Consistently taking profits (alpha) from the equity markets, in an all but risk free manor, sounds highly unlikely or impossible to most experienced traders. The following article descries a simple technique that enables traders to do exactly that, extracting profits from earnings announcements, in a very safe and sustainable way. This process utilizes Earning Announcements and Earnings Per Share (EPS) financial indices as it’s core-trading entry trigger and incorporates technical analysis signals to gauge the strength of each opportunity, as well as indicating the most opportune time to exit profitably.
Stock~Rocket Earnings Profits, describes to traders, a trading set-up that is one of the most frequent, safest and most profitable short and medium term strategies anyone can employ. The image above illustrates the four principal phases it contains: 1) Fueling or accumulations phase; 2) Earnings release and Ignition; 3) Launch and 4) Recovery of profits and capital.
The successful implementation of this strategy requires traders to carefully review three critical components to safely, repeatedly and successfully capture profits from earnings report announcements. All of this information is readably available on many websites and some of these internet resources are provided at the end of this article.
1) What the consensus earnings estimates are; often called the whisper number.
2) What the actual, reported, Earnings Per Share (EPS) numbers are.
3) What the company is guiding or projecting future earnings will be.
This simple and profitable earnings, trading technique, focuses on the momentum produced when a stock’s earnings results, surprises the market, by actually exceeding the whisper numbers the investment and trading communities were expecting. When this occurs and the companies guidance indicates that this positive result should continue into the next earnings release, you have a clear signal that the stock's momentum will push the stock's share price well above it's current price. It always works, provided that you take into account all three elements listed above. Major market upheavals/downturns can dramatically dampen these expected results. If your stock is in a segment that is currently out of favor, it will also lessen the potential prospects of a profitable trade.
I have entered several stocks within minutes of them reporting very good EPS numbers, often in pre-market or after-market trading sessions and watched the stock tank in the regular trading session. Why? Guidance was neutral or negative and although the company beat on current earnings, causing an initial run into the equity, they were also signaling that this might not occur in the next quarter or even the one after that. That negates the incentive for traders to pile into this equity and removes the momentum that this trading technique requires.
The key to the success of this trading technique is momentum. Momentum is defined as mass in motion. All of us have watched a rocket take off. It appears to go straight up until it runs out of fuel, but then continues upward for a period of time that is equivalent to the amount of momentum that the propellant and thrust of the rocket produced. The upward motion after the fuel is expended is called Inertia. It is a property of matter by which it continues in it’s existing state of uniform motion, continuing in a straight line, unless that state is changed by an external force. Inertia is exactly what we are capturing in this trading technique and is also what provides us with an almost fool proof and very safe trading opportunity. If the rocket goes up straight, fast and high we can have a very high level of confidence that it will continue much higher, even after it runs out of gas. We want to watch the rocket/stock take off and then gauge exactly how much propellant is fueling our stock-rocket. The further up the equity moves in this initial phase after earnings are released, the greater the likelihood that the current path will continue although the acceleration will decrease as the positive sentiment and trader interest decline over time, depleting momentum.
The comparison between a stock’s trajectory and a rocket’s trajectory may seem far fetched to many, but they are in fact, so similar that the same laws of physics utilized to project a rocket’s path, have been successfully applied to the technical analysis of stocks. In John Ehlers’ book, “Rocket Science for Traders,” he has adapted many of the calculations utilized to predict the path of a rocket into algorithms capable of accurately predicting a stock’s future price track.
Momentum is the shared constant between the two and relative changes in price combined with volume become the gauge by which momentum is calculated to predict a stocks track.
1) Watch for and be aware of the earnings release dates. Highlighted circle (1) in the Tradingview NVDA chart above. Actual earnings announcements are the match that lights the fuse on these stock-rocket trades. Many sites provide earnings alerts and estimates. Some of the best are listed at the end of this article.
2) Gauge the momentum produced by the company’s earnings announcements. If the stock gaps-up, significantly at the opening and/or the stock develops a large green candle (marubozu) during the trading day, (Above and to the right of “1” in the NVDA chart above) then you have found a potential trading opportunity.
StockDotGenie provides several indicators to evaluate these opportunities. The TWISTS indicator utilizes a three Laguerre filters incorporating a cross over protocol to generate the colored indicator dots you see above. The Launch Pad gives you a visualization of the magnitude, sentiment and momentum, each day's trading action represents. You can easily see the dramatic shift (2) from a negative sentiment to a positive one the first day after the earnings where released. Pass Band Multi utilizes two different lengths of Laguerre filters producing the bands you see in the indicator. The shorter length is subtracted from the longer length for the relative strength / momentum line upon which the dots from the TWISTS indicator are painted. . This produces overbought, oversold and consolidation flags. In the example chart above (NVDA) you can clearly see that the price quickly moved into an overbought area. The lines of each band are produced by calculating the standard deviation of the root mean square of the Pass Band filter. This de-trending oscillator provides the trader with advanced notice of when the momentum from this trade has been depleted by returning the Pass Band sine wave signal (white line with Twists dots) to or near the zero line.
Additionally the (7) Turning Point Volume, (above) the Candle Body Size, the Closing Score and the Master Moving Average, (below) all provide the trader with a great deal of additional information to accurately gauge the strength of trades you are considering. The current candle size is relative to the candles that have occurred recently in the trading history of the equity. StockDotGenie has an indicator that utilizes a statistical significance calculation to determine the relative size and strength of a candle’s body size. You can read how Candle Body Size is calculated here.
You want to see a dramatic increase in price above the close of the previous day and you want to determine the sentiment of those traders. The easiest way to determine trader sentiment is to calculate the days Closing Scores (Shown above). An article was recently published by me in Technical Analysis of Stocks and Commodities titled: “Closing Score: Extracting Sentiment from Price,” describing a technique that allows traders to determine how enthusiastic traders are as reflected by where the close occurred in relationship to the current trading bar. The bulls-eye at (Gold circle in the chart above) is indicating that traders where pilling into this trade all the way to the closing bell, pushing the price higher until the closing bell. The closing score calculation is provided below and you can view a video or read more about it’s significance here.
This is also indicating very strong traders sentiment that is even more compelling because the volume is extremely high compared to the 14 day average (Dark Blue vertical line in the chart above).
Basically, determining the Closing Score will provide you with the demand that was being demonstrated by the traders attempting to get into this stock and this translates directly into trader sentiment. Any number above 70 is positive, but extremely strong readings of 95 or above will produce strong momentum that translates into multiple positive days subsequent to this high reading. That is exactly what you are looking for when looking for Stock-Rocket earnings plays. In it’s simplest form, you are looking for stocks that closed at the high of the day or very near to the high of the day, on the first trading day after earnings announcements and you want to see a gap up or large candle body size accompanied by higher than usual volume.
3) Enter your target stock late in the trailing day after it has demonstrated this strength or in the after hours trading session, if you wish to have the entire trading days information at you disposal, prior to entering your trade. A lot of day-traders utilize earnings release’s as a short term momentum opportunity, but as day traders they will be selling prior to the markets close. That’s the rational for waiting until late in the trading day. This Day Trader selling action may provides you with a slightly better entry point
The signals to enter these opportunities are clear, concise and unmistakable. You are alerted well in advanced, by multiple sources and web sites of the impending earnings release opportunity. The decision to take profits can be much more difficult and ambiguous. Technical analysis enables traders to exit these opportunities with confidence and assurance that the forces that drove this stock up are now diminishing or have disappeared.
When the inertia that the momentum produced has diminished to a point that your equity is no longer moving in an upward trajectory, then you want to consider exiting the trade and taking your profits. As the candle body size decreases and the closing score decreases, you are approaching decision points where the stock will either turn sideways or reverse direction in the near future. Take another look at the image above showing a rocket taking off against the NVDA stock chart. The glowing parabolic arch in this image is an actual rocket contrail and underscores the strong coloration between the trajectory of a rocket and the price patterns of a stock after experiencing strong momentum.
Any simple moving average crossover system enables you to determine exactly when the trade has actually turned against you. I utilize a set of custom technical indicators that provide me with a distinct edge in determining the strength of the opportunity as well as optimizing the profit potential by determining the best exit point.
• TWISTS Laguerre filters
The TWISTS moving average crossover indicator utilizes another John Ehlers filter that obviously continues the rocket theme. This filter is from “TIME WARP – WITHOUT SPACE TRAVEL,” and is utilized in concert with several other indicators describe below to determine when to exit my earnings trades. This Laguerre, filter dramatically reduces the lag that most moving average crossover systems suffer from, while at the same time incorporating a smoothing function that enables you to avoid whipsaw trades. The TWISTS indicator shown below in the top panel of the StockDotGenie chart utilizes three different Laguerre filter lengths or gammas to clearly indicate trend change or crossovers.
• Closing Score Sentiment
Closing Score Sentiment was utilized to help confirm your entry into this trade and it can be an important clue as to when to exit. The white line running through the Closing Score Sentiment indicator is again a Laguerre filter of the closing scores for the previous 14 days. As you can see, (“C” in the NVDA chart below) the Laguerre filter of the closing score has entered the neutral range between 45 and 55, indicating that positive sentiment has disappeared.
• Master Moving Average Envelope (MMAE)
The Master Moving Average Envelope incorporates 9 complex moving averages and FIR filters to determine market trend direction. A unique attribute of MMAE is it’s ability to detect weakness in an equity that is still on an upward trajectory. This is because of the unique combination of filters and moving averages utilized within this indicator, many of which are determining tipping points utilizing a Center of Gravity (COG) calculation. COG is another filter developed by John Ehlers’ and is also discussed in his book “Rocket Science for Traders. COG calculates the constantly changing center of gravity that a rocket undergoes while burring off fuel in its upward ascent. That same calculation enables us to determine how the momentum of a trade is changing, relative to the current sentiment and is unique in it’s ability to identify turning points in a stocks chart.
The Master Moving Average Envelope provides you with the first indication that this equity is losing momentum. Well in advance of the equity share price, loosing it’s upward trajectory. When MMAE moves below the blue demarcation line in the indicator, separating positive verses negative trends you have a clear indication of an exit signal. In the NVDA example chart above, the stock has trickled down from the point where you would have entered into this trade at (the white dot) into negative territory at “D.”
Candle Body Size was a component of our entry decision at point “E”. Diminishing candle body size at “F,” is another indication that we are approaching a point in the trade where our prospects of additional profits are diminishing. The next statistically significant candle body indicated by the green dots two bars to the right of “F,” on the outside edges of this histogram, where produced by a positive announcement from the company regarding new products.
I knew very little about this company, but and this applies to any stock that you discover utilizing this trading technique; you have just discovered a stock that is exceeding expatiations. This one data point is not a good, singular, reason to hold onto this stock as a long-term core holding within your portfolio. It does however provide you with an opportunity to closely examine this stock that has now, already added to your portfolios profits and determine if it should be considered as a core holding. That’s the embodiment of any great investment philosophy. Examine, understand and capture alpha. I have now thoroughly examined NVDA's business and their graphic processing chip units aimed at multiple current and emerging markets and have come to the conclusion that it represents the best in it class and should out perform it’s competitors for the next several years. I still hold NVDA in my portfolio and will add to this position as opportunities present themselves.
Ideas, suggestions and tweaks to this trading strategy will be greatly appreciated. Contributing your experience and expertise can also increase your own profits. Please add you comments to the conversation below.
1) • Short and Medium-term profit opportunities enable you to discover valuable, long-term core holdings.
2) • Fundamental data from Earnings Per Share (EPS) is key driver.
3) • Unique technical analysis (TA) tools, fine-tunes and optimizes the success of this trading technique.
No stratgie can completely eliminate "risk" and no technique can guarantee "profits" to traders utilizing any trading strategy.
There are multiple services that provide alerts and relevant insights regarding impending earnings releases. Seeking Alpha has a simple and excellent page providing traders with a chronological listing of all upcoming earnings, indicating the date and if the release will be before or after the markets open. The SA site also provides you with the ability to get an email when the announcement is made utilizing their alert service.
Other sites providing you with alerts include: Earnings Whispers, Whisper Number, Stock Earning and Estimize. Estimize provides you with the consensuses earnings estimates, from 22,000 regular contributors, each providing their own opinions and as such, is providing to traders the crowd sourced, social sentiment of those contributors, reflecting the collective opinions as to what the final financial and earnings results for the company will be. Each contributor’s input is weighted by his or her creditability and prior success rates as determined by an algorithm developed by Estimize.