A Professional Earnings Report Strategy
More than 80% of all orders in the Stock Market are now automated. Buy Side institutions use Time-Weighted Average Price TWAP orders which are triggered on specific price points. Smaller Funds use Volume-Weighted Average Price VWAP orders which trigger on VWAP. High Frequency Traders HFTs are computer generated orders that trigger automatically based on news feeds, technical patterns such as a MACD crossover, or other algorithms. During an Earnings Season, HFT triggers occur frequently and often the queues are filled with their millisecond orders well ahead of the retail crowd which receives the news last in terms of Market Participant Groups.
That means all Retail and Technical Traders must hone their Spatial Pattern Recognition Skills™ to develop keen abilities to interpret the Price and Volume patterns before a stock gaps. Once it gaps, the run gain potential diminishes and the stock usually stalls at the gap level or even retraces as Professional Traders and the High Frequency Traders HFTs take their profits against the Smaller Lot Investors and Retail Traders.
Pre Earnings setups are not a new concept or strategy, but what to LOOK for in terms of a potential gap has changed. Instead of waiting for the earnings news, Retail Traders must be pro-active and enter the stock ahead of the gap. Otherwise the benefits of a big gap are lost, and gains are minimal rather than excellent.
Many big name companies have gapped up on earnings and all displayed signals and patterns well ahead of the Earnings Report. See the chart example below for Microsoft Corp. (NASDAQ: MSFT) and shows MSFT Pre Earnings Gap Signals.
MSFT showed a strong short term bottom followed by a Platform that consolidated into a much tighter formation. Large lot indicators reveal a steady pattern as shown by the green arrows, as accumulation was consistent and continuing until the stock runs up for 2 days the first part of October. Then the price action compresses into an even tighter Consolidation, holding steady in preparation for the Earnings Report and a probable HFT gap up upon its release. Since professionals are buying, Price and Volume indicators are steadily consistent and maintain specific levels. This was the signal for Retail Traders that the report results were already known by the giant institutions. The wait is for HFTs to discover the news via the report release, and they then cause the gap up in price. Profit taking usually comes shortly thereafter as this pattern is used as an earnings strategy by Professional Traders.
Martha Stokes CMT