One of the benefits of technical analysis is being able to look at a chart to help determine if a stock is a viable trading candidate. In other words, what does a technician see in a chart that would lead to the conclusion that a specific stock is or isn't a high reward to risk trading candidate? I have found chart reading to be particularly useful after a company reports quarterly earnings and have developed some specific signs/indicators I look for to help me determine if a stock is worth pursuing for a trade.
First, does the stock rise or fall once earnings are released? This is the first clue in determining if the market is excited or disappointed in the results
Next, what kind of volume accompanies the initial reaction? Heavy volume - let's say at least two times the average daily trading volume in a stock - can show that there's either a lot of interest in accumulating the stock or a strong desire to get rid of the stock.
Next, once the initial reaction subsides, how does the stock behave over the next few weeks? Quite often a stock will gap up or down, depending on the initial reaction, and then can either continue its move higher or lower or can consolidate for a period of time as traders continue to assess where the stock might be headed. It's particularly helpful to watch volume trends which can be quite useful in determining where a stock might be headed in the future.
As an example, take a look at the chart below on Michael Kors Holdings (KORS) a company that reported its earnings in early August and beat expectations.
What stands out here? First, we can see a very positive initial reaction to the KORS earnings report. Next, just look at that powerful volume on the positive response. Next we can see a clear period of consolidation once the initial euphoria had settled down. Finally we can see a resumption of the move higher on the stock as traders got re-excited.
I cannot overemphasize the importance of volume, and in this case, extreme interest in owning the stock. It would have been just as helpful to see what the volume was like if the stock had fallen sharply.
There's also another lesson here. I have found when there is an extremely positive market response to an earnings report, like in the case of KORS, it makes no sense to chase a gap higher; it's quite often a losing proposition. Instead, let the initial reaction run its course, wait for a pullback to a key technical or price support level, then make your move.
I've decided to conduct a webinar this upcoming Monday, September 18, at 4:30 PM eastern, where I will be examining market reaction to a number of companies that recently reported earnings. This will include identifying some solid reward to risk trading candidates. If you would like to join me for this highly educational FREE webinar just click here.
A picture does tell a thousand words. That applies to technical analysis as well. If you know what indicators are most important to traders you can learn to spot them on charts and use that to your advantage.
At your service,