Morning Market Thoughts

by DAN Good morning. Last night after the close, a few companies reported earnings. One popped, one dropped, and a couple didn’t do much of anything.

Square (SQ) reported really strong earnings and revenues and the stock is up about 10% pre-market. Netease (NTES) did the same thing…and kept moving higher. This is a “gap and run”. Other stocks that gap up on earnings reverse at the open. Traders sell into the demand because they like the high price. The demand dries up and the stock reverses. This is called a “gap and crap.” (Recall Fabrinet (FN) back in August).

Jack in the box (JACK) disappointed investors and the stock is trading down around 10%. It may fall further (think Macy’s (M) back in January), or it may reverse and move higher after such a big fall downward. We won’t know that until 9:30 (in about 15 minutes).

Weibo (WB) didn’t do much of anything. It’s still trading in yesterday’s range. So traders weren’t too surprised by Weibo’s strong earnings.

Tesla (TSLA) is also pretty static. IT’s trading below yesterday’s closing price, not not really enough to create any type of trading opportunity.

When you are looking for post-earnings trades, look for the big dislocations in price.

If a stock gets crushed as is happening with JACK, there might be an opportunity to fade that move and buy the stock. You just need to watch it at the open to determine whether there is strong demand for the stock. There may not be such demand and the stock will instead keep falling. In that event, stay away from it.

SQ is going to pop. It’s up big. So watch for profit-taking. Will traders be selling into that news? If so, it’s a viable short. But if the stock gaps and continues to run, as happened with NTES, then you either avoid it, or trade along with the other bulls. This is what we did last Thursday, and it netted a nice profit.

Don’t expect big moves in stocks that aren’t…moving big. Stocks like Tesla and Weibo may move in big ways…but there is no setup on those stocks for the simple reason that they aren’t trading at extreme levels. The rubber band isn’t stretched tight. They’ll likely be “nothing burgers”.

Hope this synopsis of pre-market setups helps.

Let the games begin!

–Dan

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