Stockbee on trading Episodic Pivots

My process flow for Episodic Pivots (EP)

Analyse all after hours movers up 4% plus on 50k volume to see if there is stock with neglect+ game changing earningsPre market Run IB scanner to find stock up on 50k plus volume and up at least 2% . See if there is stock with neglect+ game changing earnings

During the day Run EP scan c/c1>1.04 and v>3*avgv50.1 and v>=300000 multiple times , see if there is stock with neglect+ game changing earnings

Tools used:

Marketsmith to find earnings and earnings trends, float, fund holding

Theflyonethewall to see news on the stock

IB scanner Top % gainers volume >50k

Trade Ideas Biggest gainers scanner + Trade ideas stock with Most upside momentum

Other Data Sources:
What you need is good quality, reliable and timely earnings data. There are several sources of earnings data like Bloomberg, Thomson, Zacks, Reuters, Wall Street Journal, Investor Business Daily, S&P , Briefing etc. Basically more or less there are only 3-4 major data providers to most sites, so you will find same data everywhere e.g. the WSJ site data is provided by Zacks.Earnings Cut off
Now you need to decide on earnings growth rate cut off. Anything less than 25% is not worthwhile. Higher the better. I also do not look at earnings of less than 5 cents per share, because doubling 1 cents to 2 cents is 100% but may not be worthwhile. If your cut off is say 25%, depending on market circumstances you will get 1500 to 1000 stocks. I use a higher cutoff of 100% to further reduce the universe. This gives around 200 to 700 stocks based on where we are in economic cycle. Stocks which announce 5% earnings or negative earnings also start rallying post earnings. The reason being thy might guide higher for next earning season. Similarly a company having very high earnings might tank post earnings if its future guidance is low or if that earning is happening after a major price move, where it is already discounted.Sales Cut off
This one is little tricky. There are many industries where growth of 25% may not be possible. But again it is safer to take higher cutoff.I take 5% but you can use 25% plus and further reduce your tradable universe. In ideal scenario, you must strive to find both very high earnings and very high sales growth. Such hyper growth scenarios, if they are complete surprise can kick off virtual stampede. TASR was one such case.Price ReactionThe stocks reaction to earnings is critical. Three things will happen after a significant earnings 1) immediate breakout 2) no reaction stock continues in range (this might breakout later closer to next earnings) 3) reversal ( this typically happens after a string of earning surprises and significant price growth).Once you do this for extended period of time you will learn more about how these stocks behave over long periods. You will also get most of the big movers before most people have even heard of them. You will be able to tell weeks in advance which stocks will make it to IBD100.Why not scanners
The most critical part in this is building your own databases. If you use scanners to get this data, you will not get same results. The most scan data is batch processed with significant time lags in many cases. The earning change will get reflected in most scan after 24 to 48 hours in some cases after a week. Most free online scans have data lag, that is one of the reason, they are free.How is this different from the IBD EPS ratings.
IBD EPS ratings are good but the way they are calculated they tend to lag on certain set of stocks. Especially stocks which had string of losses for many quarters and become profitable ( which is the case in many new companies or turnaround situation). Another thing is IBD waits for earnings momentum to build before entering. In many cases companies have outstanding earnings only for 1-2 quarters. They immediately react to the earnings. The IBD EPS and Relative strength rating increase , they form cup and handle and then breakdown.
If you track the before and after earnings ratings for IBD EPS, you will notice the change after earnings season. If you read the IBD New America section carefully, you will notice many stocks highlighted are the triple digit earnings stocks, which recently had acceleration in earnings or sales.

Once I have the database I continuously rank it by price appreciation. The objective is to continuously look at top 25 price performers post earnings for opportunities. I also look for sector trends in this earnings data. You will be surprised at the longevity and strength of some trends post a stock had an earning/sales acceleration. Such trends last years. Go back and see the commodity sector or oil and energy sector, the stocks in that sector had triple digit acceleration 3-4 years ago and they are still rallying.

Typically in my experience of interacting with traders who have mastered this strategy, it takes at least 2 earnings season to get better hang of this. But the rewards of persisting with it are very good. After all it is statistically proven anomaly.

if you are looking for a profitable strategy to trade, you might be interested in putting together a working plan for next earning season.

  • Earnings Data Sources: You need a reliable source for earnings. I use the Investors Business Daily and Wall Street Journal for this. Besides these two there are many other sources of earnings. When choosing a source I look at how they adjust earnings for one time events. Overall IBD does a better job on this.
  • Three types of earnings announcements: Earnings announcements are made after close, before close and in some rare set of companies during market hours. I concentrate on the earnings announced after market close. They appear in the IBD daily edition under ‘Company Earnings Report’ section.
  • What to look for in earnings: To narrow the set of companies to track and trade for this strategy, based on my prior experience, I only track companies whose earnings are up 100% or more quarter over quarter and the earnings should be at least 5 cents. Sales/revenue should be up 5% or more. Doubling of earnings is significant. Few companies meet that criteria. So I put all the stock meeting this criteria in a list. Now what one is looking for is earnings acceleration. IBD will have those stocks with up arrow to indicate earnings acceleration. Besides that I look for price action on that stock by looking at how much they are up in last 65 days or so. I am looking for stocks which have not rallied in anticipation of earnings. Even better is stock which has no analyst coverage and is neglected. Stocks with less than 100% plus earnings also breakout, but to prioritize, I only focus on above 100.
  • Breakout: An earnings surprise on stock which has not rallied significantly will lead to breakout next day. Most of the time I will enter in the morning and add to position later if the volume climbs above average volume. Many times such stocks will gap up 5 to 300% on day of earnings and still make further moves of 20 to several hundred percent in next 3 to 12 months. I look to capture such moves. Most of these breakouts will have minor pullback at best and just go up for 2 to 6 weeks before having a reaction. So if you don’t enter on the earnings day you will be just a observer.
  • Stops: I put stops 1 dollar below the gap low if it is gap up or at 2 days low and trail with stop. In these trades I move my stops quickly once it makes 20% move. Objective in such method is to capture several 20% moves.
  • Watchlist: I maintain a watch list of stocks which respond with a high breakout on earnings day of 4% plus for next one year. These stocks often have several more breakouts during the year and make multi month or multi year moves. All major movers like NTRI, HANS, TIE, AAPL, ICE, GROW and several others had series of 100% plus earnings growth during their entire rally period. The oil stocks which had a stellar rallies for last couple of years or the steel stocks also had several triple digit earnings.
  • How many opportunities: Even in bear markets you will find opportunities using this strategy. If you set up your system properly, you should find 20-25 opportunities like this in every earnings season. When market expectations are low, or market has had several months of correction, you will find 50 to 100 opportunities in an earning season.


How to become good at trading Episodic Pivots

The way market operates you never know on which day a big Episodic Pivots (EP)stock  will show up which can make your year. The essence of Episodic Pivots is surprise and by definition you cannot anticipate a surprise.

One of my biggest EP trade was on a stock which had a EP on a day where only 20-30  or so stocks were up and everything was crashing post the Sept 11 market swoon. It was a company making bomb detection equipment for airports. It went up over 70 times in next 6-9 month and was finally bought by GE.
So the idea should be to develop a very well thought out daily plan for trading EP. To do so you must divide the day in to parts and have plan/checklist for each:
  1. After market close earnings: This is when companies announce earnings or guide higher. You must have a plan to track both. When doing this find just 1 or 2 good source of information and track it. Do not make it a complex process. I track Briefings earnings page and IBD earnings summary for this. Earnings Calendar (Free resource)
  2. After Market Earnings Guidance: Earnings Whisper email ( free resource)
  3. After market close price gainers: This you can find on WSJ page. (Free resource)
  4. Before open earnings: Again I look at the Briefings calendar for this.
  5. Before Market Price gainers: I use IB scanner for this. This scanner I open from 7 AM onwards



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