Earnings Season

I have mentioned the leaked earnings plays that we've played before. It started awhile back when I noticed patterns in 3C of companies that reported and I noticed anomalies in 3C before earnings, sometime weeks, sometimes just the day before. So I decided to try it out, but not retrospectively, I posted the trades before they reported. The success rate was over 90% on about 22 trades. So as of tomorrow, I'll be looking for trades that may have anomalies or leaks before they report. In the day time I'll post the trades on the site-not the trade list, for earnings that are due out after market or the next day before market. If you have any favorites that you'd like me to look at, please feel free to email me.

Earnings plays can be short lived, many times the initial reaction is reversed within days, so much like the cats and dogs trades, if you get a market gift (a gain of double digits) be sure to lock in enough profits that the trade won't turn against you for a loss. I never believed in trading earnings before, I always want to put s many odds in my favor and earnings ca be too much of a wild card, but when we see abnormal 3C anomalies, I believe we can use that as an edge in trading earnings. Just remember this is still speculative trade activity and risk management should reflect that.

There was this story today  in which $6 billion dollars of e-mini contracts were sold, here's what it looked like at the time.

Here's what 3C looked like right before the trade went through

 Negative divergence on the  1 minute

A worse and more serious negative divergence on the 5 min. While the block was strange as it went through all at once, there does seem to have been some front running of the order as you can see in the selling occurring via 3C. That could also be short selling as there's no way to tell the difference, whatever it was, it was big enough to register all the way to the 10 minute chart.

While price recovered somewhat, the 10 min chart did not.

Always entertaining, Bloomberg's latest insider trading activity has not changed one bit, the sell side continues to dominate as the insider selling to buying ration this week is 114:1. I've said it many times and I'll say it once again for our new members, there's a lot of reasons insiders sell, but "I think my shares will be worth more in a month or two" is not one of them. I'll be taking a closer look at some of the consistent sellers and try to match up anything interesting with their earnings dates. We may find a nugget or two in there.

Tomorrows big event will be the Portuguese bond auction, this could be a catalyst to send the Euro much lower, despite China and now Japan's comments that they will support the Euro zone-which really means they'll try to keep their currencies from exploding to the upside, at least in Japan's case and the Chinese would like to help out their second biggest trading partner, completely charitable act among nations of course.  There was a lot of volatility today in the Euro, but it did manage to get back above $1.30 at present. This is not indicative of anything to me other then the typical volatility seen recently in equities, commodities, bonds and currencies as it seems HFTs and other like-minded trading firms take advantage of support/resistance psychology to pump up volume and go fishing for stops and trade triggers-basically passing the same hot potato back and forth multiple times making as much money in that tight trading range environment or more then they would on a flat out position trade. Eventually this will break one way or the other and looking at the longer trend, I'd bet it's going lower.

As for price/volume relationships, we had two that were nearly equal close up and volume down and close up and volume up, I'd give a slight edge to close up volume down, however between the two, the theme was certainly close up.  It came in at about 2:1 over close down, so this may be crating a short term overbought situation, although I'd prefer to see the dominance in one P/V relationship rather then two. In any case, if we don't see downside action tomorrow, I think Wednesday's P/V relationship will be important to monitor.

Right now Asia is trading higher in reaction to US earnings and Dow Futures are moderately higher in screen trade. If the futures hold up and we see a gap up, I'd expect a strong probability of a close lower (earnings being the wild card). It seems recently the market's MO has been exactly this, to close or at least to close lower on a gap up and to move higher off a gap down. Short term traders or those booking profits on C&D trades would do well to remember this as those extra few cents in a C&D trade can translate to several extra percentage points.

Look for the featured trades tomorrow on the earnings front, I'm only posting those that are jumping off the chart so hopefully we'll find a few for the close and maybe Thursday's before market open earnings.  It should be interesting to see if we can replicate the success we had last time, which would also be a valuable lesson in market mechanics and manipulation/insider information. It's a lot more rampant then you might think.

Market Update

This is basically what all of the averages are looking like, a negative divergence and a small bounce-accumulation at the white arrow. However, the 1 minute charts are loosing the confirmation momentum of the 2 pm bounce.

BQI Adds Another 15+% Today

Yesterday I updated BQI as I tell you with many of these trades, if they close strong and on volume, there's a high probability we'll see follow through buying. Yesterday BQI did exactly that and has gained 43% just the first two trading days of the week and even more since it was introduced as a C&D trade idea.

Here's the charts and current situation.

Here's the Daily chart, note Monday's close was near the top of the range-a strong close and volume was nearly triple Friday's-this is what we look for when looking for follow through buying the next day and how we know how to manage the trade.

At yesterday's update, I showed you a region of profit taking, you can see it at the first red arrow-a small negative divergence and reminded you that what happens with 3C next will determine if we've entered distribution or just some light profit taking. If you look at the rest of the day, 3C continued to climb (green arrow) so we know it was just some light profit taking and the probability of further gains is increased. Thus far today, we are at another area of profit taking, as was the case yesterday, what 3C does from here will determine whether this is just profit taking or the final stage of the trade-distribution.

ICGN just Triggered a long Alert on a Breakout

This is What I'm Talking About

Yesterday when I talked about maybe playing a few earnings leaks  (and the ultra-high success rate we had last time we did this) it is precisely for this reason, information is routinely leaked on Wall Street.

THIS IS JUST ONE EXAMPLE


However, over the many years of using 3C, I've seen this too many times in instances in which you just can't argue. Wall Street is full of holes and favors and it's on a daily, hourly, minute basis, not just once in awhile.

The reason the 3C earnings trades were so successful is because I wasn't looking for divergences, I was looking for divergences that jumped off the chart in strange places and at strange times. Not every stock will have this kind of activity, in fact relatively few, but when you see it, it's obvious.

Technical Analysis has always been about trying to uncover the footsteps of the big boys and then follow in them and that is why 3C has been successful in these areas, if you understand how to use the data properly. I showed you AA last night, lets take a look at another.

LEN reported this morning a huge upside surprise of 466% above consensus, lets look at the chart from yesterday, the last time any action would have been taken on earnings reported this morning.

On Monday into the close, there was a small negative divergence knocking price down Tuesday. Tuesday traded in a narrow range mostly between $18.80 and $19.10, yet look at 3C 5 min (this is also visible on the 1 min. chart) starting at 11 a.m. there's a positive divergence, by noon time it had gone into a large leading positive divergence, yet the stock closed down for the day (-2.63%). This morning they beat big time, LEN gaps up and we see a negative divergence right on the open as profits are booked.

I can't say definitively there was a leak, I don't have that information. However charts like this that stand out are the type we had so much success with last time we traded something like 22 earnings with a success rate in the 90% range. It's hard to argue with a success rate that high, it's not a normal or average rate even for the best stock picker.

In conclusion, I mentioned above, "3C has been successful in these areas, if you understand how to use the data properly". 

This is what I mean by that statement, too many people have the wrong idea of how the market functions; they see big volume and a big price move up and assume that smart money is buying an equity so they follow their volume surge indicators and think they are following smart money. WRONG! Wall Street would never show you their hand, they will however show you what they want you to believe. If you look at the chart above, it's obvious that the buying was done at depressed levels in a narrow range, the big move up this morning and the volume is a sign of them unloading their position into demand, which allows them to unload the position into higher prices. This is also why I tell you to keep your cards close, placing limit orders and such on the books with your brokers is showing your hand, it's not a good trading strategy.

So, I'm off to look for some earnings plays.

Two long C&D Trades to keep an eye on...

HH which has resistance at $.77

and CRYP with resistance at $1.50

Both have crossed above and then back below resistance today. Both are speculative Cat and Dogs Trades

Nightly Wrap Up

In tonight's wrap up, there's a few thing on the table. One that has me excited as I think it shows that the market analysis here at Wolf on Wall Street (anything other then trade ideas and market updates) does have some insightful merit. You may remember me talking many times about our search for a house and that I would not look at any deals that were anything less then arm's length which was a difficult process as most of the homes on the market are either bank owned REOs or Short Sales, the arm's length deals are few and far in between and usually ridiculously priced as people do not comprehend what they paid for their house and what market value now is, are two separate issues and the first has nothing to do with the second. Roughly translated, arms length homes are still severely overpriced, but I dd not budge. I didn't take the bait they are offering if you buy a FNM/FRE home and get some extra loot to fix it up and the reasons for this are summed up in this post, which is one of many on the subject I've written; this is from November 22^nd, 2010

“we have been looking for a home to buy, since all of the robo-signing talk cropped up, we became very picky. Realtors, which swamped us, probably over 20 contacted us every week with possible homes-I just got a text from one right now, show just how dire their situation is becoming. We've been told over and over that 80% of first time bidders on short sales walk away as the process takes 4-5 months. We decided to stay away. After that Bank REOs were the next bit of available inventory, but because of the putback scenario that is developing and lawsuits in the future, we decided to say away from those as well. True, title insurance will refund us our buying price but not the cost of any upgrades we spend on in case a former foreclosed owner bring suit over robo-signing and wins. This left us with what is amazingly an almost non-existent supply of homes, regular arms reach transactions. If we saw 100 homes, maybe 1 would be an arm's length transaction and usually way overpriced as people paid double what their property is currently worth and they just can not accept that. I feel that these properties, which we had been outbid on one which was an estate sale, even though we offered full asking price, will be few and far in-between and those that are prices reasonably will be quickly snapped up as this trouble in the banking/real estate sector continues to grow and most likely will force real estate prices lower. Although I feel the arm's length transactions will be in high demand as Americans start to take notice of what's going on.”

And on Friday, the Massachusetts State Supreme Court put the issue to rest, ruling in favor of the little guys and against the banks. Here are some notable quotations from the decision via Massachusetts Law Blog:

-Despite pleas from innocent buyers of foreclosed properties and my own predictions, the decision was applied retroactively, so this will hurt Massachusetts homeowners who bought defective foreclosure properties.

-If you own a foreclosed home with an “Ibanez” title issue, I’m afraid to say that you do not own your home anymore. The previous owner who was foreclosed upon owns it again. This is a mess.

-If you purchased a foreclosure property with an “Ibanez” title defect, and you do not have title insurance, you are in trouble. You may not be able to sell or refinance your home for quite a long time, if ever. Recourse would be against the foreclosing banks, the foreclosing attorneys. Or you could attempt to get a deed from the previous owner. Re-doing the original foreclosure is also an option but with complications.

So as I feared, the result of buying a foreclosure of any of several types has real consequences. As I once stated, “Imagine buying a house, making it a home and then having it taken from you because of faulty legal/paper work.” This wasn't a big issue at the time, but because I was in the process, it was something I thought could materialize and now the highest court in Massachusetts has said “IT IS SO!”

The other half of this is the banking sector and what this will do, besides the issue of the pensions funds I mentioned last night, besides the issue of putbacks, and besides the issue of all 50 states AG's investigating fraudclosure, now we may have a huge class action lawsuit of homeowners claiming all kinds of damages when homes they thought they were purchasing according to the laws of the land are suddenly taken away from them. If you've ever been house hunting-you know it's a grueling process and finding the right one is a near miracle. Having it taken from you would probably be enough to join potentially hundreds of thousands of other homeowners in the same situation.

The next tidbit...

I've been talking a lot lately, I think my last post was about baby boomers and pensions massive unfunded liabilities as baby boomers are set to start retiring this month at a rate of 10,000 a month for something like the next 12 years. Well these pension funds are in huge trouble, I mentioned GoodYear Tire and Rubber's Pension fund in covering the larger topic including state, county and city pension funds as well as corporate. Just recently I said this about GoodYear's pension fund:

“In Hackel's”

Today we have news that there's a push being lead by Newt Gingrich to allow states to go into bankruptcy, something that hasn't happened in a hundred years. This would also allow them to discharge their pension obligations. If you read this article I just published Sunday on the retirement onslaught of Baby Boomers, you'll realize just how much trouble our states are in and the pension funds, but maybe more importantly, how much trouble baby boomers could potentially be in. A lifetime of savings for retirement may be swept away forever in a stroke of the pen. Here's the article about Baby Boomers and how dire their situation already is... and now this! 


Is it any wonder I'm long term bearish on real estate and financials?


As for today's trade activity, we had several C&D trades doing well today, as I mentioned in an earlier post we'll be opening up a new front in trades with earnings season. Our last shot at this saw a 90+% success rate.


With the NASDAQ closing up and the S&P/Dow closing down and volume all over the place, it's no wonder that today we didn't have a dominant price volume relationship which means that we don't have any short term oversold/overbought conditions in the market.


Right now the Asian markets are mostly down and it's that familiar theme of contagion in Europe, this time centering on what was sure to be the next victim after Ireland, Portugal. Expect Spain to be the next domino to fall-(see our European bank short trades on the January trade list). This week the auctions in Europe starting Wednesday/Thursday should provide some catalysts for some volatile moves, especially if they come is even worse then consensus. 


As for a couple of trades to keep an eye on that are looking close to ripe, a few more Cats and Dogs: AEN and MRNA.


AEN already gave us a 1 day 32% gain

 This is a 60 minute chart showing a beautiful triangle consolidation above resistance of a big base. Volume is perfect for the pattern and we're not seeing the black box pattern manipulation in the C&D trades, there's just no money in it for them.

 The daily chart showing a rounding base, the breakout and now consolidation with nice volume and a beautiful long term MACD histogram. I see $2.20 as a potential target here.

 Look at the huge 3C daily accumulation through the rounding base!!

And my m/a signal screen is giving 3 long signals. More importantly, AEN has pulled back to the 10-Day m.a. in yellow, this is where I'd expect it to pullback to and the triangle is looking ripe for a breakout.


MRNA

 Daily Chart-look at the triangle-beautiful, volume is right and MACD is right. This one looks ready to breakout anytime.

As far as the daily 3C chart goes, you couldn't ask for a better looking chart. Keep both of these on your radar, they may break VERY soon.