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TheStreet Open House

3 Earnings Trades for the Week

Stocks in this article: SWHCCKECSAM

Trading this week's earnings MINNEAPOLIS ( Stockpickr) -- The waves of the market are changing. Trends in place for several months are starting to crumble, making the market more difficult for traders to navigate.

Stocks escaped last week with fractional gains thanks to a late day Friday rally. Without that move, the market as measured by the S&P 500 would been down for the week. Instead, stocks managed to eek out a fractional gain.

This sort of sideways market is particularly dangerous for traders. Without a clear direction, it is easy to get whipsawed. For those venturing into the waters, I recommend a strict adherence to the rules for whatever strategy you may be following.

With respect to trading stocks in advance of earnings, that means keeping a finger on the trigger to close positions should you find yourself on the wrong side of a trade. For my approach, that includes using aftermarket trading to exit a position should that become necessary.

That was starkly apparent with last week's buy recommendation of McCormick & Schmick (MSSR). The seafood restaurant released disappointing results, which sent shares south -- and that move only became more severe after the company conference call.

Related: Rocket Stocks for the Week

Immediately after the release traders could have exited the trade with a 3% to 5% loss. If you had waited until the open the day after, you would have seen your shares down 8% to 10%. These little discrepancies can make a big difference in your returns.

Another example was Warnaco (WRC), another buy recommendation from last week. Again, the news was as expected. Results were good, but the company noted margin pressure for the future that negatively impacted share price. It took some time for the full impact of the news to hit the market. An immediate exit of the trade could have been implemented, keeping damages to a minimum.

I cannot overemphasize the importance of following these rules. You are either a trader or you are not. If you decide that you want to trade these stocks, make sure you are paying close attention when news is released, and do not fret the trading cost of using the aftermarket to exit a trade. You will be better off in the long run.

On the positive side, we did manage to make some money selling Costco (COST). The stock was priced for perfection, and its earnings report did not deliver the goods. Shares were down 2% to 3% during the trading day after it released its report on Tuesday.

With a sideways market that may be tipping south, I am changing my own approach to determining future outcomes with respect to companies reporting earnings. Here are three trades for this week.

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