Market Gems Manual

"Anticipatory Upswing" and Earnings Season

“Anticipatory Upswing”, is the driving force that propels a stock close to its earnings report date. It is the resultsof the tug of’ war between the bulls and bears. We have chosen the top stocks from our scans to heighten thechances of the bulls beating and the stock moving higher as a good report is anticipated.

ELNT, JNPR, EMLX, CHKP, SEBL, OPWV were all uptrending BEFORE the earnings report. Some of the beststocks are those with very high relative strength and strong technicals and have just come off of a correction. NoteFigure 1 HLIT had a small correction about 3 weeks prior to its report. Anticipation began the end of June. A stronguptrend began around July 3rd and the breakout through resistance was just a few days prior to its earnings report.

Do not choose stocks that are already topping and exploding with the results of the ‘good news’ but rather turnaroundplays like PKTR, RMDY, SYMC, PRGN or CYTC. In particular, watch the stocks that we report have the highest estimatesof EPS growth about 1 week before earnings.

The very best stocks for Anticipatory Upswing are usually stocks that either oversold or in the first stages of anuptrend. Note the chart of HLIT below. It was just at the bottom of the trendline after a correction, and the buytriggers were there BEFORE the stock reported. We can still get into stocks in the midst of a strong uptrend but youshould realize the closer to earnings you are holding the lesser chance your stock will actually give you the ‘pop’ youdesire after its earnings report.

We’ve following HLIT through three earnings seasons and it was only a ‘teenager’ when it was discovered. Now it’s amonumental stock capable of giving and sometimes taking 10 points a day.

Anticipatory Upswing began the end of June and HLIT only had slight corrections until the stock exploded onAugust 13. The very best stocks for anticipatory upswing are usually stocks that either oversold or in the firststages of an uptrend.

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Note the chart of BRCD below.. It was just at the bottom of the trendline after a correctionBRCD triggered a buy BEFORE the stock reported. We can still get into stocks in the midst of a strong uptrendbut you should realize the closer to earnings you are holding the lesser chance your stock will actually give you the‘pop’ you desire after its earnings report.

Figure 1. BRCD already gave a pop before earnings came out

Figure 2.USWB A large number of big blocks went through (58) on this day. That shouldalert you of institutional interest. Breakout + Market Climate + big blocks traded adds toprobabilty of USWB being a good trade

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There are many advantages to utilizing earnings plays even after the company has reported good earnings. Expectsomewhat of a sell-off especially if we are talking about a stock like BGEN, KSWS, YHOO that starts their anticipa-tory upswing as much as 1-2 weeks before earnings actually come out.

DO NOT HOLD TRADES THROUGH EARNINGS REPORTS. There is no certainty that any company will beat estimates.

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Examples of Earnings Plays that are coming back for a second season. Note the continuing strengthin these stocks.

LTX Corporation LTXX Technicals:Relative strength is bullish and the On Balance Volume showing that LTXX is under accumulation. Momenum,ROC and Relative Strength indicators are BULLISH. LTXX should break through its 52 week high of 8.19 on agood report

TOPP was another small one like METHA with very good acceleration since it appeared on the calendar. TOPP has been followed for months on the thread and has appeared in a Market Gems report together withITN.. Chart is excellent and TOPP is in a strong technical position of strength. Relative strength and MACDare bullish and money is flowing into TOPP and it is under accumulation. Resistance was at 6 7/8.

TOPP

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Ordinarily a buy signal would be trigger when the price goes above the 20 day moving average.

MSTR has been trading above its 20 period moving average since the 23rd and we need a strong signal. Here wewait for a 2 or 3 candle bullish formation and MST triggers at the arrow. You can still put a buy stop above the priceof the previous bar. Keep the position as long as the trend is in place. Trail your stop loss higher at every newprofit high.

Carrying the position until the crucial day of 18, the date MSTR is scheduled to report after the market closes. Even if the close of the 18th is bullish you still have only one choice TAKE YOUR PROFITS and close the position.

BS

!!!!!Stop Loss

volume

ADX bullish

+ DX crosses over -DX

bullish gap up day after the report

Indicators used are our ADX which should be higher than 30 and in an uptrend, theRelative Strength Index and the -DM and +DM.

Anticipatory Upswing Before the Report

Market Gems Manual

Setting up your Trading Strategy Before Earnings Report

Entry Price, Exit Price, Stop Loss PriceExpected length of time to stay in trade: (daytrade versus swing trade )

The Last crucial day/s before the report. Technical position of the stock:

MIPS was trading at steep down trend since the last week in July.

MIPS was in a downtrend prior to the earnings report. Ironically it is actually this steep downtrend that escalates the anticipation that MIPS might come through as a possible trade.. So you must wait for the earnings report.

MOUNTAIN VIEW, Calif. (CBS.MW) —MIPS Technology beat Wall Street’s first-quarter earnings estimates and said itinked a deal with General Instruments.“MIPS Technologies just completed its fifth consecutive quarter of contract revenue growth,” said Casey Eichler, chieffinancial officer, in a statement.

Earnings “POP” of 99 pound weakling..

Figure 1: MIPS in a sharp downtrend prior to earnings report.

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➣ Okay looks like a good report and we expect a possible rally in the stock. Expect a certain ‘percentage’ gap up 4% seems about right for a stock with the pricing history of MIPS. I would check the average gap ups (if any)of the stock in previous quarters to get an average estimate of what the stock usually does after the report.

➣ Set up a 10 minute chart or you can set up a 5 minute chart. Always refer to a Daily Chart as well for the big picture.On rare occasions I even use a two minute chart but this is only for more seasoned traders who are comfortablewith “Advanced Order Execution” systems.

➣ Set up a Daily Chart so you can see the general longer term uptrend. Buy signals on the daily chart arestronger than ones on the intraday chart..

Figure2: MIPS after excellent earnings report. One analyst “pounded the table’ MIPS on 10/15/99

OBV buy trigger

DX crossover buy trigger

➣ Place a buy stop above the 20 period moving average. on the 15 minute chart at 29 with a stop loss at 28

The DMI triggers a buy signal and the OBV surges right at the open.

10 minute chart. You might want to wait for more confirmation. For instance the second and even third candlestickhave formed a visual patterns of bullish candlesticks which some traders think is a stronger signal in predicting apositive price reversal. Put in a buy stop of 29 to enter the trade.and a stop loss at 28.

Target is more difficult to determine in an Earnings Play because you are having the added volatility and surgecoming from the earnings report and external factors such as oversold stock. it might be the double top breakoutpoint of 35, but more likely in a situation involving an earnings play you look at “PROFIT MADE” and do no't holdthe trade too long. Stock reached 34 at its height which is quite a respectable gain even for a 2-3 week holdso prepare to close the trade at the first sign of reversal just to lock in that great profit. I was able to exit at 33 5/8for a 5 3/8 gain.

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For experienced traders a ‘sell short’ could have initiated at 33 and 3/8 or the trade just closed. Short plays are notfor the beginners and you need a uptick to short sell a stock that is falling. More aggressive traders short stocks asthey reach resistance levels. and or if it fails to take out the resistance, other more conservative traders short on thefirst rally after the stock breaks below support.

Earnings plays are not that cooperative and might not give you the opportunity to wait for support because of thestrength of the from the earnings report, so in a case of an earnings play I’d short at the resistance level or as it fallsbelow. It might have been possible to re-enter the trade at another day but MIPS really never showed any signficantrally potential for the rest of the week.

The Market Climate the Day of the Earnings Report:

Of course we did emphasize that the stock moves irrespective of the market climate, but if there is a particularlystrong market, it usually brings the ‘rewarded’ earnings play to higher highs. Ironically, if the market plunges, theeffect can be the same as traders rush to put their money into a ‘sure thing’ and the stock could gain. I’d rather add to aposition in an earnings play in a market that starts out weaker than recovers than ‘play on the expectation’ a plung-ing market will bring the stock even higher. NEVER FIGHT THE TREND

A technically strong stock that has fallen up to 15% from recent highs and the report is expectedto be bullish.

➣ BEFORE the report.

Strong stocks tend to correct and then retrace and try to test the recent highs. Usually with good preparation wecan spot the successful retest and its pretty often close to the earning report. The chart below is a daily but weshould an eye on it, while we trade using the 10 or 15 minute intraday charts.

In this daily chart you can use the trendline broken and FLEX attempting twice to retrace to the previous highs of69-70, hasn’t even succeeded in staying obove the 20 period MA. Since most of our trades are based on a pop offthe 20 period MA, we look to it once again as a signal for entry. For days FLEX failed to test the highs of the uptrendline as it fell downwards. As the Earnings date of October 14 came close we finally spot a successful attemptto break obove the 20 period MA.

BS "

Earnings report10/14

stock succeeds in retracing the former highs

stochastic crosses

its percent K and percent D lines.

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Figure 1. Exit positions as stop loss hits and wait for another opportunity before earnings are out

Figure 2 FLEX only takes one day to correct and once again on Mondayanother trade opportunity presents itself

figure 3. Report date

sell

BS

#

➣ Put in a Buy Stop (BS) at the high of the previous bar (the one that rose above the 20 period MA)

“Stocks that exhibit earnings anticipation

of trading range will most likely continueand close at the 85% and above

the uptrend. Its the bullish expectionsfor the stocks earnings”

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Post -Earnings Uptrend