Tracking the Earnings Battle

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  • on January 19th, 2011

We’re now in the time when the workload expands but so do the opportunities.  Instead of evaluating the market as a whole, I can return to old fashioned stock picking as companies release results.  Mind you, I’m not dissecting balance sheets and income statements; my focus is the reaction to the news.  It’s these quarterly events when all interested parties are present, volume and range expand for a day or two, and we can assess the structure of a stock and motivation of its holders.

My starting point is volume.  While I could care less about a 10% rise or fall in index volume, I care greatly when a stock trades double its normal volume.  When accompanied by increased price range and a new interim high or low, I know we’re in the presence of a lasting area of focus.  What’s not clear is whether that one day indicates a buy or a short, or the beginning or the end of a trend.  But simply narrowing our focus down to these high impact events allows us to act with confidence once the winning side emerges.

Identifying the candidates can be automated, but tracking them afterwards involves a lot of work.  I’ve yet to come up with a way to easily represent on a chart what I’m tracking, but most stocks fail to make it through the volume and price screens to begin with so that makes the manual part achievable on a case by case basis.

Where I really differ is in my insistence on a fixed starting date.  While most programs focus on a fixed period for calculating a moving average, I like to use a fixed starting date and let the period expand as the days pass.  This is no different than using a trendline from a major pivot/anchor, it just requires some creative ways to measure.  I’m sure at some point I’ll figure out how to automate this step…this is a major reason I share my thoughts, as it often leads to an idea from a fellow market junkie who builds upon my thought.

The idea is that a moving average, whether a round figure like the 20 day or a random one like the 34 day, drops an old data point each day and replaces it with the latest.  In general, that’s fine…I understand moving averages as a smoothing mechanism.  But in the case of a high impact event, it brings the following problems:

1) I don’t want to drop the “event day” from my field of vision

2) I no longer care about the prices before the event day

So I track this in Excel, and apply my favored measures of strength to the period since the event.  Clearly there is a more efficient way to do this, I just haven’t found it.  As far as I’m concerned, the days just after earnings are the equivalent of football’s red zone…good teams score and bad teams don’t.  The next few weeks is Red Zone overload, as earnings come fast and furious and high volume + wide price range + new high/low events are triggered in the dozens per day.  Just in the past couple of days, the following stocks had potentially high impact days that will allow me to track them with a 1/18 starting date:

ASML, AAPL, MELI, AVT, ALXN, AMAT, HAS, DLB, CMA, CSTR, MRK, VIP, CREE

I’ll do my best to carry no bias into these events, and don’t care how great or poorly they acted in getting to the red zone.  I simply want to know how they reacted once there, and will use those 1-7 days as my template for the next quarter.  Things do change intra-quarter, particularly in high beta sectors with fast product cycles…semiconductors are greatest offender.  But in general, I’m a firm believer that the days following a high impact event provide the best clues for how they’ll perform over the coming quarter.  Price above the event is good, price below the event is bad…long way to get to a simple thought, huh?

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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