Low-risk Earnings Winner Plays

Playing earnings winners is a proven successful strategy so long as you understand how the price action normally takes place. Since so many other investors play this niche as well, discipline is key to making money. Often during the trading day the stock will be choppy, and demonstrate a lack of clear directionality. When this is the case, you must learn to ignore the stock and wait for your opportunity even if you think the earnings were wonderful.

The two best times to buy an earnings winner are in the morning and in the mid-afternoon breakout. The latter is ideal as it entails greater possibility of upside with a similar level of risk.

So how do you go about finding these earnings winners to catch the morning spikes? Yahoo's price % gainers page provides this ability for free until you're willing to pay for real-time quotes. Personally the free version suites me just fine. You should check this page every morning at around 10am EST. Here you will want to be scanning for stocks with high volume (>500,000), and a decent percent gain. Typically you will want to avoid banks, biotechs, stocks related to commodities, and foreign companies as their trading is affected by a multitude of other factors that make them higher risk unless you understand exactly what is affecting the price. Once you find a stock that seems to fit the criteria, click it's ticker and check the latest headlines. You will be looking for headlines announcing earnings earlier that same morning. In order for this strategy to remain low-risk, you will want these earnings to have significantly exceeded estimates. If you get this far, you now have the option of buying now, or placing it on your watchlist for the afternoon. Remember that an afternoon breakout provides the better buying opportunity but there is certainly no guarantee that the breakout will ever come. The problem with buying in the morning is that you have little ability to predict where the morning spike will end. The best way to get an idea of how the stock will act is to check how it has acted in the past. Does the stock have a history of running following earnings or does it quickly level off even after seemingly good earnings? Even with this information, it is possible that as soon as you buy, the stock will begin to decline and you will have bought at the top, the worst place to enter. If this turns out to be the case, just get out immediately and either move on to another stock or wait for that afternoon opportunity. As I said earlier, the key is discipline and if a stock acts in a way that you didn't expect (e.g. goes down after you buy), just get out.

In the mid-afternoon you will be looking for the stock to break above the previous day high. Ideally, this break will also be a new multi-month high. The longer it has been since the stock has made this high, the better. Following this logic, all-time highs are the best since you will have passed all previous resistance points. Just like morning spikes though, breakouts can experience fakeouts, in which the price quickly falls back below the breakout level. This is another point to get out quickly because it shouldn't happen if there are lots of excited buyers. Unfortunately, there is also the possibility of a confirmed breakout, in which the stock breaks out briefly, returns to the breakout level as though it were failing, but then spikes up again. This confirmed breakout is the most bullish sign the stock can give but it easy to get shaken out during that initial dip. The safest way to play it is to get out on that dip and get back in when it starts to look like a confirmed breakout. Such trading though varies from stock to stock so it's difficult to write a single strategy to cover all scenarios. Your best friend during these breakouts is going to be your L2 (Level II), or market depth, which will give you an idea of how much buying and selling pressure there is. If you see big sellers at the breakout level, there is less chance of it successfully breaking past those sellers to more upside. On the other hand, if you see big bidders just below or at the breakout level, it becomes less risky to buy those potential breakouts because those big bidders should act as a cushion to limit potential downfall. Keep in mind though that L2 can be manipulated and so your trades must not hinge solely on your L2 data.