Our primary focus for a long time at EarningsBeats.com has been on those companies that beat earnings expectations and have strong charts. The reason being that companies with strong numbers and strong charts provide superior reward to risk trading opportunities. But we've learned lately that companies that miss earnings expectations can also provide high reward to risk opportunities for those who are willing to short stocks.
We have found over the years that it is tougher making money on the short side than on the long side. Why is that? It's because over time the market goes up more than it goes down and shorting stocks brings with it additional risk not found when trading on the long side. For example, if I buy a stock for $10 and it goes to zero, I know the limit of my loss is $10. However, if I short a stock at $10 there is no theoretic upside to how high the stock might go and thus no limit to my losses. And this is particularly problematic when the market is in a bullish mood.
On the other hand, when the market is in a more bearish mood, just like it is right now, going short can provide an alternative for those who like to trade but realize how tough it is to make money on the long side. So this is why it makes sense to look for companies that miss earnings expectations and especially those with weak charts.
As an example, let's take a look at Amazon. They recently reported earnings and missed by a mile. As you can see below, they paid the price:
Since AMZN is such a loved company, the stock recouped some of its losses on an oversold bounce but look what happened when it tested both its 20 and 200 day moving averages from beneath; it failed, right on cue. And this is the kind of shorting opportunity you want to find if you are willing to expand your trading arsenal.
I will be conducting a webinar this Tuesday, February 23 at 4:30 pm eastern. Tom Bowley, Senior Technical Analyst at Stockcharts.com will be joining me to show some samples of companies that missed earnings. We will also cover some companies that beat earnings as well and why they could be good trading candidates. If you wish to join us just click here to register for this free event.
At your service,
John Hopkins
EarningsBeats.com
