Tricky period for breakouts

The breadth has steadily deteriorated in last one month. Currently the Stockbee  Market Monitor is in negative territory.

The stocks leading the advance since brexit bottom are showing signs of breakdiowns. The breakouts do not have enough follow through.

But as of now the market overall is down only around 2.5% and looks to be in sideways range.

The election results might be the catalyst that will clarify market direction and launch year end rally.

How to profit from PEAD (Post Earnings Announcement Drift)

Currently we are in earnings season. During the earnings season there are always some stocks that have significant earnings surprise either to upside or downside. Such earnings surprises lead to rallies in such stocks. Those rallies are not just one day wonders. If the earnings was game changer them that stock can continue to rally for next quarter or more.

This tendency of stocks to move in direction of earnings surprise is called PEADS. 

PEAD (Post Earnings Announcement Drift) is a very well known and extensively studied market anomaly. Ball and Brown first documented the PEAD phenomenon in 1968. Since then hundreds of thousand studies have confirmed their findings across world markets. Stocks that beat earnings substantially and exceed analyst expectations outperform over period.

Everyday during earnings season number of companies surpass earnings expectations or miss earnings. When earnings is announced it is compared to existing expectations.

If the earnings is a major surprise to the market then the stocks reacts immediately to that news. Most of the time the stock with significant earnings surprise  will make 40 to 100% move on earnings day itself if it is a small cap with low float. Depending on market conditions these stocks can go in to multi week rally. In uncertain market conditions, they tend to pullback and go sideways or form range and then breakout nearer to next earnings.

When looking for PEAD candidates , stocks with first or second significant earnings surprises and significant earnings growth lead to big moves. After a few quarters of earnings acceleration, everyone notices it and the reaction is more muted as the earnings get discounted. Very few stocks can consistently surprise on upside for more than few quarters. 

There is a cockroach effect in earnings trends. One earnings surprise is typically followed by many more earnings surprises. When you focus on first earnings acceleration there is good chance your stock will have more such earnings. So effort spent in researching stocks during earnings season can pay you off for many quarters. The structural factors which contribute to earnings acceleration do not disappear in one quarter. That is why earnings trends persist and price trends persist.

If you want to profit from earnings track the significant surprises this season.

Stocks Setting up for 8% to 20% move

Develop these habits to improve your trading

Daily study past winners and losers on various time frames and note down your observations.

If you can develop this habit you will see steady improvement in your understanding of market moves and it will be based on your own efforts.

What should you study for short term swing trading

Study stocks up 8% plus in last 5 days c/c5>=1.08 and c>=3 and minv3.1>=100000

Study stocks down 8% plus in last 5 days c/c5<=.92 and c>=3 and minv3.1>=100000

Study stocks up 5 dollar plus in last five days c-c5>=5 and c>=3 and minv3.1>=100000

Study stocks down 5 dollar plus in last five days c5-c>=5 and c>=3 and minv3.1>=100000

Those are the kind of stock moves that swing traders are interested in. By studying them daily you will understand what works and what to look for in momentum burst swing moves. Where to put stop. Where to exit. What to look for on day one of move.

If you do this for weeks and months or years you will be expert in 8% plus moves. When you study these moves over and over again you start finding small nuances to look for in successful breakouts.

A study like this will make you question some of your own guidelines for selecting trades or will make you question commonly touted market rules based on your own study.

One of the best reason for doing this is it is based on actual past winners in immediate time frame. It gives you lot of information on what is working currently.

Most days it takes only 10 to 15 minutes to do this. Some days while going through them you find something and then it can trigger a deeper study.

What should you study for longer term swing trading

Study stocks up 100% plus in last 1 year c/c252>=2 and c>=3 and minv3.1>=100000

Study stocks down 50% plus in last 1 year c/c252<=.5 and c>=3 and minv3.1>=100000

Study stocks ranked in top 25 by MDT ranking c/avgc126 rank by it and study top 25 or 100

Study stocks ranked in bottom 25 by MDT ranking c/avgc126 rank and study bottom 25

Study stocks ranked in top and bottom 25 by YTD moves

Longer term moves have different characteristics and studying them will help you find buy points as the move progresses.

A study like this will also help you debunk lot of myths like should you only buy stocks near 52 week low or high, with only low floats, or only with IBD EPS ratings above 85 , or with growth or value characteristics, or IPO in last 2 or 3 years only and so on and on.

Get in to habit of building your own market and setup. No one else can do these exercises for you.

As everyone knows if you want gains of an exercise you need to do it yourself and not outsource it to others.

Bullish and bearish anticipation setup for today

Bullish Anticipation

CGNX WGO PAYC WIX STB FB CTRL GNW

Bearish Anticipation

CBRL DXCM PII DECK LEG LGIH SCSS

Breadth deterioration continues

The markets  are experiencing steady decline in breadth . Sellers are dominating the action in last few weeks.

This kind of selling is not conducive to breakout buying. A breadth thrust to bullish side can reverse this deterioration.

In spite of selling the Indexes are near high and continue to go sideways.

Periods like these can lead to death by thousand cuts if you are too aggressive on long side. Protecting capital and being selective is the key at this stage.

Steady breadth deterioration

In recent month there has been a steady breadth deterioration. You can see that in Market Monitor.

In last 13 days we have seen 7 negative breadth days. On 9/9/2016 we had a big 634  down day . That selling has not been followed by aggressive buying.

The T2108 Worden indicator peaked at 79.73% on 7/18/2016. Current it is at 35.37 which tells you only 1/3rd of the stock universe is above its 40 day moving average  or in other words in uptrend.

This selling has been slow and not affected the indexes so much as they have been going sideways for months after an initial sharp bounce in July. The sideways action is also showing up in many stocks. If you see the anticipation scan , you will see several examples of that.

Breadth divergence and deterioration by itself is not fatal unless we get big selling and setup failures. As of now we do not see much of that.

Sideways range is leading to less follow through on breakouts

A sideways range has formed from middle of July.

In recent days a up day is followed by down day.

As a result of index action compression vigorous follow through on most b/o is lacking .

Need to be selective in buying b/o

How to use momentum to find swing trades

Swing trading s a style of trading in which speculators profit by capturing part of a explosive move with low risk. It is active trading style that looks for several hundred trades a year.

There are many different ways to swing trade that I know of , but I focus on primarily swing trading stocks with established momentum.

When a stock has momentum it exhibits certain tendencies and if you study those tendencies you can profit from them.

ATHM is recent example of swing trade on a stock that had just started a momentum phase as defined by my momentum indicator Stockbee Trend Intensity.

Everyday I scan for stocks with Stockbee Trend Intensity above 1.05. ATHM showed up in these scans for first time on September 26th. On September 30th , it showed up in my Anticipation Scan as it had consolidated for 7 days after establishing momentum. On October 3rd it had a  breakout and as I had it in my watch list I saw it early.

In these kind of swing trades the stop I use is low of the entry day which was 24.37. The stock had follow through next day and was up 6.93%. I closed part of the position to lock in quick profits. Third day it was up more till 10:30 AM before fading the gains. But by then I had exited the trade at 27.87. I always like selling in to strength. the stock did move a bit more after that before fading the gains. But by then the trade was over for me.

If you see this stock, it made 16% move in 3 days before fading yesterday. That is the kind of momentum burst which show up regularly on momentum stocks. 

The key to trading  these kind of move is to understand the nature of these moves. These moves are just 3 to 5 days move. So I am looking for exit on 3rd day if trade has already made 8 to 20% by then. Exiting in to strength is best in these kind of trades. 

How can you find these kind of trades?

The entire process to identify and trade these kind of moves has been detailed on this blog multiple times. If you study the posts highlighted in the sidebar you will see detailed guidelines to scan for these setups.

If you are serious making money swing trading, invest in a software, setup scans, find stocks with momentum , develop process to trade them. If you can do that you do not need  stock picks from others. 

How to find explosive moves in stocks

Short term momentum swings in stocks are driven by supply demand imbalances. Periods of high demand or supply are followed by periods of low demand or supply. This creates momentum bursts in stocks moves.

A stock after going up pauses briefly, but any small catalyst can lead it to breakout of the range, this is noticed by market participants and then they enter in the hope of capturing the next part of the swing.

BVX is current example of this  kind of stock. It has gone up in 3 swings in last 3 months. The first swing was followed by minor 6 day pullback. The second swing was followed by 24 days sideways consolidation.

The underlying cause for stock momentum can be fundamental driven, news driven, sector driven, or often  sentiment driven. But no matter the cause basic tendency of stock is to move in momentum bursts of 3 to 10 days . These bursts are of 8% to 50% magnitude.

Once you understand this structural phenomenon of momentum bursts you can exploit it to capture short term swings of 3 to 10 days. Those swings offer 8% to 50% profit opportunities in short period of time. 

When swing trading these kind of moves it is critical to take profits into strength. Such momentum burst swings typically last for 3 to 10 days. If you overstay the trade then you can end of giving up bulk of the profit. 

If you want to profit from these kind of momentum burst, first start by studying such past moves a nd understand them. These kind of moves happen everyday.