February 14, 2012 - Earnings

Earnings play a huge role in the stock market, whether its giving an extra kick to get the market into an uptrend, or the last straw that leads to an extended downtrend, earnings can do a lot. For individual stocks, earnings can be even more important, but not in the way one might think. The technical analyst does not actually care about what the numbers are in the earnings report. We have to assume that the market already reflects all of this information, and even if it doesn't, we have to assume that a small trader like us won't be the first or even the hundredth to find out. So, why do we like earnings?

The answer is: We really don't at all. Earnings can be a shot in the dark. A lot of people actually purely speculate on earnings. They choose stocks that are well-known and buy the day or week before earnings and sell when the earnings come out. For a stock like Riverbed Technologies (RVBD), earnings might look like a savior but they are really the dagger in the back. In the chart below, RVBD's 2011 was fairly disappointing. 2010 resulted in almost a 300% return, but in 2011 RVBD gave back half of that. The earning days in 2011 were January 27, April 19, July 19 and October 19. All of them were AMC (after market close). What this means is that the earnings report was revealed after the market close on each of these days, making the next day the first day of trading with the earning report.



The purple arrows represent the day after each earnings report. The main one I want to cover is the July 19th earnings. As you can see, the stock lost almost 25% of its value that day. The scary thing is that the indicators prior to this day seemed to show that RVBD was poised for another uptrend. It crossed it's 30-day and 50-day MA's and the day before seemed to have a big price increase on very high volume. This just goes to show that earnings reports cannot be trusted. There are no patterns involved in earnings reports which means technical analysts hate them.



There is one stock to watch tomorrow with earnings. Fossil Inc., which reports its earnings today BMO (before market opens). This will be interesting to watch. It is overbought and at its resistance of 104.50. Like I said above, earnings can be that extra kick that a stock (or the market as a whole) needs to extend an uptrend. But, it can also be the last straw that starts a downtrend. In RVBD, the only time it had earnings when it was overbought was when it lost 25% of its value. We will see what happens today.