The second earnings season of the year is set to begin at the close today (April 10th) when Alcoa releases its earnings for the first quarter 2007. Other Dow and S&P components will release earnings this week and next as well, meaning that volatility and possible market gaps are likely if actual earnings differ from estimates.
Technical traders beware if you are taking a week-long swing position in a company – ALWAYS be sure to view Yahoo finance or some other source so that you can document and plan ahead of a particular company’s earnings release. For pure technical traders, it is often best not to hold a position just ahead of earnings announcements, as predictability and reliability of price swings greatly decreases.
Some traders use earnings releases as strict gambles, and do so will call or put options. I do not recommend this, yet one can make a lot (or lose a lot) of money trying to guess earnings.
Remember that a company can report great (increased) earnings, but if they fall even a penny shy of consensus estimates, investors and traders can punish the stock quickly and those who hold positions in it.
The Trading Bandit also offers his perspective on earnings season which I recommend studying.
Also, it is often not enough to know the earnings releases of companies you wish to trade, but also you must know related companies, and especially industry leaders and their earnings releases. There have been countless examples of a leading stock announcing poor earnings and it dragging down a multitude of other stocks both in its sector and industry. This is because investors are trying to predict the direction of the sector (based on current earnings extrapolated to future earnings) and if the leader fared poorly, they expect “followers” to fare poorly as well.
Remember, traders drive price, but not all price is driven by technical analysis, and sometimes, it is best for pure technical traders to stand aside or trade lighter when fundamental data will be ruling price movement, unless you stick to basic price and volume (and sentiment) analysis to drive technical decisions.
Be safe, and best of luck during this earnings season.