In Part I of “Trading the Google earnings report” we covered Step 1, the short term overall market picture by analyzing the Nasdaq 100 index chart.
We still have 3 more steps to discuss, but before that, a catch up on Wednesday’s trading session. The strong reversal of the last two hours of trading is most likely the entry into a trading range as we expected. Do you feel confused about the volatile down and up move? Others might feel like that also, which is why a confident breakout follow through is very unlikely for at least a couple of days.
Step 2: Relative Strength
With the wording “relative strength” I am not referring to RSI or other momentum type indicators. It is more like observing weather GOOG has under or outperformed the market index.
- Google could not reach a new high in the last seven months, but the Nasdaq did. Therefore at area #1 the RSI shows divergence on the Nasdaq and convergence on the Google chart. A convergence is always a stronger card in the bears’ hand than a divergence. Especially because the Nasdaq divergence occurred at too high of a level -75 on the RSI – to support a trend change. In contrast, a bearish convergence – notably at 60 on the RSI – can be indicative of a major trend reversal.
- The weekly Nasdaq looks like a terminal setup in an existing bull trend while Google shows a ranging market which might break down based on RSI range analysis (area #2).
- 13.1% GOOG decline is in line with the 10.1% drop in the NDX. Check the current leg from the September high (mark #3).
- The Comparative Relative Strength indicator on the top right pane summarizes our assessments. Google had been outperforming the Nasdaq until February 2014 (area #4) and has under performed since then.
Based on Step 1 and Step 2, Google does not qualify as a good target for an earnings report related, “buy the dip investment.” The Nasdaq is in a bear phase within a larger bull trend, maybe entering a trading range, while Google has underperformed the market since February.
Step 3: SOH
This is the easiest step in the process, although I know it is difficult for many.
Sit-On-Hands until after you know the impact. Not just, “wait for the results,” but “watch and sit through how the market jumps up and down in a volatile manner.” Do not attempt to trade the excitement right after the announcement; there is no technical edge there, just emotions. Especially pain and panic.
Step 4: Resume trading
If the current bear trend remains intact even on the following morning of the earnings call, then continue trading in the direction of the trend.
Before you consider trading any type of news event, your strategy should rest on solid technical background and patience. Try something along Trader Skillset’s four step approach:
– be aware of the trend on the market (75-80% of the individual stocks follow the trend in a bull market and up to 97% in a bear market)
– choose underperforming items to sell and outperforming names to buy
– don’t trade the events directly, wait for the market to form smaller bars again
– resume trading only in the direction of the preexisting and intact trend.
As always with Trader Skillset, we have an approach that is defined by: Context, Momentum and Signal. This three step process is what ensures we aren’t trading by random instinct, but by process. The area we’ve covered here, how to trade an earnings report, is part of the Context and Momentum. You’ll still need to wait for a clear Signal, and we’ll cover that in a future article.
The time zone we reference on our charts is Pacific Standard Time. Therefore, the U.S. cash market opens at 6:30 AM PST and closes at 1:00 PM PST.