A case for caution.

Earnings season creates lots of drama, intrigue, and hype as well as the dream of striking it rich by picking the big winner.  It’s easy for even experienced traders to get caught up in the gold rush that earnings season creates.  It’s the same business plan that built Las Vegas.  Trading an earnings event is gambling pure and simple.  Anything is possible, and I think a good reason to build a case for caution.

Successful trading is not a sprint; it’s a marathon that requires careful planning and endurance.  We all want more but the allure of the big win is often the temptress leading us to slaughter.  With more than 800 companies reporting the next two days anything is possible and could make for violent market action.  I have learned over the years (often the hard way) I don’t have to trade every day to be successful.  As technical traders, we give up our edge by over trading earnings.  Think about it.  If anything is possible, isn’t that gambling?  How can technical analysis give us much of an edge if anything is possible?

On the Calendar

The hump day Economic Calendar has three potential market-moving reports.  At 8:30 AM Eastern is the Durable Goods Orders which consensus expects a gain1.0% overall.  Ex-transportation is seen as up 0.5% and core capital goods also increasing 0.5%.  At 10:00 AM we get the New Home Sales report which is expected to moderate to a 555k annualized rate in September vs. the 560K in August.  Then at 10:30 AM is the EIA Petroleum Status Report.  There are no forecasts for petroleum, but a quick look at oil stocks would suggest traders are bullish and expecting demand to continue to lower national supplies.

The earnings calendar has more than 300 companies reporting today.  If you need an example as to why you need to be aware of earnings reports take a look at CMG, JNPR, and AMD this morning.  These companies reported after the close yesterday.  Those traders will be singing the blues with big losses in their accounts today!

Action Plan

Although the DIA set new records yesterday on the back of great earnings reports from MMM and CAT, the other indexes took a little siesta from the rally.  Futures are pointing to a flat open currently but with so many companies reporting earnings today that could obviously change in very quickly.

The overall trends are bullish, but for most traders, I think it’s time to exercise a little caution.  With so much data coming out the next couple days could be very challenging.  Big gaps and whipsaw price action can damage the accounts of even the most experienced traders.  Try not to get caught up in the drama and hype surrounding earnings.  Remember we want Quality over Quantity and not every day has to be traded to be successful.

Trade Wisely,

Doug