Five Keys To Playing Earning Announcements

To play earnings can be tricky.

Some critical signs that the Street is about to be surprised in a big way.

KEY #1: WEAK PRICE ACTION DURING THE TWO OR THREE DAYS LEADING INTO EARNINGS

Weak price action just before earnings is often a sign of low expectations (or even no expectations at all!) When you have low expectations, it isn't as hard for a company to surprise everyone with strong earnings. Better-than- expected profits could lead to a quick rally on the stock.

KEY #2: PUT OPTION ACTIVITY THAT FAR EXCEEDS CALL OPTION ACTIVITY DURING THE WEEK LEADING UP TO EARNINGS

When puts (bearish options) are being traded much more than calls (bullish options) on a stock, it's a sign that investors are pessimistic. Again, another opportunity for a positive surprise! All it takes is some positive upside news and you have the ingredients for a rally.

KEY #3: A HIGH LEVEL OF SHORT INTEREST

When investors short a stock, they expect the company to fall sharply. This is a sign of pessimism. But ironically, those same short sellers can actually drive a stock upward!

If a company surprises Street with positive earnings, all those short sellers are going to have to start buying, and buying fast, to cover themselves and limit losses. This extra buying will add more fuel to fire a rally.

KEY #4: WEAK ANALYST RATINGS

If all the analysts are saying "buy" a stock, there's little room for moving up. However, if most analysts are saying "sell," then there is lots of room for upward movement. A positive earnings report will spur some analysts to upgrade their ratings, thus driving up momentum for a stock.

KEY #5: A STRONG INTERMEDIATE-TERM OR LONGER-TERM UPWARD PRICE TREND, COMBINED WITH A HISTORY OF IMPRESSIVE EARNINGS

Sometimes investors and analysts just don't believe in a company. But eventually, they will catch on, particularly if the positive earnings surprises just keep on coming. As more and more investors become believers each earnings season, these latecomers to the bandwagon will drive the price upwards.

>>Thanks to Shri Mamgain