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TheStreet Open House

Wait for Reaction to Google's Earnings

NEW YORK ( TheStreet) -- Trading a stock in front of earnings in my opinion is usually a coin flip. First, you have to get the number right -- will the company meet or exceed the expected numbers? -- and then you have to get the reaction right. Sometimes numbers are beat and stocks sell off. Other times numbers are missed and stocks climb.

If I'm not already in a stock, I tend to just avoid it as a result until after the numbers hit. Google (GOOG) is a good example of such a stock and the potential to trade it post earnings. Google reports Thursday, and though I expect it to handily beat the expectations, I honestly don't know if that will take the stock higher. What I do know is that how it reacts will potentially give me the trade setup if I simply wait to see the reaction; no need to take a chance in front of the number.

On this daily chart from Monday, for example, Google looked as if it should be sold because it was having real trouble working through the resistance at $550. The very next day it shot up almost $7 and appears ready to test the resistance area again, in front of the earnings report.

If you pull the chart back though, you can see that there is a huge range trade and the current price level is right in the middle of that range. There is no edge to guessing which way Google will trade once earnings are released. The edge is to fade the edge of the range.

Wait for earnings to drive the stock one way or the other. That's what happened previously. In both of Google's two prior earnings reports, the result was a stock that gapped higher ($60) or lower ($40) off the reaction. I expect this to happen again, and in this particular case there are good boundaries on both sides of the current price level that can be used for a quick trade in the opposite direction to the initial reaction.

If Google trades down to the bottom end of the range near $475 it is probably a good buy, and if surges to $625 then the opposite trade is in play. If Google is on your radar screen, the trade I would advise for this earnings setup is to let it stretch coming out of earnings and then fade it.

Until next time, just keep trading the charts!

At the time of publication, Little had no position in Google, though positions can change at any time.

L.A. Little, author, professional trader and money manager, writes daily on his own educational Web site for traders and investors. He has been featured in numerous publications and is the author of Trade Like the Little Guy. His new book, Trend Qualification and Trading, details the principles and techniques he writes about on TheStreet. Little�s background includes degrees in philosophy, computer science, computer information systems and telecommunications. With a trading philosophy centered on capital protection first and the accumulation of consistent gains over time, Little espouses a simple technical approach to trading the markets that is a throwback to the days of past. With a focus on swing points and trend qualification, he provides a breath of fresh air to an otherwise crowded room of derivative indicators with an emphasis on technical minutiae.

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