10/29/2010

CALD: Callidus Software

If you have well set method they just show up on your scans. Highlighted this to members early in the morning.

Some developing setups to watch

DPZ, ICON, UHAL watching for possible entries in near future.....

10/27/2010

Daily Market Analysis Video from last night

To see the video please visit the site.

Three basic types of setups

There are only 3 basic types of setups. All traders trade a variation of these same setup.

1 Breakout

2 Pullback

3 Exhaustion

If you understand each of these kind of setup and the logic behind each of them , you will be able to design your own setups.

Start thinking in setup terms. Study setups of other traders. That will give you good idea. While there are many many trading blogs, you will find very few have very well defined setup. You will find many are just randomly spraying bullets hoping it will work.

Setup is a setof conditions a stock or a situation needs to fulfill to be considered for trade. Setups help you decrease cognitive load. If you have done good job of selecting and defining your setup, you would have answers to :

1 What kind of stock should I trade

2 When should I enter then

3 How much should I risk

4 When should I exit

You will have answers to all these questions before you enter a trade. Then the only thing you need to focus on is execution.

Setup should match your personality. Some people can trade breakouts, some can not. Some people have natural inclination towards trading pulbacks. Some like finding tops and bottoms, they trade exhaustion setups.

If you try and trade setup that does not match your personality it will not work It will lead to psychological stress.

Once you find a setup the next important step is to organize like crazy around that setup. All your scans, software, data sources, hardware, and processes should be optimized for trading that setup.

I trade primarily a breakout setup and everything is organised to trade those setups. For Top25 breakout I have a well documented method and supporting structure. So if I see a stock in scan I can instantly find out its float, its distance from six month high, number of 4% b/o in last few days, its earnings, sales, IBD rating, sector rank. Everything I need to make a decision is well organised. It takes me few seconds to find information I am looking for.

Similarly for Episodic Pivots setup I have everything well organised. One of the advantage I have is I get access to number of tools developed by members for free. For EP Skytrader developed a tool to rapidly find information and he gave me access to it.

For the sector breakout DC has developed the Bluefin which has simplified life. Earlier it used to take me half an hour to find stocks from leading sector now it takes few minutes.

There is a risk reward calculator which quickly allows me to find R/R. Same way the position sizing tool allows me to calculate how much to risk.

For every single method I trade I have a tool or a routine and I stick to it. What it does is it reduces cognitive load, it makes you confident, and you are in control of the situation.

Many traders are not well organised around their setup and spend lot of time on unwanted processes or change routine . That is not very helpful. Organize like crazy around your setup and you will find trading becomes easy.

10/26/2010

CIS: IPO Breakout

CIS is breaking out after a sideways move for a month or so. Higher volume would have been preferable.

MIPS :Episodic Pivots example

MIPS is having a high volume move today. But at this stage it is extended. But in August it had a earnings breakout. That time it had many months of sideways action. The earning surprize started a move which has resulted in stock doubling from that point.

Related post:
Paul Tudor Jones and Episodic Pivots

10/25/2010

SMTX: High volume breakout

SMTX had a big move 6 month ago and gone sideways since then. Today breaking out on above average volume.

ARTW: Recent Episodic Pivots example

Stock had multi month neglect. Extremely thin daily volume till earnings day. A big earnings beat resulted in breakout and stock has gone up since then

Related post:
Paul Tudor Jones and Episodic Pivots

DISCA : Pre Earnings Rally

10/23/2010

Paul Tudor Jones and Episodic Pivots Part2

Tudor Jones has made exactly similar kind of comments many times before about how when a market has a range expansion it is signalling a move in the direction of range expansion.

Paul Tudor Jones In Market Wizard

We have tested every system under the sun and amazingly, we have found one that actually works well. It is a very good system, but for obvious reasons, I can't tell you much more about it. The basic premise of the system is that market move sharply, when they move. If there is a sudden range expansion in a market that has been trading narrowly, human nature is to try to fade that price move. When you get a range expansion, the market is sending you a very loud, clear signal that the market is getting ready to move in the direction of that expansion.

and in recent interview he said...

“Anything greater than an 8 percent move in stocks in one day is probably because of something either so fantastic or so bad that taking more than another day to think about it is a good thing,” Paul Tudor Jones, 56, said.

Think about this long and hard over this weekend. Especially if you are a working person and has very little time to devote to market......

Sometime trading methods are printed on the font page of a newspaper and people still do not get it.............

A simple look at chart of every stock that made 25% plus move in a month would show you that. Even the 4% breakout is based on same logic. What do we want as ideal condition a stock which had not had a 4% plus b/o on either side for last 10 to 20 days and then it breaks out. That is in other words range expansion. In Episodic Pivots instead of last 10 to 20 days you want to look for 100 or 200 days of low range and then range expansion.

AUMN

VHC

Obviously to make it work you need to build expertise in trading the method and you may not catch every big trend at beginning, but if you catch few in year it is sufficient. I will be redoing the bootcamp on Episodic Pivots next week onwards on members only site as lot of new members have joined recently and a bunch of them joined in last 2 days after The Kirkreport highlighted the EP post yesterday.

10/22/2010

Paul Tudor Jones and Episodic Pivots

“Anything greater than an 8 percent move in stocks in one day is probably because of something either so fantastic or so bad that taking more than another day to think about it is a good thing,” Paul Tudor Jones, 56, said.

This is a very insightful quote. When stock makes a big one day move it is often telescoping a big story. Such big moves are not everyday happenings. Such big move happens if there is a catalyst. I have an entire method that I trade around this concept of a stock making a big 8% plus move in a day and had significant success using it. Sometimes I have found neglected stocks which made 100 to 400% moves using this simple idea of everyday tracking stocks that make 8% plus moves. The method I trade based on this concept is called Episodic Pivots or EP .

The dictionary defines episode as a significant incident: an event that is a part of but distinct from a greater whole and that often has specific significance.

Episodic Pivots are significant events in the life of a stock. These are incidents where new information becomes available to market participants and as a result there is re evaluation of current trend or price level. Such new information can launch a rally lasting months or years or reverse a pre existing rally. If you look at stocks which have made big moves over their life time you would see a series of episodes triggered those big moves.

How does the market react to new information or "surprise". If market was perfectly efficient once a new information likely to effect stock price is released the stock price should immediately trade to the new level and there should be no way to profit from such surprises. However in real life markets are inefficient. Market participants have many biases and as a result they tend to overreact or underact to new information. People learn slowly. There are not enough quick learners to eliminate mispricing in markets. Investors overreact to negative news and as a result you will find a huge gap down or down move on negative news. Investors become overly optimistic about recent winners and overly pessimistic about recent losers. Under such circumstances if you have a "surprise" on a stock on which investors are overly pessimistic then such information produces a big jump in price creating a Episodic Pivots. As investors are skeptical about such information they under react to such new information. Analyst are slower to factor in that new information in their targets. As investors learn and slowly digest this new information, it results in price momentum as price keeps drifting higher or lower to reflect the new information.

So a ideal bullish EP is a situation where investors are overly pessimistic about a stock or have low expectations and then a new information is released to change that hypothesis. In price term what we are look in for is a stock which is not rallying in to EP. Ideally has a price trending down for last month or so before EP day. Alternatively a stock which has a long sideways move indicating indifference or a neglect. A neglect in stock is also represented by low trading volume and no analyst coverage.

So we are looking for three kinds of preconditions for ideal EP:

A stock trending down for a month or so.
A stock with 3 to 6 month sideways move.
A neglected stock with low trading volume or low analyst interest.

In light of new information such stocks are mis-priced and so a EP results in momentum. Such momentum lasts till next information release cycle. In EP strategy we are primarily interested in a new information that has potential to move a stock 50% plus in a quarter or so.

There are basically two types of EP:

Earnings related EP
Non earnings related EP

Earnings are the most important criteria affecting stock prices both in short term as well as long term. Investors want to invest in companies that are growing their earnings or are likely to grow their earnings in future. Wall Street is obsessed with earnings and rightfully so. So any earnings related news has a potential to move stocks in either direction. Studies after studies have shown that trading strategies based on post earnings announcement drift (PEAD) has consistently generated abnormal returns.

Ball and Brown in 1968 first documented the PEAD anomaly. As its name suggests, the PEAD is the tendency of stocks that beat earnings expectations to continue to drift upwards for about two months after the announcement, or likewise for stocks that miss earnings to continue to drift downwards. The market does not immediately fully incorporate the information contained in the earnings announcement in to the stock price.

So when a company announces earnings and it is "surprisingly" good or bad it leads to a rally lasting 2 to 3 months. Earnings EP are easiest to understand and act on. The market reaction tells you whether this earnings was :surprise" and "significant". The stock will immediately go up post such announcement and the move will be supported by high volume. The EP scan captures such breakout.

What does the EP scan look for:

( 100 * (C - C1) / C1) >= 8 AND V > 3000 AND (100 * V / AVGV100) >= 300

It basically looks for a out-sized price move of 8% plus A volume surge of 3 times average 100 day volume.

So a stock appearing in EP scan has a volume surge and the price surge. We then investigate what caused this price and volume surge or what was "the surprise" that caused such a big move and what is "the nature" of such surprise. Is this information likely to lead to big move.

For that we look at : - Context of the earnings. Is this a first major earnings acceleration. - What caused this acceleration. Is it one time or likely to persist. - Does this earnings trend represent a structural change in the industry or the position of this company. - Is this surprise reflected in current price level.

Market reaction tells you a lot about the likelihood of future prospect of that stock. If volume is very high, you can assume move has legs. You will see that most EP which go on to make really big like say 100% plus kind of moves in next 1 to2 months post an earnings EP will have huge volume surge, typically of 10 times or more compared to average volume. The volume on EP day might be highest volume in the history of the stock or multi year high volume. So when analysing EP I always sort my list by Volume surge and first look at stocks with highest volume surge.

In earnings EPs there are two kinds of situations:

Stock with no analyst coverage
Stock with analyst coverage

Stocks with no analyst coverage are typically smaller companies or companies which are out of favor. On such stocks a significant earnings acceleration compared to last year same quarter as well as quarter over quarter is what to look for. I like to look for companies which had earnings acceleration of 100% plus in such cases. Many of the current market leaders at some stage in their price life cycle such companies. They were neglected small companies which market noticed when they announced big earnings acceleration.

Stocks with analyst earnings coverage are widely followed stocks on the street. Such companies in most cases are well established companies. They have predictable earnings most of the time and analyst keep a very close eye on such companies and constantly adjust their earnings target. But once in a while such companies manage to significantly surprise the market and that results in a earnings EP. Earnings EP on companies with significant analyst coverage do not do as well as the first kinds. Genuine analyst surprises are rare and in many cases company pre announce and manage earnings expectations to avoid significant surprise. Established companies also often time secondaries and other capital raising events to time with such surprises and so often you find the EP on such stocks tend to have a pullback.

If a earnings EP happens on low float stock it is ideal situation. This is an ideal combination. In such situation you can have really explosive move. Float below 25 million is ideal for this. The best moves happen on float below 10 million. EP on companies with 100 million plus float tend to have pullbacks. EP's on stock with 500 million plus float is something which I not really very enthusiastic about unless they are trading near their historic lows or are in single digits.

Non Earnings EP are of various types and are often difficult to judge. The most common non earnings EP are:

Top Sector EP: These tend to happen in later or last part of a sector big move. At some stage everyone is very bullish on a sector and in that case almost all stocks start breaking out. Such stocks may or may not have any earnings may be of questionable quality but due to sector momentum they make big moves in few days or weeks. These can be very profitable as long as you can get out of them before they crash. To find these look for Top sector by IBD relative strength or Stocks in Top 11 sectors by MDT.
New Order EP: These are common in industries where there is a big lag between orders and actual sales. Defense, heavy construction, aeronautics, heavy engineering, project management , etc sectors are where such EP work. In this case news of a large order or a series of orders can trigger a big move in such stocks. In such cases the current financials of company does not matter.
Buyout Rumor: I stay out of these kinds of EP.
Regulatory Changes: Change in govt policy can often cause EP. Recent example of this is the solar sector where the news of proposal for providing subsidy by Chinese govt for solar installation lead to EP on all Chinese solar stocks. In such cases again the current earnings or financials do not matter.
Drug Approval EP: FDA approval news leads to EP on biotech sectors. These can be very volatile EP and often can make unimaginable moves. Stocks will double, triple or go up 10 times on more news of FDA approval. Such EP are typically on developmental stage companies and many of them trade on such news. Such EP can also crash quickly so one has to be very careful on these and not tale very large positions. Many of these EP's sometime will have gap ups of 50% plus and still go on to make big moves. In such EP I look for EP with over 10 times average volume. Less than that don't tend to work too well. In most good biotech EP the volume surge in first 30 minutes of trading or in pre market itself will be over 4 to 5 times average 100 day volume.
Drug Marketing Tie up: In this a small developmental drug company ties up with a large pharma company for joint marketing of the drug. In such case the large company makes a upfront payment for rights to such deal. Typically deals involving 250 million plus upfront payments tend to produce good EP. Again in this case EP with 10 times average volume surge tend to work better.
Natural disaster/ war/ disease: Often such events produce EP's in companies likely to benefit from such event. Lot of time this is just speculation that these companies will benefit from such event. e.g. when the stock market opened after 9/11 the companies which produce bomb detection equipment for airlines had EP. One of them InVision had a EP with about 10 times volume surge. The symbol was INVN , I think. It went on to make 450% move over three month or so and was ultimately acquired by GE.
Shortages: These kind of EP happen in commodities related stocks. News of shortages, drought or crop destruction can often lead to EP. e.g. in the beginning of 2008 there was news of coal shortage in China. This resulted in EP in all coal related stocks in our market and some of them made very big moves.
Rate Increase: Again these are common in commodity type stocks or in other industries where profitability is greatly dependent on slight price changes. Shipping industry is one where the Baltic Dry Index drives these stocks behavior and any sharp increase in freight rates lead to big moves in stocks.
Media Stories: Barron's, Business Week, Forbes, James Crammer , etc can often create EP. Such EP tends to have very low success rates.

This is what happened to OPEN post that Episodic Pivot...

On the members site there is extensive discussion on this method and sometime back I did an entire bootcamp on this topic. I have been trading this method for around 10 years.

Moral of the story pay very close attention to a stock that makes 8% plus move on a big volume. Listen to Paul Tudor Jones.

Related Post
Paul Tudor Jones and Episodic Pivots Part2