered a daily doji sell signal. MU was a bit higher on Wednesday closing at $32.34. It reports earnings after the close on Thursday, June 29.
As a technical analysts I do not spend any time estimating earnings. It is possible that MU will report blockbuster earnings and could rally another 5-10% after their report.
As I explained to one subscriber, I felt the chances were equally high that MU could drop 5% after its earnings. Therefore, I determined that the risk did not justify the potential reward. If MU should drop back to strong support, I will likely favor buying. I will share the market's reaction to earnings on my Twitter account.
With over 150 stocks included in my weekly and daily Viper Hot Stock scans, there are stocks in both the PowerShares QQQ Trust (QQQ) and the iShares Russell 2000 (IWM) so there are always plenty of good opportunities for new trades.
If you are interested in learning more about my trading strategies, you can download a copy of my eBook and also be added to the list for the free Viper Report emails. Market commentary and technical tips are sent out several time a week.
