No shareholder enjoys sitting through an earnings miss. If you’ve been investing or trading long enough, you’ve probably had your share of these unpleasant surprises, the kind that gives you a sinking feeling in your gut.
Even worse are the situations in which your stock begins declining well before earnings. Yet such things do happen, and depending on your intentions as well as your confidence in the company, an earnings miss may prompt you to buy more or to protect your profits.
In this post, we’re going to talk about protecting your profit. For investors who have never placed a swing trade before, there are a few short-term tactics you can use to protect most of your profits (assuming that your position was profitable, of course).
If a stock is in an uptrend, then it typically cycles in a manner that steers clear of violating its previous downswing while penetrating its previous upswing. You know, higher highs and higher lows.
Sometimes, when the market undergoes a period of high volatility and indecisiveness, price will violate both levels, only to continue exhibiting its trending pattern post-shakout. But generally, this basic trend rule may serve as a useful way to protect profits, by trailing a stop loss below each swing low.
Take Intuitive Surgical, Inc. (ISRG), whose earnings of $2.61 had a 9-cent miss, yet whose sales at $974 M beat expectations by $160,000.
ISRG began tanking a few days before its earnings report.
Supposing you purchased this stock before its Q1 2019 earnings report, you can see that ISRG cyclical highs and lows exhibited a near-ideal type of trending scenario (as illustrated by the lines beneath every swing low leading up to April).
The swing low on April 4 marked ISRG’s last downcycle before its April 18 earnings report. If your outlook was positive, then you might have been taken aback at the sell-off that began on April 16, two days before Intuitive released its earnings.
If you were skeptical, perhaps enough to sell it if the figures missed expectations, then you might have placed a stop loss right below its last swing low point . This does two things: first, if ISRG beat expectation, then you might give the stock enough room to continue rallying; second, if ISRG’s figures didn’t meet Wall Street’s forecast, then you might have been able to take profits at a point below which might have invalidated your bullish bias (at least from a technical analysis point of view).
As you can see, ISRG plunged below support . Had you placed a stop, it might have saved you from the ensuing carnage after its earnings miss. And if you were still bullish on the company’s overall fundamentals (and not worried about a wash sale), then placing a buy stop above and of the following swing high levels might have provided strong points of re-entry.
But overall, taking a more tactical approach to certain scenarios that require a trader’s short-term finesse over an investor’s long-term insight might be helpful when timing your entries and exits.