News which can impact earnings can also lead to explosive moves. In case of Force Protection Inc. (FRPT), there has been recent news of big orders and that has lead to this stock breaking out on huge volume 6 days ago (that is when we entered it). It had further news of new orders and that lead to more upside on Thursday. Such Episodic Pivots can precipitate big rallies.
The dictionary defines "episode" as 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 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.
A strategy based on trading such Episodic Pivots can be very profitable.
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