Two weeks after the beginning of every quarter (January, March, June, September) starts a period where public companies (those traded on the major exchanges) must report their earnings results to the public at large. 

During this period, an army of Wall Street analysts spend most of their time trying to figure out what earnings the companies will report, or if they are not profitable, what type of revenues they’ve generated. Once they’ve concluded their analysis, they will write a report and issue it to their clients with a recommendation to either buy, sell, or hold a stock.

Since there are many analysts dissecting the same stock, a general consensus forms as to what the most likely earnings scenario will be for each company. Then, on the day the company releases their earnings report, traders will react to the actual numbers. If a stock misses the estimate, the knee-jerk reaction is to sell the shares en masse. If the earnings exceed expectations then the opposite occurs. This ritual happens every earnings season on Wall Street.

If you are a futures trader involved in trading one of the broad indexes such as the S&P 500, Nasdaq 100, Dow 30, or Russell 2000, it is vitally important that you understand the influence of some of these big bellwether stocks on the movement of the underlying index.  This is especially true during earnings seasons as the reaction immediately following the release of an earnings report will cause a spike in volatility.

This spike could be perceived as added risk or offer great opportunity, depending on your level of skill and discipline.

In the last couple of weeks, many of these high profile stocks have reported earnings, and indeed have added additional volatility to the underlying indexes.

One such example was in the Nasdaq 100 E-mini futures contract. On Thursday, July 18th, soon after the stock market closed in New York (4:00 pm EST) Microsoft (a big bellwether stock) reported strong earnings (above the consensus). As a result, the stock rallied sharply in after-hours trading causing the Nasdaq E-mini futures contract to follow suit. As seen in the chart below.

Chart

 

For many traders this seems like a like a very bullish development, however, for those traders that possess an edge, this actually presented a low-risk opportunity to short the Nasdaq E-mini futures contract.

As we can see from the chart below, the Microsoft rally actually pushed the NQ futures into a high quality supply zone, an area where there were unfilled sell orders, which is a high probability shorting opportunity.

Chart

 

What ensued was a big drop (as seen in the chart below) in the Nasdaq E-mini futures. In trading, there are never any guarantees so this could have also stopped out, but because it had all the attributes we look for in a trade (low risk, high probability, and high profit potential) this one happened to work very well.

Chart

 

The takeaway here is that this trade opportunity was only made possible by the initial reaction to the Microsoft earnings report. Microsoft, because of its market cap, is very influential in the price movement of the Nasdaq 100 and thus should be monitored after its earnings report is release.

Stocks like Apple, Facebook, Amazon and Alphabet (Google) are also big influences in the Nasdaq and should also be closely watched for their earnings report releases. If you aren’t comfortable trading during high volatility, being aware of when these companies release their earnings reports will allow you to exit the market. Otherwise, these releases give traders a chance to look for trading opportunities. I hope this helps.

Read the original article here - Earnings Reports and Their Influence on Index Stock Futures

This content is intended to provide educational information only. This information should not be construed as individual or customized legal, tax, financial or investment services. As each individual's situation is unique, a qualified professional should be consulted before making legal, tax, financial and investment decisions. The educational information provided in this article does not comprise any course or a part of any course that may be used as an educational credit for any certification purpose and will not prepare any User to be accredited for any licenses in any industry and will not prepare any User to get a job. Reproduced by permission from OTAcademy.com click here for Terms of Use: https://www.otacademy.com/about/terms

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