Our last two columns discussed the difficulty when faced with earnings. But even after an earnings report, trading can be tricky as stocks absorb the new information and analysts adjust their valuation models. TJX provides an example of swing trading after an earnings gap.
Buy Or Wait On Earnings Gap?
Like many stocks, the April market pullback set up a nice double bottom for TJX with an entry at its March high (1). It was shallow, just 10% depth but not atypical for a slower moving stock like TJX.
Of course earnings can often turbocharge even a slow stock. This latest report saw TJX jump 7.5% at its peak after its earnings report (2). For a stock with an average true range (ATR) of just 1.4% before its earnings gap, that's a big move.
But it couldn't hold it. By the end of the day, it was at the lows of its trading range and up only 3.5%. Investors rushing in at the peak were in an uncomfortable situation.
That pressure mounted the next day when TJX dropped another 2% and filled in most of its gap (3). But it also provided an opportunity for astute traders. As TJX bounced the next day and recovered above its March highs, we added it to SwingTrader (4).
Position Size For TJX
We started with a quarter position in TJX. Using the lows of the day prior to our entry gave us a risk of 3.1%. But that was pretty large for a stock that typically doesn't move that much. Our intention was to add to the position if it held up well, but we had already filled up our portfolio with other names by the end of the day.
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After a brief pause for a couple days (5), TJX saw a nice 2% move (6) as we started to make progress on the position. Arguably, this could have been another place to add to the position. But again, we were faced with an already high exposure level. We opted for larger positions in faster moving names.
That was tested on May 31 with a violent shakeout in the indexes. But TJX held firm that day (7).
Locking In Profit While We Had It
A mild downside reversal started us thinking about the exit for TJX (8). We had achieved a 5% profit, but our position was smaller and typically more weakness follows downside reversals. That's what unfolded the next day and we exited the position to lock in a solid gain (9).
As TJX trades tightly, it might earn another shot on SwingTrader. And maybe this time, we could go with a larger position.
More details on past trades are accessible to subscribers and trialists to SwingTrader. Free trials are available. Follow Nielsen on X, formerly known as Twitter, at @IBD_JNielsen.
