Every day there are dozens of companies reporting earnings during earnings season, which only comes along 4 times a year. The earnings catalyst has the potential to create some of the best trending stocks. But how do you know which stocks on your scanner will have a strong fade or spike in reaction to their earnings? How do you know when a stock is going to go on a monster trend? Earnings breakdowns have the potential to give huge moves as longer-term investors look to hit the exits in reaction to bad news on the future of a company. Let’s look at a recent earnings breakdown play we had on US Steel, X. We will talk about all of the characteristics of the stock that made it a great fade, and what you should be looking for in other earnings plays to find great trends that you can use to grow your trading account.
Bearish Daily Chart
You can see the bearish trend on X’s daily the past several weeks. There have been two textbook bear flags. When you see a bear flag break on an earnings catalyst, that has the potential to be a very powerful sell signal. The breakdown level was under the psychological $35 level. Once we got the intraday setup under that level, we knew there would be a high probability of $X having a big fade.
History Of Large Range During Earnings
History often repeats itself in the stock market. Stocks that have already demonstrated their ability to trade with larger than normal range on an earnings play will likely do it again. We go into more depth on our recent $X trade in this video:
Intraday Price Action
Even the best daily setups with an earnings setup cannot be profited from if they don't give you an intraday setup. You need to have an array of go-to setups that will get you in early before the big move is made, while also giving you great risk versus reward on the capital you put in. You can see on X's intraday chart how it gave multiple intraday setups to join the trend:
The first setup of the day was the ORB (opening range breakdown). This allowed you to get an entry just under 35 with about 40 cents of risk, using the 9 EMA as your stop loss. This setup allows you to get in early on the move, which makes it easier to add to your position without ruining your average. The best earnings breakdowns give you multiple setups and allow you to add to your winners. That is exactly what X did.
Once we saw the bear flag forming between $34 and $34.5, we knew this had potential for another leg lower. Once the bear flag broke we added to our position and moved our stop loss down to lower our risk even more. We got a great fade all the way down to the 31's after this setup, showing you how powerful these plays can be when you get all these ingredients together on a stock.
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