Trading through the earnings of a highly volatile stock often feels like flipping a coin. A trader must try to predict the earnings results AND the market's reaction to those results. Some stocks are much better to trade after the results and the market's initial reaction are known. Amazon.com (NASDAQ:AMZN) is one of those stocks. Over the last twelve earnings reports, buying AMZN at the open has produced a winning trading strategy.
AMZN has been a mysterious stock to me because the market seems to buy into AMZN on good and poor headline earnings results. In the latest round, AMZN disappointed with downside guidance in revenue and earnings for the first quarter. The company projects revenue of $12.0-13.4B while the consensus estimate is $13.34B.
Amazon warned that it could generate an operating loss of as much as $200M. The upper range to guidance is a positive $100M. This represents a year-over-year decline of between 162% decline and 69% decline compared with first quarter 2011. Consensus expectations were for $263M in operating income. If history is any guide, the market may quickly buy into these results and snap AMZN stock off the floor.
To test my casual assumptions, I reviewed the charts from the last twelve earnings reports. This range covers January, 2009 to October, 2011. I took a snapshot of the two calendar weeks before and after earnings and observed the following:
- Buying at the CLOSE of post-earnings trading resulted in gains on six occasions, losses on four occasions, and a wash on two occasions.
- Buying at the OPEN of the first day of trading post-earnings produced gains on seven occasions and losses on five occasions.
- Stopping out of a trading position once Amazon.com closed below the lows of the first day of post-earnings trading reduced losses to minimal levels and preserved all gains. In other words, when Amazon.com is racing to post-earnings gains, the lows from the first day of trading post-earnings hold as firm support.
- On six occasions, buying the open produced sizeable one-day gains by the close of trading.
These observations produced the following rule for trading Amazon.com post-earnings: buy the open and hold for at least two weeks UNLESS the stock closes below the low of the first day of trading.
I decided to focus on the charts rather than the specific calculations this time because these charts provide the context that numbers cannot easily deliver. For example, each post-earnings trading period offers slightly different contours, providing for flexible interpretations of proper exit points. In a future post, I will present a numerical analysis (similar to what I have done for Google's (NASDAQ:GOOG) stock in the past).
The gallery below shows the two calendar weeks before and after each of Amazon.com's earnings announcements from 2009 to 2011. Each chart is a daily chart. Reading from top to bottom, the charts are ordered by quarter and by year. The labels precede the graph. In each case, the post-earnings reaction can be identified by the day with the largest daily trading volume represented by the bars at the bottom of each chart. The third quarter of 2009 is the one exception where the trading volume post-earnings was essentially equal to the trading volume the day of earnings.
click to enlarge
Source for charts: stockcharts.com
Be careful out there!
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in AMZN over the next 72 hours.