How to Take Cues from Earnings to Identify Successful Breakouts

The earnings season has already started and there will be more companies that will release their quarterly results in the coming weeks. This period of the quarter is important in determining the pace of economy as well as the outlook for individual businesses and sectors. The stock market is obviously highly sensitive to earnings’ outcome, specifically to whether consensus estimates were missed or bettered. But these earnings reports can also cause needless volatility, bringing losses in the short-term. So, what is the best way to leverage the earnings season to make profits in stock markets?

Things to Keep in Mind

  1. Do not bet on any stock just before or on the day it is scheduled to report. Baseless speculation and short-term volatility may reduce your capital. It is better to wait till the earnings are out and the volatility in the stock subsides.
  2. Make a shortlist of the stocks that are trading near pivot levels and also meet the checklist of sound fundamentals. Also, make sure that the stock belongs to leading sectors
  3. Track results of large corporates within the industry group of one of your stocks of interest. These results will provide information regarding the health of the general market and can be the leading indicator of how the entire sector/industry group will perform.


How to Discover Leading Stocks and Their Successful Breakout

  1. Shortlisted stock that have good fundamentals and are trading near pivot levels must be analyzed carefully. The key points to look for, other than the numbers, are management commentary and outlook. Any new product launches, new capex or expansion announcements, and acquisition plans are the key drivers that will fuel the stock’s future growth.
  2. Just after the results, backed by new announcements, if the stock exhibits breakout with strong price-volume action, it is a sign that it is up for a bull run. Typically, the volume for a successful breakout just after earnings announcements are more than 150% of the average volume.
  3. Also, look for the stock that are retaking their key moving averages (50- and 200-DMA) on high volume just after the announcement of results. These stocks maintain their momentum and breakout to reach new all-time-highs.

Infosys announced its results recently. More than the financials, what played out for the stock was management’s positive outlook. Management increased their revenue guidance for the upcoming quarters by 10%, which was a strong signal validating its improved growth prospects. The stock gained momentum and rose with heavy volumes (~225% of average volume) after that and has been under accumulation.

Wipro broke-out from its pivot level with ~235% of average volume on the day of its results, but before announcement. However, the credibility of the breakout will only be established after the earnings announcement brings some key drivers that can support the Company’s prospective growth and profitability in a sustainable manner.

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