We are now at the time of this quarter in which companies report earnings and they almost always “beat” the estimates, because they are created to be low enough to be “beaten” by company management through the usage of leaks to analysts.
Often when a company “beats” the estimates you’ll see people on CNBC talk really fast about the news and the stock gap up to attract buyers.
But you have to be very wary of buying into that type of action, because usually when it happens the stock ends up fading in the days that follow.
This already has happened with NLFX, which reported earnings two days ago. It gapped up and is already dumping on people who bought.
The gap up was a bull trap.
But this is a stock that now traps more than it generates profits for buyers when it has gap ups, because it is trading well below its 200-day moving average.
Yes – it was once a wonder stock that everyone seemed to want to buy, but now it is lagging the stock market averages and that 200-day moving average is now going to act as long-term resistance on the stock.
It’s a broken stock.
And when a stock is broken like this then gaps up it almost always ends up being a bull trap.
So be very wary of buying into gap ups on stocks reporting earnings that are trading below their 200-day moving averages!
Yes – I know that we both know that NFLX has fundamental reasons to now be trading like this. It has competition growing everywhere and even reported this week that it is going to have to borrow at least another billion dollars to stay viable. It doesn’t generate profits, but only creates more debt.
That was true two years ago though when the stock was a wonder stock and it didn’t matter then when it was going up seemingly forever. But in time fundamentals catch up and bring reality to people who bought into dreams without any trading strategy at all. That’s why these chart patterns are so key.
So avoid stocks that are trading below their 200-day moving averages and gap up on their earnings reports no matter how pumped up people get on TV about that news.
I just posted a podcast I did with Carmine Savastano about an interesting documentary he found about the old OSS spy agency during WWII. It shows what it takes to become a real super spy that is even a better spy than James Bond. To listen to this discussion go here:
-Mike
