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Michael Michaud is the founder of Invest2Success.com (http://www.invest2success.com/) and the Invest2Success Blog (http://invest2success.blogspot.com/). He has been investing and trading in the financial markets since 1989. He founded Invest2Success.com to empower individual institutional... More
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  • Twitter Blows Up And Reminds Us Why We Avoid Earnings Plays 0 comments
    Feb 6, 2014 8:24 PM | about stocks: TWTR, FB, GPRE

    Twitter Blows Up and Reminds Us Why We Avoid Earnings Plays By Market Authority

    On Monday, February 3, the Weekend Trader model portfolio advised buying Green Plains Renewable Energy (NASDAQ:GPRE) at $21.80. Our algorithm alerted us to the stock because it had been showing strength in a weak overall market and the fundamentals look cheap.

    On Tuesday, the stock traded up to $22.80, before pulling back to $22.50 on the close.

    On Wednesday, I advised selling the stock in the $22.25 - $22.55 range for a 2-3%, 2-day profit. (GPRE closed yesterday at $22.98.)

    We sold because GPRE earnings were reported this morning (Thursday). They beat handily and now the stock is called higher by 6% at $24.30.

    Were we wrong to sell? Yes, on a single trade decision basis. We left 6% on the table.

    However, in the long run, avoiding earnings plays is the right decision. Especially since we allocated 50% of our portfolio to the original trade. If the stock had reacted negatively to the news, the psychological pain of dealing with a position -5% on the day is much greater than leaving 5% on the table.

    And no one ever went broke taking 2-3% gains in a 48-hour stretch.

    As I've previously stated, there's too much uncertainty when playing earnings with an equity-only account. No trade is ever a sure-bet, but earnings plays are too much of a coin flip. You may win a few- however, in the long run, most traders are too quick to sell the winners and hold on to the losers.

    Here's what GPRE looks like this AM

    Green Plains Renewable Energy

    Now here's what happened when everyone's favorite stock, Twitter TWTR, missed earnings this AM


    Just because something worked out correctly, doesn't necessarily mean it was the correct trade. For every GPRE that beats earnings, there's a TWTR land mine waiting to be stepped on.

    Since it's nearly impossible to determine who will beat and who will miss, the smart thing is to avoid them altogether.

    Remember, this is for traders who manage leveraged, concentrated equity positions. If you're a portfolio manager, a stock like GPRE or TWTR is only a fraction of your overall portfolio. Thus, you don't need to liquidate ahead of earnings.

    PS: It looks like the "tradeable bounce" mentioned yesterday is materializing. 1770-1780 range is now resistance. So if you bought any stock on that dip below 1740, we are closing in on time to lighten up.


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    Stocks: TWTR, FB, GPRE
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