Technical
analysts who study the charts over many reporting seasons see something
quite startling: the chances of an individual stock selection moving in
line with the short-term technical indicators is at best, uncertain.
The fact is that the risk-reward scenario of holding a
CFDs
or
Exchange
Traded Options (ETO's) overnight when the company is about to
report is unfavourable.
From experience, more short-term
CFD
and
Exchange
Traded Options (ETO's) traders get hurt during earnings
season than at any other time of the year.
Why? There are several mechanics at work during an earnings release.
Firstly there are the raw numbers themselves. Did they actually beat
the estimates? Sometimes it appears as they have, but how’d
they do it? If they did it on falling revenues, then they accomplished
the feat by cost cutting or playing the currency spreads. None of them
are indicative of great growth. Then we have the issue of just how much
did they beat the estimates by? Quite often beating the estimates can
be more a matter of creative accounting than a real estimate of
business growth.
Moreover, the short-term technical analysis generally supports the
jawboning of the analyst’s and their estimates. The
CFDs
or
Exchange
Traded Options (ETO's) trader sees the stock price moving
with the expectations of the analysts, encouraging the trader to enter
the trade. The next morning the company announces their earnings and
“whack” the share price
gaps
down or falls quickly, despite the fact that they beat the numbers.
Secondly, there is the all-important “guidance”.
The earnings released is already old news as they represent the
half-year that has already past. Fund managers and analysts are very
interested in what the company is doing now and what they think they
will do in the future. If the guidance is less than encouraging, the
stock may well take a knock.
The
aqua circle is the day we entered the trade on the 6th February 2007
while the yellow circle is the day BHP reported. The green rectangle
shows the
MACD
and the yellow rectangle shows the RSI. Technically there was very
obvious positive momentum shown
As you can see in the above chart that the share price gapped up
considerably the day BHP reported.
Please note, unlike its counterpart, RIO, or the Resmed chart below,
there was heavy "fundamental" and "technical" support for a positive
BHP report, along with the share price being supported in a strong
short-term
uptrend.
Many dedicated BHP analysts were also upbeat about BHP. As it was BHP
stunned the market with is buy back plan.
Practical Example 2
As you can see with
Resmed
(RMD) above, the share price fell drastically after reporting.
Obviously the market reacted badly to the release. Again, as in the
earlier BHP chart, the yellow circle indicates the day prior to the
release of the report and the aqua circle is the report day.
From a techincal analysis perspective, note the volatilty prior to the
release of the report, suggesting uncertainty in the market place. The
RSI was displaying bearish divergence prior to the release of the
report (yellow rectangle). The MACD (green triangle) was tumbling along
showing no strong or "obvious" signs of future possible direction of
the share pirce. Upon release of the report, the RSI and MACD followed
the share price movement down.