Every day there are hundreds of stocks that are gapping up or down before the market open. You need to have specific criteria in selecting the stocks that you trade every day. It is quite simple what you are looking for. You want to be in stocks that will trend. So how do you find stocks that will give you a strong trend that you can be a part of? What do the stocks that fade or spike 10%-20% on earnings have in common?
Clean Daily Chart
Earnings plays are my favorite setup. The catalyst always has the best follow through. When you combine this with a clean daily chart, you are seeing a high-quality setup with a high probability of having a strong intraday trend.
If you are looking to the long side, you don’t want to see any resistance to the left of the stock’s daily chart. If you are looking to the short side, you don’t want to see any support to the left. Check out this video for a recent example of an earnings breakdown we played with $MIC:
History of Running on Earnings
Before trading any stock, you have to pull up its daily chart and go back a year or two. What has happened the last time the stock it had an earnings breakout or breakdown? Did it follow through? Or did it completely reverse? A good example of a stock that has a history of running on earnings is NVDA.
You can see the circled candles of all the times it has gapped up on earnings and followed through. This is what you want to see on the earnings plays you are looking to trade.
Strong Daily Trend
You can see that NVDA is a stock with a strong uptrend. When a stock that is trending, gaps in the direction of the trend, the probability of it following through is very high. If NVDA gapped down on earnings, the probability of it following through to the downside is very low. On strong stocks, gap downs are usually bought up. For weak stocks, gap ups are usually sold into.
There is nothing worse than day trading illiquid stocks with huge spreads. It is easy to take big losses because of slippage. Illiquid stocks also rarely follow through as you would expect them to. When you look at a stock's daily to see how it behaved when it had an earnings catalyst, you want to see it trading on above-average volume, ideally 1 million shares or more on these days.
Even if you have all the ingredients mentioned above, you still need an intraday setup to get an entry. This will help you manage your risk in case the stock goes against you and increases the probability of the stock going in your favor if you are correct. In our MIC trade, we used an opening range breakdown to give us an entry. You need to master 1-2 intraday setups that will give you a chance to capitalize on these kind of plays.
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