I occasionally refer to myself as a Technifundahistorian, because I believe in technicals, fundamentals, and history. I practiced in public accounting in 20 years, so I cannot ignore those basics. Earnings matter. And beating earnings estimates and raising future guidance REALLY matters. That's why we regularly update our Strong Earnings ChartList (SECL) and Raised Guidance ChartList (RGCL) for our EarningsBeats.com matters. Knowledge matters too.
Technical analysis many times can tell us things that fundamentals will not. The long-term chart on Amazon.com (AMZN) quickly comes to mind. For the longest time, I could not pull the trigger on one of the best investments of our lifetime. The company went years without making a dime of profit, yet its market value kept soaring into the hundreds of millions. Wall Street was sending us a message through price action that we simply couldn't see in the fundamentals. I said I'd never make that mistake again. When Wall Street sends us a message, we need to listen as technicians, even if the fundamentals don't support it. That's why our EarningsBeats.com research includes more than just strong results and strong future guidance. A few months ago, we introduced a new portfolio, our Earnings Reactions Portfolio. This portfolio doesn't care whether a company beats its quarterly estimates. It only cares about the market's reaction to the report. It MUST see signs of major accumulation. One surefire way to accumulate a big position is through VERY heavy volume and consistent buying. The resulting candle is typically a mirabozu candle, which is where we see a stock close WELL above its open. It tends to close on its high and open on its low. This results in a hollow candle.
In ChartSchool, here's the definition found in the glossary:
I don't always need to see a marubozu candle, however, to believe significant accumulation is taking place. Instead, I look for two things. I want to see a significant move from opening price to closing price - typically a minimum of a 5% move - and I want to see VERY heavy volume.
Earnings Reaction Portfolio
During our first "test" quarter with this portfolio, we included 10 equal-weighted stocks (same as our other portfolios) that appeared to be under significant accumulation. It's outperformed the benchmark S&P 500, +7.51% vs. +3.80%, since its inception on August 10th. I was only concerned with the one day candle. I wrote about this strategy a bit in my ChartWatchers article this weekend. A stock featured there was SiTime Corp (SITM), which had its one-day reaction to its earnings report on August 5th when it opened at 156.24 and closed at 185.00. From open to close, SITM gained 18.41%, which ranked it 2nd out of thousands of companies that reported last quarter. Many traders would shy away from buying a company that's made such a huge one-day move. But SITM never came back down. When we selected our 10 equal-weighted stocks on August 10th, SITM had risen another 13% or so to 204.82. It was stretched and overbought by nearly any measure. Yet, over the past 11 weeks, SITM has been the best performer in our Earnings Reaction Portfolio, gaining another 29% from that August 10th inclusion.
Another example of a stock that was included in this portfolio was Fastly, Inc. (FSLY). Here's the chart with the post-earnings candle circled in red:
FSLY opened the morning after earnings at 34.95 and closed at 39.93. That represented a move up of 14.25% from open to close, which was 10th among all companies reporting last quarter. And the volume of over 50 million was the second highest EVER for FSLY. That's major accumulation. FSLY reports its quarterly results this Wednesday. It's difficult to say how this report will unfold, but it is part of a very strong software area. Should they beat revenue and earnings estimates, another move higher could be in order. We'll see.
On Monday morning, I will be featuring what I believe is one of the best earnings reactions thus far this earnings season in our free EB Digest newsletter and a stock that'll likely be in our next Earnings Reactions Portfolio - to be announced on November 10th. If you'd like to receive this stock and its chart, simply CLICK HERE and type in your name and email address. There's no credit card required and you may unsubscribe at any time. We'll get it out to you Monday morning before the market open!
Happy trading!
Tom
