Folding Pocket Aces

__________

Many traders often improvise their strategy on how to navigate earnings season. So long as you develop a style of risk management that you are comfortable with, there is nothing wrong with taking a case by case approach. However, for the purposes of this post, I thought I would detail my strategy for a certain stock, of which I currently have no position.

We all know that AA (Alcoa or pocket aces) reports earnings after the bell today to kick off the season. So, let’s take a look at whether it is worth holding, buying, shorting, or leaving alone leading up to it.

On the weekly chart above, quite simply we can see the tremendous run that the stock has had off the summer double-bottom. Moreover, Alcoa is now quickly running into a well-defined area of resistance from January, 2010, just above. Thus, in the short-term (days, a few weeks), the risk/reward does not justify allocating fresh capital to the long side here, regardless of the actual earnings.

Now, as far as whether to hold an existing position into earnings, I believe that the stock is much more susceptible to a gap down than a gap higher due to the distinct possibility of aggressive profit-taking on any, and I mean any, slight disappointment in the earnings report. So, I do not think holding a sizable position through earnings is a good choice.

The next option is to position yourself for Alcoa to pullback after tonight. While this strategy makes sense for a few technical reasons, a few of which I outlined above, the fact remains that the stock is still in a very powerful and steep uptrend. Overbought can become even more so during a powerful uptrend. Although extended here, just because a stock is not a good buy does not make it a great short.

The above analysis leads me to conclude that your best bet is to fold pocket AA into tonight’s earnings report and take a pass on playing it, save perhaps a few exotic options strategies for advanced options traders. Earnings season for conservative swing traders is not a particularly fun time. We are dealing with more external variables than usual with a direct effect on price action and volume. Taking a pass on earnings plays is not a sign of trepidation. Rather, is a perfectly acceptable risk management strategy for traders who want to have staying power in this business.

If you enjoy the content at iBankCoin, please follow us on Twitter