What are Episodic Pivots and how to find them

Episodic Pivots for Thursday market close

eps %sales %floatp/sEpisodic pivots
POT99-71-4129091Agrium issues bullish forecast on fertilisers for next year

ATVI15258-554378Beats analyst estimate
Declares dividend
Announces 1 billion buyback
CME94-6-46692buys 90% of Dow Jones Index
JASO2938007444Beats analyst estimate and guides higher
CPA60-12663Beats analyst estimate
Analyst upgrade
In top 10 sector
TKLC126486669Beats street views
LF87167-431731Beats analyst estimate and guides higher
ATR1771796554Beats estimate and guides higher
HGR4542113034Beats estimate and guides higher
ABD150-4305417Misses analyst estimates
LPSN42200264181Beats estimate and guides inline
ELOS1574-502387Misses earnings estimates
OPK6625-6310897Announces blood test for Alzheimer 
Prices a secondary
NGAS7-125-532533Convertible note exchange completed
LYTS91333141929No news
LNUX58-25-65755Post earnings rally
LMLP9410052080Post earnings rally

What are Episodic Pivots

Earnings season offer two types of opportunities. Some stock will make a immediate big move post earnings and can be good short term trades. The second type of stocks are stocks which start their rally on earnings day and continue it for months or sometime 3-4 quarters. If a company announces a big earnings surprize and if it is not currently priced in to the stock it will go up. This phenomenon is called PEAD or Post Earnings Announcement Drift.

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 after the announcement, or likewise for stocks that miss earnings to continue to drift downwards. What does the study show. it shows that if you form 10 portfolios of stocks ranked by their earnings surprize then the portfolio of stocks that are in top 10% by earnings surprise outperforms the 9 other portfolio and similarly the bottom decile portfolio under performs the nine other deciles. This is the most researched topic in financial field. Every year at least 50 new papers are published on PEAD and is persistence. 

Earnings are the most important criteria affecting stock prices both in short term as well as in the 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. 

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. 

You can create a  scan captures such breakout. It should basically looks for a out-sized price move on high volume post earnings. One of the simple way to create a scan like this in Telechart is:
((C - C1) >= 5 AND V > 10000 AND C >= 62.50 AND V > V1) OR ((( 100 * (C - C1) / C1) >= 8 AND V > 3000 AND (100 * V / AVGV100) >= 300) AND C > 1)

So a stock appearing in such a  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 the future prospect of that stock. If volume is very high, you can assume move has legs. You will see that most earnings breakouts which go on to make really big  (like say 100% plus kind of) moves in next 1 to 2 months post an earnings,  will have huge volume surge, typically of 10 times or more compared to average volume. In many cases the volume on earnings day might be the highest volume in the history of the stock or multi year high volume. 

In earnings breakouts there are two kinds of situations:
  1. Stock with no analyst coverage
  2. 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 were 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 breakout. Earnings breakout 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.

Earnings Breakouts and low float
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. Earnings breakouts on companies with 100 million plus float tend to have pullbacks. Earnings breakout 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.  

So everyday we monitor earnings before and after the market close and look for trades in them. Earnings is not the only catalyst which can move a stock big, many other catalyst can lead to big moves. Such Episodic Catalyst can help you find many profitable trades. On a daily basis I monitor around 20 types of Episodic Catalyst.

Different Type of Episodic Pivots
Earnings Growth 100% plus
Earnings 40% plus
Earnings Beats by wide margin
Earnings Other
Sales 100% plus but no earnings
IPO Breakout
Top Sector
New order or contract /new order rumor
Buyout/buyout rumor/mergers/ tie ups/division sale
New product launch/news
Regulatory Changes
Drug Approval
Drug /marketing Tie Up
Natural disaster/ war/ disease
Rate Increase
Media Mention
Analyst upgrade/downgrade
Declares Dividend
Financial Engineering 
Junk of the bottom rally

Related Posts
How To Trade Earnings
How to trade earnings Part2
How to trade earnings Part3
Earnings and Bulkowski
Improving odds in earnings breakout
Earnings Season- Time to be very careful...

Earnings and Dan Zanger
Earning Surprise System for $1495
Trading Earnings Breakouts
Earnings Acceleration- Long Term Impact
Trading Earnings Breakout -Part1
Trading Earnings Breakouts -Part2
Trading Earnings Breakouts -Part3

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ppmoore said...

Hello Pradeep,

I recently discovered your site through the Kirk Report, and was especially interested in your EP scan for Telechart.

I tried to reproduce the scan using Amibroker, and using its built-in backtester, didn't find the result ecouraging (about 6% CAR). However, when I modified the scan to also detect the subsequent flag after the breakout, as described in the Earnings Flag pattern on p893 of Bulkowski's book, which you also referred to, the results for the period 2000 to the present were about 50% CAR.

This scan is a purely mechanical buy/sell backtested system, so I would expect better results in real-life.

Thanks for building this site. I intend to subscribe.


Pradeep Bonde said...

I buy less than 1% stocks from that scan. Tere are additional criteria like eps growth, sales growth, extent of neglect, nature of catalyst which are used to narrow the scan candidates further. So it is not a pure mechanical method.

ANS said...


Why do you use 8% and not 6, 10 or some other number? What's the reasoning behind the selection criteria being a rise of 8%.

PEAD basically says that a company with earnings surprises will good stock price appreciation in next few quarters, so it's possible that a company with good earnings surprise may not have immediate price action and hence may get missed in the scan.

Thanks for all the info.

Pradeep Bonde said...

Going by past experience and research typically a stock which makes 85 plus kind of move on earnings tend to do well.
I also use a monthly EP scan to find stocks that breakout later after earnings. Besides that i also use a screen for stocks which had 50% plus earnings surprise last quarter. So there are many ways in which this concept is traded.

ANS said...

I tried finding in the articles on Episodic Pivots about setting stops, however could not find anything. The entry criteria are pretty well definied, such as running the scan and looking at what news item caused the move as well as what was the chart action prior to the move. However, I could not find anything about a stop.

What sort of exit strategy should one follow if trying to trade the EP method?

Pradeep Bonde said...

Because we track earnings daily most of the time we enter these kind of trades in pre market or at open. In such cases the stop is the low of last 2 days before entry. The exits are in 4 parts with profit target of 20% plus.