Earnings Reactions

I am a believer that insider trading exists and that the “smart money” has access to privileged information when it comes to company’s data, such as earnings. I mean, do we really think Yahoo Finance gets the same info on the same timeline as Goldman?  

If you study price action like I do, you begin to see patterns where odds begin to favor a particular outcome. I hear a lot of talk that “you can’t game earnings” or “it’s a completely random event”. While there is a certain degree of randomness in any market situation, I do think it is possible to “game” earnings reports with better than 50/50 probability (and I do know successful traders who do so).

If my theory is accurate and Smart-Money investors are privy to exceptional information ahead of the general public, we should be able to glimpse their behavior ahead of a market moving event. As the saying goes, “the majority of surprises tend to occur in the direction of the dominant trend”. Of course not all surprises follow this thesis, but overall more than 50% do in my experience.

An example of this is occurring right now after-hours with initial earnings reactions to Nike (NKE) and Micron (MU).

I am in the camp that Big Money is right more often than not and they will telegraph their moves to those who are watching. I always watch how a stock trades about 6-weeks or so ahead of earnings

MU

Notice the trend into the earnings report? Major buyers have been bidding the stock higher in anticipation of a strong result for the last quarter. Did they have exceptional information? I don’t know. But what I do know is that they were right to do so as MU is trading higher by +3% on their initial reaction following the report.

Contrast this look with Nike over a similar period; they too announced earnings after the close today:

Nike is currently trading lower by -4% after-hours following their report.

Now, this could all be coincidence that MU trading in an uptrend while Nike traded in a downtrend ahead of the report, but I have seen this happen too many times to count to think there is nothing to it. I would conclude that investors where accumulating shares of MU for a reason and likewise distributing shares of NKE.

We can also point to examples where this wasn’t the case, again this isn’t right 100% of the time. But overall if we are watching the price action we will see patterns like this occur for a better than 50/50 outcome.

There is another pattern that emerges leading into an earnings event that can be a powerful risk reward; Looking at SQ as an example of how price will consolidate orderly ahead of an earnings report within an overall uptrend 

SQ

When a pattern persists like this with a series of rallies and tight consolidations, it is a sign of lack of investor interest in selling. The orderly pullbacks show tight supply and suggest the Smart Money is happy to hold their shares for more upside to follow.

If we watch for the behavior of the largest investors we can get hints as to their overall knowledge and expectations. Since they are the “Smart Money” they tend to get it right more often than not, and ultimately that is what this game is all about. 

Position in Review: ABBV

For several months now we have been long ABBV in monthly basis accounts. March provided the initial signal and then June followed through to new highs.

Both of these signals came off of bullish consolidation patterns and Inside/Up triggers off the prior month's tight range. Most importantly, the overall base structure here is what was so attractive to me.

Following the 2-year rally beginning with the Abbott Labs spin-off, the stock churned sideways for another 2-years. The action began to tighten considerably near the 20 Month SMA in early 2017, just before this recent leg higher began.

Once I establish a position in a strong long-term chart, I will begin to look for opportunities on the Weekly timeframe to add shares for a more aggressive trade.

 
The Weekly signal to kick off June was a combined Inside/Up pattern on both the monthly and weekly timeframes, this was the aggressive add spot for us. Price then rallied nicely for 6-weeks, pulled back in mid-August, and then kicked off again from a new Bull Flag pattern. This second signal was another spot to trail stops and add again.

The last two weeks have been vertical, trading higher more than +17%. Due to the series of very strong risk/reward entries we had quite an overweight position by late August. This surge has taken the stock into a notable level based on the monthly pattern that I feel warrants reducing some exposure, re-balancing the trade a bit.

As price approaches this 161.8 extension level, and due to our significant overweight holding, plus the vertical price action, I reduced some exposure (1/3) on Friday.

Price has extended substantially over the past few months and a consolidation would not be unexpected. Should that play out we will look for new opportunities to add back exposure in the right situation or continue to run our current holding should the stock rally further.

Based on the big picture look in ABBV I do not think this move is over at all and I intend to stay bullish until proven wrong. I have found great success following large base patterns over the years and this one seems like no exception.

If you are interested in receiving our live Weekly/Monthly trade alerts and being part of the ZenTrends Trading community please reach out to me on social media @zentrends. We are excited to announce that our expanded service offering will be available in the next few weeks.