Technicals often precede fundamentals

It is something I was taught by Dr. Alexander Elder already at the beginning of my trading journey, but I have realized it even more along the way based on my personal experience. A single example in trading doesn’t mean very much as it can often include market noise and randomness. However, these recent examples reminded me the lesson.

NFLX -70% in 5 months

Netflix started to turn down and I exited with a profit in January (red arrow), few weeks before the earnings announcement and gap down by -21%. I hold long-term trend positions through earnings date if the trend is going in my favor. Here, technicals preceded fundamentals and gave a sell signal well before. The second earnings gap down -35% happened in April when the downtrend was still intact.

NFLX - Netflix downtrend and earnings gap down

FSLY -85% in a year

Fastly turned into a downtrend for me in early 2021 and I exited my position with a profit (red arrow). It announced earnings in May and price gapped down falling -27%. Many months later in February this year, the stock gapped down again by -33% on earnings call. It has been in a sustained downtrend the whole time.

FSLY - Fastly downtrend and earnings gap down

FB -51% in 8 months

Meta turned down and I exited with a profit in December (red arrow) followed by the next earnings announcement and -26% fall on 3rd of February. The downtrend has been intact, but Meta doesn’t necessarily need to gap down twice like the other two examples above as the price has been selling off sharply and becoming oversold in a potential double bottom pattern. Whatever way it goes, it’s not a place for me to hold the stock with a long-term growth perspective while in a downtrend. It needs to fix a lot of the technical damage to be considered in an uptrend again.

FB - Meta downtrend and earnings gap down

Any single event in trading is random

Of course, it’s not always going to be the case that price action gives the right information just before earnings. A trader needs to think in probabilities not certainties. However, I prefer not to hold downtrends into earnings announcements even if it makes me miss some occasional reaction rallies.

Lesson Learned: Technicals often precede fundamentals.

You may want to read on the same topic: Trading into earnings is a crapshoot

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