The Different Kinds Of Market Trends That Can Influence Your Trading
There are countless large and small market trends in the market today, but some market trends are stronger and more stable than others. The following market trends are stable in the appropriate market environment and give a good overview of the sorts of patterns that exist in the market.
Earnings Market Trends
Of course, if a company gives an earnings warning, its stock may not be as good a candidate for the earnings-run play. In the right market environment, though, earnings market trends may work in spite of earnings warnings.
In our opinion, the only way to trade earnings market trends is to always sell the stock before the earnings announcement. In terms of percentages, holding a stock through its earnings announcement is a losing strategy.
Stocks often drop sharply immediately after earnings are announced, even if the report is good, because the good news was fully priced into the stock before the announcement. (Remember: buy on rumor, sell on news.) Stocks occasionally continue to climb after earnings reports, but if you were to consistently hold trades past earnings reports, you’ll lose money more often than you make money. And your losses would be large, because most companies announce earnings either after the market closes or before the market opens, so prices can plummet in premarket trading and you’ll have no way to cut your losses. We recommend selling early because stocks sometimes start to sell off toward the end of the last day before the earnings announcement.
Stock Splits & Market Trends
Though the inherent value of a company is not literally enhanced by a stock split, stocks that are about to split will typically outperform the market.
Although this pattern of market trends usually begins ten days to two weeks before the stock’s ex-date, it’s a good idea to wait for the stock to start to ramp up before entering a position. The run-up will generally continue into the exdate and sometimes for a day or two beyond it. Key indicators of how to trade the split can usually be found by analyzing how other stocks that have recently split trended into their splits. As always, use protective and trailing stops. That way, if the market turns against you or the stock isn’t ready to run, you can always trade out with a small loss and then trade back in later if the situation warrants.
When choosing stocks to trade for splits, watch the different market trends and make sure the split ratio is at least two shares for one. Generally, a larger ratio (such as three for one or even four for one) indicates a stronger split run-up. Splits in ratios such as three for two don’t have large price movements heading into their splits. And never trade a stock that’s doing a reverse split (such as one for four.) Reverse splits are usually desperate attempts by failing companies to bolster their dwindling stock prices.
Earnings market trends are one of the strongest market trends around. When a company is expected to have good earnings, its stock usually begins to rise in price, starting about two weeks before the earnings announcement is scheduled to take place. A stock’s price can go up as much as 50% to 100% or more in anticipation of a good earnings report.
The stock of a company that’s announced a stock split to run up into the split’s ex-date can be market trends that will be strong and lasting. (The ex-date is the day a stock’s share price changes to reflect a stock split and revised numbers of shares are credited to shareholders’ accounts.)
