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Swing Trading an Earnings Report (Twitter)

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When Technicals Hide the Bigger Picture

Some technicians believe that a stocks fundamentals are evident in its price action. The swirling forces of supply and demand always come to end in a series of singular price points, rendering any speculative potentialities into the hard matter of bid, ask, and fill.

This view may be true, but only if youre content with looking backwards or seeing whats immediately ahead. In Twitters most recent movements, we see both technicals and fundamentals in agreement with the current context: that fundamentals were largely indecisive, or that the fundamentally-driven decisions made the stocks volatility net directionally inert.

But unlike other contexts, the technicals in this case barely hinted at the larger though more subtle forces at play. Either that or you would have missed it (see rectangle) if you werent aware of the anticipated earnings report that Twitter was scheduled to release on April 23.

Twitters Earnings Breakout

On the larger technical scale of things, the nine-day lead-up (see rectangle) might not have looked very significant considering its location within the nine-month trading range.

When it comes to swing trading, we have an important rule: avoid trading when price is locked in a range--instead, trade the breakouts. But we have a secondary rule that actually trumps the first: consider fundamentals over technicals, as supply and demand drives price action, and price action is a mere reflection of supply and demand after the fact.

In the case of Twitter, you would have missed the significance of the movements--and hence, the opportunity--leading up to April 23 if you werent anticipating a its earnings report, for TWTR jumped 7.4% at the open.

How might you have played this?

Setting Up TWTR for a Swing Trade In Anticipation of Earnings

If you were following the lead-up to the April 23 report, you might have noticed the significance of the nine-day climb toward the secondary resistance zone at 35.50. A break above this range would potentially lead to a test of around 37.50, the top of the trading range.

This would have required a bit of a leap of faith, as response to earnings can often be unpredictable, causing a gap up or down depending on the circumstances. But if you were bullish, you might have entered the day before the release of the report at [1], placing a sell stop below the nearest swing low at [2].

Given that this was a swing trade, an that you had a bullish bias toward Twitters earnings, you might have had two profit targets, one at the resistance level at the top of the trading range [3], and the other at the close of the day at [4] (again anticipating a positive outcome).

As you can see, TWTR surged by 7.4% opening at a gap a few points below the first target, closing for the day at 39.77, making this trade a potentially successful engagement.

Sure, this might have been a risky trade, especially from a technical standpoint. But it might have been a favorable risk for those who were fully apprised of the companys fundamentals enough to hold a bullish stance. If you were one of them, then the next question would have been purely tactical: what might have constituted a good point of entry, a reasonable stop loss level, and favorable profit target.

The risk of loss in the trading of stocks, options, futures, forex, foreign equities, and bonds can be substantial and is not suitable for all investors. Trading on margin or the use of leverage is not suitable for all investors and losses exceeding your initial deposit is possible. Supporting documentation is available upon request. Trading futures, options on futures, and FX involves substantial risk of loss and is not suitable for all investors. Carefully consider whether trading is suitable for you in light of your circumstances, knowledge, and financial resources and only risk capital should be used. Opinions, market data, and recommendations are subject to change at any time. The lower the margin used the higher the leverage and therefore increases your risk. Past performance is not necessarily indicative of future results.

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About the author

Karl Montevirgen is an independent content writer. Having been involved in the commodities and FX markets for the last 9 years, Karl writes for several companies and publications in the finance space. 

You can view his extended profile, list of publications, and theoretical content work on his LinkedIn page. 

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