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Earning Misses - Profiting from Weakness

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Most of you who read my blog know the name of our service is EarningsBeats.com. The name makes sense since, for many years during the bull market, we've zeroed in on those companies that beat earnings expectations that could be prime long candidates. Fast forward to today and we've got a new category to focus on; companies that miss earnings expectations and could be prime short candidates.

To give you just one example, take a look at the chart below on XPO, a company that reported results in December, fell sharply on huge volume and has made its way up close to key technical resistance, where it has stalled. So, in effect, the opposite of a potential long candidate that had strong earnings, gapped up higher and then pulled back to key support.

In this case, we issued a short alert to our members last Wednesday with an initial entry price near $58, with a second entry on any move higher to $59, with an initial downside target of $53.80 and a stop of any close above the 20-day moving average, which was near $59.40. This resulted in roughly a 5 to 1 reward-to-risk ratio, assuming both entry levels hit. But, given the extreme volatility these days, ANY profits have to be gobbled up quickly, so we adjusted our stop Thursday morning to any Intraday move above $55.50 after the stock had moved lower (but had not hit our price target) and ended up with a nifty profit of 4.2% in less than 24 hours.

It's not going to surprise me if we find a number of companies coming up short of expectations when Q4 earnings start pouring out in the next few weeks. Just take a look at Apple, as blue chip as they get, slammed hard on their earnings warning after the bell on Wednesday. So having another tool to work with - shorting those stocks with weak results - could be just what the doctor ordered as traders navigate what could be some bearish waters ahead. In fact, if you would like to see a few of the stocks on our Weak Earnings ChartList that could be setting up as high reward-to-risk trading candidates on the short side, just click here. In the meantime, keep an open mind as you set your trading strategy, as we're in a completely different market environment than most of us have been used to.

At your service,

John Hopkins
EarningsBeats

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About the author: is the founder and President of EarningsBeats.com, and has been active in the stock market for over 30 years. He previously co-founded and ran Invested Central for over 10 years, and hosted a national radio show, "Market Open Live". John and his team at Earnings Beats look for companies that beat earnings estimates and have strong technical charts. He is a featured contributor to the ChartWatchers Newsletter at StockCharts.com.
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