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Investors Business Daily
Business
JUSTIN NIELSEN

How We Handled Earnings For DHI Stock

With earnings season in full swing, should you hold swing trades into quarterly reports? Here's how we handled a recent trade in DHI stock. The reality is you'll win some and lose some in either case.

DHI Stock Shows A Few False Starts

No question the homebuilders have been one of the surprise areas of strength in the stock market. When D.R. Horton looked like it was going to break a short-term downtrend in March, we added it to SwingTrader a little prematurely (1).

The reversal in DHI stock on the day of our entry was followed by another downside reversal the following day (2). We eventually exited when a March 29 market follow-through day saw little participation from DHI Stock (3).

While DHI stock jumped up on volume a couple of days later (4), it immediately pulled back again and undercut its entry-day low over the next few days (5). We didn't trade it that time but it was still on our radar while it hugged its 50-day line.

It's not uncommon for stocks to have a few false starts before they really get going.

The Trade That Worked

DHI stock recovered from its weakness just a few days later with another strong price move on accompanying volume (6). We decided to give it another go on SwingTrader that day.

Initially it looked like it was up to its old tricks with another pullback over the next three days (7). But even at its lowest point, DHI stock still didn't undercut our entry day, found support at its 10-day line and never closed below its 5-day line.

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Those factors allowed us to weather the storm. When DHI stock recovered, we took our first third off to lock in some profit with a 2.5% gain (8). But we were faced with another decision: The quarterly earnings report was due in a couple of days. Was DHI stock worth holding?

Short-term Trading Means Avoiding Big Losses

For swing trading purposes, holding through earnings is generally not worth the risk. Does that mean we miss out on some big gains? Definitely.

DHI stock gapped up for a 5.6% gain on its earnings report and it was even higher earlier in the session (9). A strong move like that can really boost portfolio performance with a decent position size.

Same thing with a recent SwingTrader idea with Meta Platforms. Selling that before earnings meant we missed out on a 14% gap up on its earnings report. In that case we had even more cushion going into the trade.

But for all those temptations, remember there is a downside risk too. We also removed Crocs from SwingTrader with a nice gain before its earnings report. It fell 15.9%.

The point is, you never know what will happen on an earnings report. A big drop is survivable as a position trader since you will have some outsized gains over time that can counterbalance bad earnings reactions.

But for swing trading you rely on smaller gains building up to a good year. Wiping out months of progress in your portfolio due to a single stock becomes harder to justify.

More details on past trades are accessible to subscribers and trialists to SwingTrader. Free trials are available. Follow Nielsen on Twitter at @IBD_JNielsen.

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