How To Trade an Earnings Thrust - part 1

There are several factors to consider when trading an Earnings Thrust.
1. Percent Surprise
2. Volume
3. Price
4. Float
5. Consolidation or Prior Weakness

How much thrust does this stock have?

Percent Surprise will give you the biggest bang for your buck. You should look for stocks with 100% surprise or greater. Significant upward guidance will also add to the trajectory this stock. If you review the historical examples from the past 6 months you can see the earnings information at the time of their earnings thrust.

Volume will tell you how much thrust the stock initially has on the day of the earnings announcement. A volume surge greater than 2x average volume by 9am is normally a good indicator that the market liked the news. Again the greater the volume; the greater the initial thrust is from the day of the announcement.

Price is a confirmation that the market likes the news and indeed the stock is gaining momentum. Look for price to make a monthly high after a tight consolidation or minor weakness and approaching a 6 month high. You can think of over head resistance, as gravity pushing down on the stock as it is trying to accelerate to new highs. The more levels it has to push through to get to a new high the smaller the move.

Float is the number of shares of a security that are outstanding and available for trading by the public. This tells you how heavy this puppy is. The larger the float the more thrust this stock will need to get moving. Preferably select the stock with the lowest float.

Finally, look for flat bases, months of neglect where the stock has not been doing much. Try to avoid stocks that have deep cups or v-shaped looking patterns when entering the trade. Again, review the examples posted on the site to get an idea of what these look like.

In my next post, I will cover tools to help you spot these stocks.

For more information see:
Balakrishnan, Karthik, Bartov, Eli and Faurel, Lucile, Post Loss/Profit Announcement Drift (November 20, 2009). Available at SSRN:

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