💵 Process, Process. Process

In association with DarwinexZero. Allocating real capital to successful traders 👇

I often extol the virtues of systematising as a tool to remove emotions from trading (or at least, mitigate them somewhat).

The idea being that the more hoops you have to jump through before trading, the lower the likelihood you will shoot from the hip or trade in anger and live to regret it.

Put another way, it's a way to prime yourself. A method to ensure you only take trades that fit criteria identified in advance, before the red and green numbers are flashing their tempting little buttons at you.

I don't think I could call myself entirely systematised, at least not in the modern usage of the word, because much of what I do is not fully automated, although maybe it should be.

However, I feel entirely comfortable with the label “process driven” because that's exactly how I approach the markets.

I use processes that can be repeated on a daily, weekly, monthly or quarterly basis. They are reliable but not necessarily set in stone, nor are they so complex that they can’t easily be altered or adapted.

The end goal of these processes is to identify opportunity. Trading setups that have a high probability of success. Situations that are only in need a of catalyst to come to fruition.

Indeed that's really what I my approach is all about. Using a blend of technicals, fundamentals and selected quantitative and qualitative inputs to create value-added outputs which by and large offer a trading edge and a fair degree of Alpha to boot.

A case in point can be seen below 👇

The path to which was described here 👇

(Tim's call for a sharp move to 170 to end the trend isn't looking so bad either...)

Each quarter I get a chance to dig out a predictive process that's designed to provide pointers for earnings success.

The thinking behind this is that positive price momentum in the run-up to an earnings release is a good omen for, or pointer towards earnings success.

We're talking a beat on revenues, earnings per share (EPS) or both. If we're really lucky, maybe even upbeat guidance for the coming quarter(s).

There are two starting points for this.

1. The earnings calendar and

2. The list of stocks that are trading above their respective 50D Moving Average.

To some extent these two components in the process will act as filters for each other. The idea is simple. The position of the stock relative to its 50D MA, in the run up to earnings, e.g. a week to 10 days prior, is most important or imparts the most information / gives the biggest signal.

Looking at the data from a top-down level right now, the implication is that it should be a very positive earnings season. In fact, 83% of the S&P 500 names are trading above their 50D MAs.

But a lot can change between now and late August, the period that encompasses the bulk of Q2 earnings...

Having identified which large-cap stocks are reporting in the next week or so we can dig a bit deeper, gathering other data points including the analyst rating score, the number of analysts researching each stock's earnings, estimated consensus price targets etc.

I also grab some performance data such as one-month and 5-day % changes and of course, we need to know the last price and the level of the 50D MA  line.

Throw these data points and one or two others into a spreadsheet, and we can start to filter our list.

A good place to start is with stocks above the 50D MA. A simple filter screens out those that aren’t. We won’t write off those stocks that don't make the cut just yet, however.

We can look at those separately to see which ones have improving momentum or sentiment as we approach their earnings release.

Now we can start to play around with and visualise our data. For example here is a chart of stocks that are reporting earnings up to 19/7/2023. The chart plots the % that each stock is above its 50 D MA against its 5-day % change.

So for example Tesla (TSLA ) in the bottom right is 19.85% above its 50D MA but its 5-day % change is -2.96%.

Whereas Baker Hughes (BKR) is more to the top right and also reporting on July 19th, is 14.33% above its 50 D MA  but has had a 9.50% 5-day change.

Swedish Engineer SKF (SKFRY) is found mid-table on the left-hand side of the chart it’s 3.40% above its 50-day MA and has had a 5-day change of 8.20%.

That interests me because the data suggests that the stock has only recently moved above the moving average.

A quick look at the chart shows that to be the case and also highlights the fact that it's testing against a downtrend line which extends lower from February.

Interestingly the ADRs of another Swedish Engineer Atlas Copco (ALTKY), which report on the 18th of July, have also sprung into life. Though at the time of writing, they hadn't yet moved above their own 50D MA.

Now of course trading stocks over earnings is very binary, but it never hurts to have a watchlist of names of interest.

For those that understand the world of options, earnings season creates the potential for volatility or large price movements that can exploited for a known cost or risk ahead of the event.