How To Trade A Stock After An Earnings Report?
One thing that is universally not recommended is holding a stock through earnings.
When earnings are released it is difficult to tell which direction the stock will go. Typically a trader will have the initial reaction from the earnings, followed by the counter reaction, which sends the stock in the opposite direction.
Coach (NYSE: COH) reported earnings on July 30, which were less than stellar. This sent the stock into the $53.00 territory from $57.38. With a move like that, it immediately sent the stock into oversold territory.
Since then, Coach has done a good job of clawing its way back up.
The setup traders are seeing in Coach is a suspended bear flag. These will typically form in the middle of a chart without a moving average or price resistance nearby. These are the lowest probability bear flag but they are still effective. Like the others, the pole is formed through heavy selling, which takes the stock into oversold territory.
In this case, the selling came overnight so the flag pole is invisible. Once there the stock needs to rest before moving lower. This rest period is formed through a bounce as sellers take their profits. If the bounce is on low volume we call it a “dead-cat bounce”. This means the stock is not under accumulation, it is just relieving some sell pressure and it should continue lower.
The pullback here will be gradual forming a nice flag shape. Entry on this setup is not near the top like the others but instead it is when the flag is broken.
Shorting Coach at $53.50 will confirm that the bear flag is breaking. A trader’s first target should be at the bottom of the flag pole, $52.10. Stop-loss should be at the top of the flag, 54.28, so if traders get taken out then they’ll know it is because Coach is breaking higher. This will give a reward/risk of 1.8. Once the stock begins to move lower, traders should reduce risk by lowering stop-loss to $54.00.
Adam Beaty is a weekly options expert and can often be found quoted or writing for Benzinga and Wall Street Journal. He’s the founder of The Options Prophet; an interactive newsletter, which builds consistency through trading credit spreads. Sign Up Here To Receive Free Updates From Adam Beaty.