Microsoft Surprises with Earnings then Gap Fade

Jan 25, 2008: 9:55 AM CST

Microsoft (MSFT) was the darling talk of the financial media last night, with discussions of beating earnings and sales expectations, and a large upside overnight gap formed in the stock.

So far, traders who entered long this morning when most retail (at home) traders were able to do so have been burned, as Microsoft has eroded $1.00 of its $2.00 overnight gap.

Although it may be unlikely MSFT will fade the gap entirely, this is yet another example where it was far more profitable to “Buy the Rumor, Sell the Fact.” Let’s look:

Here on the daily chart, we see the two prior days posted gains from open to close. Microsoft traded at a low of $31.00 on Wednesday (after Tuesday’s shock gap), which coincided nicely with the rising 200 period moving average which commonly serves as support. Savvy traders and investors, in expectation of positive earnings, bid up the stock to a high near $33.50 on Thursday.


This morning saw a large $2.00 upside gap to $35.00, which took price comfortably above the flattening 20 and 50 period moving average, but the savvy traders were exiting their profitable positions that were established a couple of days earlier.

Traders who watched the financial news and bought with anticipation and glee saw their profits instantly turn sour. That’s not to say that this is a bad investment, but that their expectations were dashed and they may not understand what happened.

After all, if a stock had better than expected earnings and everyone talked about it on TV last night, then why in the world should it go down?

Let’s take a closer look:

Trading can be a difficult business full of illusions for newcomers. Things may not always be what they seem.

Rather than playing the news, try playing the reaction to the news for increased probability. Or, if you are truly a newer trader, try staying away from earnings or news plays at all. There’s no way to know:

  1. What the actual news will be
  2. How traders/investors will react to that news

So why try if you are just beginning? There will be plenty of opportunities once you understand new concepts.

Stick to your set-ups you have learned and trades with which you understand, and try not to have extraordinarily high expectations with any individual trade.


3 Responses to “Microsoft Surprises with Earnings then Gap Fade”

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