OVERVIEW
The Market Will Rally

This week kicks off another exciting period for us swing traders, with the big tech companies gearing up to report their earnings. It’s the perfect time to get pumped because this is when volatility spikes, and that's where we make our profits. There's nothing quite like the buzz in the market when a company announces its earnings for the past quarter.

How To Trade Earnings

Earnings EP Entry Daily

Earnings-based episodic pivots (EP) are the most explosive and volatile setups you can find. When a stock surprises the market by beating analysts’ expectations, it attracts a ton of buying volume. Everyone, from retail traders to big institutions, gets excited about a company that's outperforming, which pushes the stock’s perceived value higher. As this perceived value increases, more buyers jump in, driving the share price up even more, especially in pre-market and after-hours trading. This activity causes the stock to “gap up” on high volume before the regular trading hours even begin.

What Stocks to Look For

When trading earnings EPs, you want stocks with strong fundamentals. Ideally, you're looking for triple-digit year-over-year (YoY) earnings and sales growth, but even mid-to-high double digits can be great. Some stocks might not show earnings but can have impressive sales growth, which can also be a good indicator.

It's fantastic to see a big beat on analyst expectations and higher future guidance. But the number one thing to watch is volume. The best earnings EPs see gap-ups of over 10%-30% in pre-market trading with average relative volume over 30 days in the first few minutes of the live trading session. High volume indicates that a stock is garnering a lot of attention, and without it, even great news won’t move the stock much.

How to Enter

The best way to enter an earnings EP is to look for a breakout of the first 5-minute opening range high (ORH). Here’s how you do it:

1. Wait for the first 5-minute candle to close: This sets the opening range.

2. Look for the first 5-minute candle that closes above this opening range high: Your buy order should be placed just above the high of the first green candle wick that breaks this range.

3. Place your stop loss: Always set your stop loss at the lows of the day. If the stock falls below this level, it invalidates the trade.

Why use the 5-minute chart? The 1-minute chart is too volatile and can give you too many false signals. The 1-hour chart is too slow and might miss the optimal entry point. The 5-minute chart strikes the right balance, giving the market time to settle and confirm the new share price, which reduces the number of failed entries and maximizes your risk-to-reward ratio with the tightest stop loss possible.

Focus on those earnings EPs, watch the volume, and make sure to time your entries perfectly for the best chances of big profits.

Nasdaq

The Nasdaq had a solid bounce in yesterday’s session, with the daily 50-EMA acting as support, similar to what we saw on Friday. It managed to reclaim its point of control (POC) at $460 intraday and is now encountering resistance at both the declining daily 10- and 20-EMAs. We're starting to see a range developing around $485, which the QQQ needs to break above (white dotted line). This level coincides with prior areas of support/resistance and the declining EMAs.

Yesterday's volume was notably high compared to other green days, and the green hammer candle typically signifies a continuation of the bullish trend. This indicates a bullish outlook for the Nasdaq in the short to medium term. However, this is dependent on the upcoming earnings reports from large-cap companies like Tesla and Google this week.

We'll delve into these earnings in more detail, but purely from a technical analysis standpoint, we are bullish on the QQQ and suspect the Nasdaq will be trading at or near all-time highs in the coming week or two.

S&P Midcap 400

The midcaps are looking incredibly strong and are in a very bullish position right now—definitely something to get excited about. Yesterday, the daily 10-EMA acted as a significant support zone, attracting a high volume of buying pressure and driving the market action.

The visible range volume profile (VRVP) shows an overwhelmingly greater buying volume compared to selling volume at all levels above the daily 10-EMA. There isn’t any heavy supply zone above the current $557 level, which reduces the likelihood of bearish action.

This week, we want to see the MDY hold and reclaim $560. Ideally, we'd like to see a bull flag or volatility contraction pattern (VCP) form on the daily chart above the daily 10-EMA. This setup would be perfect for another leg higher. However, given how well-received the first test of the daily 10-EMA has been, it’s quite possible that we could see another big leg higher even with little consolidation.

Russell 2000

The story is very much the same for the small caps. The IWM bounced perfectly off the daily 10-EMA yesterday, albeit on lower volume, but still managed to close the day firmly in the green after an initial intraday dip.

Our analysis for the small caps mirrors that of the midcaps. Ideally, we want to see some sideways action here, with a flag being built. This would allow emotions to cool down and for buyers and sellers to get comfortable with the IWM at these levels, especially since many stocks are quite extended following last week's big run.

By seeing some consolidation or a volatility contraction pattern (VCP), we can set the stage for a more sustainable move higher. This period of consolidation would be healthy, allowing the market to digest recent gains and build a stronger foundation for the next leg up.

DAILY FOCUS
Do Your Pre-Market EP Scans

The market continues to show strength, and with the textbook bounce yesterday in the small and midcaps, we see another leg higher as imminent. The upcoming earnings are a big deal, and we urge you to run your pre-market scans to find stocks gapping up on big volume due to positive earnings reports.

Tesla is reporting its earnings after hours today, so tomorrow will be the earliest time to look for an entry there. However, today we still have other stocks moving pre-market, such as Spotify, which should be on your radar.

A word of caution: don't get too excited and dive in blindly. Let the trades come to you and stick religiously to your entry criteria. Only enter on a break above the 5-minute opening range high (ORH) and focus on strong growth stocks, not random gappers.

We are positioning ourselves with moderate risk simply because most breakouts have already made their moves, and there are only a few potential entries outside of the EPs we are seeing pre-market.

Keep an eye on those earnings-based EPs and maintain a disciplined approach. Only take trades that meet your strict entry criteria, and remember, it's better to be selective and cautious in this current market environment.

Stay focused and good luck!

WATCHLIST
An EP To Watch

SPOT: Spotify Technologies S.A.

• Spotify reported impressive growth metrics in its latest earnings release. Monthly Active Users grew 14% year-over-year (YoY) to 626 million, while subscribers increased 12% YoY to 246 million. Total revenue was up 20% YoY, reaching €3.8 billion. The company also achieved a gross margin of 29.2%, and operating income improved to €266 million.

• Due to this impressive report, Spotify is jumping pre-market, with the stock surging by 13% on strong volume. This has generated a lot of excitement among investors.

• However, one issue we see with the stock is its average daily range (ADR). Spotify has a relatively slow-moving ADR of about 2.7%. This means that, unless we use a 3x leveraged ETF, this setup doesn’t meet our threshold of a >5% ADR. We prefer trading faster-moving stocks because we don’t want our capital tied up in a slow-moving company where a 20-30% move could take months to materialize.