Analysts upgrades and downgrades are popular in the financial market. On every trading day, analysts will publish their ratings on certain stocks and assets. As a result, traders use this information to buy or exit the mentioned companies.
In this article, we will look at how you can trade stocks with a fresh upgrade and downgrade.
How analysts upgrades and downgrades work
Before we look at how you can trade such events, let’s look at how analysts come up with their updates.
Most investment banks like JP Morgan and Goldman Sachs have a team of analysts that track several companies. Large firms have analysts tracking a sector and others tracking specific companies.
Therefore, as part of their work, these analysts are required to come with their target of share prices of a company. These targets are usually changed depending on new information like mergers and acquisitions (M&A) and news.
Analysts estimates explained
In general, analysts usually set a specific target for a stock and the overall thesis. Here are the meanings of these analysts calls:
- Overweight (strong buy)- This means that the stock will outperform the overall sector in the near term.
- Buy - This is a recommendation to buy a stock at the current price.
- Hold - This is a simple recommendation to hold a stock. If you have bought it, you should continue holding it.
- Underperform - This means that the stock will likely underperform the overall stock market.
- Sell - This rating means that you should sell shares of a company.
- Reiterating - When they reiterate, analysts are basically emphasizing that their previous rating stands. It is also known as maintain.
It is worth noting that all analysts upgrades and downgrades are not created equal. Investors will often listen to big companies like Goldman Sachs and JP Morgan than that of small boutique companies.
Also, many traders pay close attention to ratings of respected analysts.
But remember, not all companies have analysts coverage. In general, many investment banks follow large companies, most of which are in the S&P 500. Obviously, it does not make sense for a bank like Goldman Sachs to track a small-cap company with a market cap of less than $50 million.
› How to Day Trade Small Cap Stocks
How to identify stocks with fresh upgrades and downgrades
Many day traders react to analysts outlooks that are in the media. For example, fresh upgrades and downgrades of major companies like Microsoft and Alphabet will always make it in the media.
However, most ratings never make it to the press.
Still, there are many free platforms that can give you these analyst ratings. One of the best is MarketWatch, which keeps track of these upgrades and downgrades. The chart below shows the most recent analysts calls.
Marketwatch upgrades and downgrades
Below is another list by Briefing.com.
Briefing - Analyst stock upgrades
How to trade stocks with latest upgrades and downgrades
In general, a stock will either rise or fall after a fresh upgrade or downgrade. However, as mentioned above, these ratings are usually not the same. In fact, many stocks will not react violently to analyst’s ratings from smaller firms.
First, you should look for companies that have been upgraded and downgraded, as shown above.
Second, you need to look at the catalyst for the upgrade or downgrade. For example, in the charts above, we see that analysts upgraded stocks like Snap and Pinterest because the two firms delivered relatively strong corporate earnings.
Third, you should look for specific technical levels. For example, when Snap was upgraded, the stock rose to an all-time high of $64.2. This means that the price was slightly below the psychological level of $65.
Also, a closer look at the daily chart shows that the jump was actually a bullish breakout since the stock was previously in a triangle channel whose support and resistance was at $48 and $57.40, respectively.
Predict key possible levels
Therefore, it is clear to predict the key possible levels for the stock. First, the stock could continue rallying because of the rating. Alternatively, it could go through a pullback as bears target the support at $57.40.
Snap chart from Tradingview
Another recent upgrade was Wynn Resorts, a company that suffered substantially because of the virus. The company was upgraded by Citigroup analysts, pushing it from $108 to $119 within a session. Looking at the hourly chart shows nothing important in the stock.
Wynn Resort Hourly Chart (source: TradingView)
However, looking at the daily chart shows that the stock had actually managed to move above the important resistance level at 117.23. Therefore, it means that in the long-term, the stock will possibly continue rising after clearing this resistance level.
Wynn Resort Daily Chart (source: Tradingview)
Multi time-frames analysis
Therefore, after a company receives an upgrade or a downgrade, it is usually important to conduct a multi-timeframe analysis. That’s because it will provide you with a clear picture about what is happening.
The overall chart pattern
Also, it is essential that you look at the overall chart pattern. For example, in the hourly chart above, we see that the Wynn Resorts is forming a bullish consolidation pattern. Therefore, there is a high possibility of a bullish continuation in the future.
Finally, you should always embrace the best risk management strategies when trading companies with fresh upgrades and downgrades. You should use tools like stop loss and take profits to reduce substantial losses.
Final thoughts
Analysts upgrades and downgrades play an important role in the financial market. They are usually key catalysts for volatility. Using the tools and strategies mentioned in this article can help you make profits while reducing risks.
