http://www.traderinterviews.com/webinars/RSWebinar.html

 
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So, I decided to change my approach. My new strategy would be to trade stocks ahead of key events, take advantage of any run anticipating the “rumor,” and sell the stock PRIOR to the “news.” Key events include earnings releases, shareholder meetings, analyst meetings, user conferences, and sometimes even economic reports. This theory obviously doesn’t work all the time, but it works consistently enough that I have added it to my arsenal of trading strategies.

A real-time example of this happened over the past 4 trading days. I bought $NFLX last Tuesday morning (4/19/11) and sold it Monday afternoon (4/25/11) prior to its earnings release (after Monday’s close). I made approximately 20 points on the trade. Here are some keys to this strategy:

1) DO YOUR HOMEWORK. Find out the EXACT date of the earnings/event. That’s the easy part.

2) CHOOSE STOCKS that are liquid, widely followed, and preferably highly shorted. For example, stocks such as $AAPL $NFLX $PCLN tend to run ahead of earnings reports, and if it’s a highly-shorted stock such as $OPEN $LULU $DECK, the shorts tend to cover prior to earnings.

3) FIND A LOW-RISK ENTRY POINT for your trade. This isn’t so easy as it took me years of trading to work on getting better entry points. In general, it helps to trade around strong technical support areas.

4) HAVE A LOSS CUTTING STRATEGY. No matter what your reasoning is for making a trade, ALWAYS USE STOPS! For example, I got into $NFLX around 233, my stop loss was 228, and my target was 250-255 (a 4R trade). If the trade didn’t work, I wasn’t going to force it or be stubborn about it. I was simply going to sell the stock. As Paul Tudor Jones says: “Play great defense, not great offense.”

5) STICK TO YOUR PLAN AND DON’T GET MARRIED TO THE TRADE. Whether the stock hits your target, your stop, or somewhere in between, don’t risk holding over the event. Simply move on with no regrets. In other words, if $NFLX goes up 30 points after its earnings, I don’t care! Too many times, technical traders start reading fundamental news to justify why they should hold over earnings. JUST MOVE ON TO THE NEXT ONE WITH NO REGRETS AND NO EMOTIONS!

One final point: This is one of many strategies that I use to trade AHEAD of earnings. Sometimes, I will hold a position OVER earnings, but I will save that topic for a future blog post. Again, the above strategies don’t work all time, but they are consistent enough to consider using as a trader.

Follow me on Twitter @jfahmy
Follow me on StockTwits @jfahmy

Follow me on Twitter @jfahmy
Follow me on StockTwits @jfahmy

Follow me on Twitter @jfahmy
Follow me on StockTwits @jfahmy

1) Many recent leaders are “late stage” and need to consolidate or build new bases. Examples include $NFLX $CMG $FFIV $AKAM $BIDU.

2) There seems to be a subtle rotation into several commodity related sectors. If the market does pullback, a few areas I would watch include Agriculture ($AGU $CF $MOS $POT $SQM) Steel ($MTL $TS $TX) Coal ($WLT $ANR $YZC) and Mining ($MCP $CLF).

3) A brief correction would shake out some of the extreme bullish sentiment.

In the brief video below, I discuss these topics and go over some charts.

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1) Although the volume on the NASDAQ Composite was higher than the previous day, if you remove the 500m shares that $CSCO traded above its daily average, the overall volume is actually LOWER than Wednesday’s volume.

2) When looking at the other major indexes: the S&P 500, the NYSE Composite, and the Dow Jones Industrials all had lower volume than on Wednesday; another sign that the selling was not severe. As my friend Michele Schneider (@marketminute on Twitter) pointed out, the volume on the $QQQQ $SPY $IWM and $DIA were all lower. These are ETFs that track 4 of the major indexes.

3) The major indexes closed fairly high in their ranges. It’s a sign of institutional support when the indexes open low and make their way higher throughout the day.

4) As another friend pointed out (@CubbieBears on Twitter), the NASDAQ Composite closed above its 10-day moving average; an area it’s held since this rally began on September 1.

5) Many TRUE big cap leaders such as $AAPL $BIDU $FFIV $NFLX held up well today and some of them were higher on strong volume.

6) I say TRUE leaders because I don’t consider $CSCO $DELL $MSFT $INTC leaders anymore. In fact, they have been dead money for over 10 years now. While they are all excellent companies, keep in mind that “Wall Street wants to see growth.” I have no interest in owning any of these companies because they’re simply too big and can’t sustain high growth rates.

7) I always say: “Pay attention to your stocks!” If I only looked at my stocks on Thursday (without looking at the indexes), I would have thought the major averages closed up for the day. Why? Because I finished up for my clients and the majority of our stocks finished positive on the day…once again proving the importance of strong stock selection.

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I know it’s only one day but so far, so good. Your first reaction might be: “But Joe, the Dow was down over 100 points on Tuesday!” My response: “I was paying attention to my stocks and not obsessing over the most over-hyped index on the planet!”

Here’s a quick story: I have a friend who does not trade and has no interest in the stock market. Whenever I talk to him after a big up day, he says: “Wow! I saw the Dow Jones was up 200 points today, you must have had a great day!” And he says the opposite on the big down days. My point is that the average person views the Dow as an indicator of the entire market. 1) DON’T THINK LIKE THE AVERAGE PERSON! 2) The Dow is only 30 stocks and not a great indicator of the other 7,000 stocks 3) Many traders perform well on down market days and lose money on up days. In other words, we don’t always correlate to the indexes.

My main point is to pay attention to your stocks and don’t obsess with the indexes (unless you only trade the indexes). For example, if I only got final quotes on my stocks today and got no index quotes, I would have guessed that the market was relatively flat on Tuesday. Why? Because the majority of my holdings and watch list were barely down and many of them advanced nicely on the day. In fact, my managed accounts finished positive on Tuesday, further confirming the importance of stock selection.

Examples of a few leaders that pulled back on light volume Tuesday: $FFIV $MELI $BIDU $CTXS $CRM $VMW $APKT. Some that bucked the trend and advanced nicely: $NFLX $ISLN $CMG.

So what do we do from here? Watch your stocks. If they are showing you a profit and acting well, try and hang on for a bit. If they break down on heavy volume, lighten up and wait patiently for a better opportunity. As I mentioned on my show, there’s no reason to rush back in and chase stocks. I began to SLOWLY get back in last week by taking light positions and “testing the waters.” So far, my stocks are acting well, but I will cut my losses quickly if they break down. I’ll keep this blog updated later in the week as the market gives us more information.

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