Do you ever watch the action after hours with/without money on the line? Do you get stressed out, anxious or worried that stock being taken down following an earnings report is going to hit your p/l badly the next day? It happens to many of us, but that shock of a move is often on lower volume or turnover, which means there is a lack of conviction to sell.
The market is often a game of trickery and many shenanigans are witnessed, yet if you stay the course and go with what is truly happening you may not get fooled. After hours action is usually thin trade, which means fewer participants creating an il-liquid market.
In these moments, especially after an earnings report prices are pushed around without much effort, the result of little pricing depth. That lack of depth is often a smokescreen and punishes those who take action trading in off hours. Often times the next trading day(s) finds much better price discovery on a stock that might have shown much less activity after the markets closed the prior day.
My advice would be not to look, trust or believe the price action in the after hours or pre-market. The intention is to fake out the crowd. Two weeks ago Intuit (NASDAQ:INTU) reported decent earnings but the stock was pummeled after the close, down some 5% or so. The hot money removed, we now see the stock not only recovered those losses but has tacked on another 6% to close at an all time high above 202. Those who panicked and left the name and did not wait patiently would end up buying the stock much higher.
One instance last week was showing a modest price rise pre-market in Google (NASDAQ:GOOGL) on May 31. Volume was suspect, yet some news may have triggered some bidders in the stock.
I waited for the market to open before executing a trade, which in this case occurred about 3 minutes after the open (we bought the 1080 strike July monthly call for 34 dollars at that moment). By Friday, our call had doubled to 68 bucks, an astounding gain in one day (we took that down and rolled up to a higher strike, now we have a free trade working and cannot lose money regardless of what the stock does going forward).
While the pre-market may have been a set up for this stock to move higher, it was the waiting we did for regular hours to start that gave us the push to get involved in the name.
Which stock should you buy in your very next trade?
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