Let’s hop into my time machine.
It’s the early 2000s and one of my favorite go-to stocks is Yahoo (man how times change). The stock is gapping down big on earnings.
Yahoo’s numbers are horrible. Revenues are down. Guidance is revised. There is increasing competition from the likes of AOL, Altavista and a little guy named Google.
The poster child for the dot-com boom is on it’s way to dying a slow death. I know it, and so do most people. If there ever was a stock setting up for a short, this one is it.
So I do what any rational investor slash trader would do. I short the stock.
I feel like a genius after the first few days of entering. The stock drops another few percentage points. I expect it to never come back up. It’s a dog and everyone knows it, so I hold on for a bigger gain.
However, then something peculiar happens.
Without any new positive news, the stock reverses course and is up 2%. From there, it continues higher and is right back up to where I shorted it. Within a few more weeks it not only above where I shorted, but it has now put in a bottom and is trading like a momentum stock.
This didn’t make sense to me. I’ve always tried to follow the rules of logic, and this is highly illogical.
Why would a stock with horrible earnings and news go higher?
While in all my years of trading I’ve never been able to come up with a satisfactory answer to the why of this question, I do know what usually happens. Stocks with bad news tend to go higher.
Years of testing earnings gap downs has revealed 5 different setups that happen over and over again, every single earnings season. We will go over these setups and more in next week’s earnings course, as we get ready for yet another earnings season.
In today’s video I show you 5 examples of stocks that gapped down on bad news and subsequently went on amazing bullish runs.
Earnings season is starting up the second week of July! If you want to learn 12 of my favourite Earning’s Swing Trading setups, along with my exact strategy to trading these setups every quarter, then checkout my live 3-day course I will be teaching from June 29th – July 1st!