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Critical Earnings Breakdown

Hey 5-Star Trader,

As we enter another earnings season, I wanted to take a moment to break down some of the most critical terms that traders must know as we trade throughout the season. As we discussed on Tuesday, there are so many trading and investing opportunities surrounding earnings season.

For a full, one-hour breakdown, join me on Tuesday at 7 p.m. Central where I’ll discuss all this and more – live! Click here to sign up! 

Here are some of my favorite, need-to-know terms:

Earnings Season – Publicly traded companies report earnings four times per year. The majority of companies, especially companies within specific sectors and industries, report around the same time. While the season, in reality, spans across 12 weeks or so (with some stragglers at the beginning and end) most of the action occurs between weeks three to nine. During this central time frame of Earnings Season, there can be upwards of 200 companies reporting earnings per day.

The Hot ZoneThis is the term I use when I’m describing the 21-bar time frame on a daily chart prior to a company’s earnings report. This time frame is critical, as this is generally when a stock begins experiencing a move either to the upside or downside. The reason why it covers 21 bars and not 21 days, is because the days the market is not open do not count. I start at the earnings report date, and then count backward to identify which day the ticker “enters the Hot Zone.” 

Check out this screenshot of Netflix (NFLX) below. The highlighted portion refers to the Hot Zone for first-quarter earnings. NFLX entered the Hot Zone on March 18 and will report earnings on April 19. This means it is currently “in the zone.”

In the Hot Zone, I will either have a neutral, long, or short bias for a particular stock based on past pattern, overall macro view, consumer sentiment, and statistics. I use two different terms to identify these setups.

Run into Earnings – This is what we call a bullish move into an earnings report. This is because the stock will likely “run” going up to the report. The idea behind this trade is that I am identifying a strong ticker that I can trade higher going into, but not through, the report. This setup is primarily pre-earnings, as the earnings report itself can shift the pattern. But, it doesn’t matter, as I’m out of the trade by then!

Earnings Destruction – This is the pattern that appears when a ticker is more likely to fall going into earnings, due to a lack of earnings anticipation. This can occur both pre-earnings, while the ticker is in the Hot Zone, and it also likely continues post-earnings.

When a stock enters the Hot Zone, opportunities for trading arise – if you know where to look! But, the earnings opportunity doesn’t stop there.

Additional opportunities can be found in trading options overnight on the earnings reports themselves, and for trading post-earnings trends. Stay tuned for my next newsletter, on Tuesday, March 29, where I’ll be discussing some of my favorite opportunities “in the zone.”

And, don’t forget to join me Tuesday evening, for a full breakdown of what you need to know this earnings season… and more! Click here to sign up! 

-Danielle =)

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