Should you buy a stock that breaks out just before it reports earnings?

1. How is the overall market doing?

Is the current outlook a confirmed uptrend or something else?

It’s generally best to avoid making any new buys while the market is in a correction.

If the outlook is “Uptrend under pressure,” that also adds risk, since it means signs of institutional selling have been on the rise and it’s possible the market is on the verge of slipping into a correction.

So as a general rule, only take on the added risk of buying a stock that breaks out ahead of earnings if overall market conditions are positive.

2. Is volume unusually heavy on the breakout?

To help minimize risk and increase the odds of success, make sure volume spikes higher on the day of the breakout. It should be at least 40% – 50% higher than normal.

A big spike in volume indicates heavy buying by institutional investors, and it’s critical to see that enthusiasm as the stock breaks past a key area of resistance (i.e., the ideal buy point in the base).

Be wary of any breakouts on tepid or below average volume, especially when a stock is also scheduled to soon report its latest earnings.

3. How far off is the earnings report?

When the stock breaks out, is it 2 or 3 weeks away from reporting or just 2 or 3 days?

The amount of time can certainly impact your risk. If a stock breaks out a few weeks prior to reporting, that can give you time to potentially build a profit cushion that can help you sit through the earnings release.

4. Does the company have a history of steady – or wildly fluctuating – earnings?

Take a look at the last several quarters: Are the numbers fairly steady or do they show huge swings from quarter to quarter?

While past reports certainly do not guarantee how a company will fare in the future, in general, it would be riskier to buy a pre-earnings breakout with a stock that has a history of wild swings.

5. Is it a top-rated CAN SLIM stock breaking out of a sound base?

To help keep the odds of success in your favor, make sure the stock has the kind of CAN SLIM traits the best stocks have just before they launch a big move.

Also make sure the chart pattern is sound.

6. How has earnings season been going so far?

Have companies generally been reporting well – and getting rewarded with a nice bump in share price? Or has sales and profit growth been generally disappointing?

Also, if some leaders have missed estimates by a penny or so, has the market just shrugged that off or has it sent those stocks sharply lower? That will give you a sense of how forgiving or unforgiving the current environment is.

It’s obviously riskier to buy ahead of earnings in a more unforgiving market.

7. How have other leaders in the same industry group reported?

If other stocks in the same industry group have already reported, how did they do? Did they show good earnings growth and shoot higher? Or did they disappoint and decline?

While that’s no guarantee of how your stock will report, that can give you a sense of the overall direction and health of the industry.

Have Your Selling Game Plan in Place

Remember: If you do buy a stock that breaks out ahead of earnings, be sure to have a selling game plan in place.  You may also choose to use stop-loss and trailing stop orders to help protect your profits and cut short any losses.