Just as Micron Technology (NASDAQ:MU) was about to post its earnings, one of the members of Exposing Earnings asked me if I could give the gameplay for this earnings report. Earnings for MU is generally easy to predict (it sells off), but this quarter’s strong fundamental growth made me wary of recommending a short play into earnings. As the earnings report hit the press, MU jumped, quickly selling off into the day.
As the day ended with an open gap, I applied my experience in gap trading and also ran my gap algorithm to ensure the gap was an area gap. Area up gaps after earnings usually have a red/black “gap day” candlestick, as you can see below. The small size of the gap and the fact that it did not bring the stock to a 20-day high told me it was most likely an area gap:
Note: Compare this gap analysis to the one I ran on Broadcom (AVGO).
As the gap was too small, I didn’t play, but I did start to question the reasoning behind the expedient post-earnings selloff. Before earnings, I ran through my standard pre-earnings analysis to find MU had strong and growing fundamentals. I wanted to understand the story here, so I dug into the earnings call.
If we follow the standard logic, an earnings release and the earnings call add a large bundle of new information into the market, readjusting the stock price to reflect previously unknown fundamental data. The updated fundamentals revealed in MU’s earnings were stronger than had been expected, beating on both EPS and revenue and therefore not justifying a selloff. But an earnings selloff can also come from the forward-looking statements in earnings calls, which is why I spent several months poring over the research in this field before opening my earnings prediction service here
A stock’s earnings report approaching usually means using a number of semi-useful, free online resources that give tertiary information and questionable earnings predictions. Stop relying on second-hand guesses. Instead, try Exposing Earnings.
Exposing Earnings is an earnings trade newsletter (live chat) that is based on statistics, probability, and backtests. My models are unavailable anywhere else online, as I designed them myself, keeping the code private for Exposing Earnings subscribers and myself. If you want a definitive answer on which way a stock will go on earnings, the probability of the prediction paying off, the risk/reward of the play, and my specific options strategy for the play, click here.
