Frequently Asked Questions
Pocket pivot price/volume action can give clues in the one or two days leading up to an earnings announcement. That said, it would be foolish to hold a large position in a stock going into earnings if you do not have a profit cushion in the stock. You could hold a smaller sized position going into earnings without profit cushion, but know that gap downs of greater than 10% are possible. Other than that, use your normal sell rules to get you out of the stock on and after earnings are reported should the stock hit your sell alerts.
On the topic, our recent comments on holding BIDU into earnings (as of October 19, 2010) also stand for any other pocket pivots we've mentioned recently, such as Amazon.com (AMZN), for instance. If you choose to hold into an earnings announcement, consider your risk vs. the size of your position. For example, if you want to hold a 10% position in XYZ into earnings, and XYZ tanks 20%, it will cost your portfolio 2% overall. If you want to hold a 20% position you would suffer 4% damage to your portfolio. Frame the problem within parameters of potential risk given the scenarios that could result, and what you are willing to tolerate as potential downside risk. Also consider the worst-case scenario of a drop of 20-30%, which is rare but still always a possibility. 30% on a 10% position costs you 3% damage to your portfolio, so consider the various potential outcomes in this manner.