Anticipation Trading

by Jea Yu

Decision Anticipation Trading

Objective: To profit off the anticipation buying ahead of an FDA panel decision or drugs decision date.

The key is to sell into the buying 24 to 48 hours ahead of the actual decision date.  Do not believe the hype and hold through the actual decision.  Stocks usually halt ahead of highly anticipated decisions.  Don’t take the risk of getting stuck in one.

It is a wise idea to plug in “FDA” as a keyword into any streaming news feed that you have so that you can jump on these.  You can also just use FDA as a keyword on Google News.  Otherwise, there are a number of blogs and sites that list upcoming decisions. 

Context: FDA decisions are the second most common events that drive extreme volume stock movements.

Variations: Phase III clinical results data also tend to get stocks to rise in anticipation.  However, many companies will not actually pinpoint the exact release date of the information, making it very tough to time the play while avoiding the risk of getting stuck in a stock halt.  If the results data do not have an exact date, then it’s best to stay out.  Another source of anticipation buying can be found going into the larger industry conferences, like the oncology conference, whose guest presenters often release clinical trial data.  Always remember, buy on the rumor and sell before the news!

Pre-Earnings Anticipation Longs

Objective: To profit off anticipation buying going into a company’s earnings report.

The inherent optimistic nature of people will usually cause a stock to rise in anticipation of good earnings ahead of the earnings reports.  The goal is to buy ahead and sell into the anticipation buying up to the day of the earnings.

Context: The overall markets tend to lift about one week ahead of earnings season.  Once earnings season begins, it’s best to wait for a leader stock to report first with a strong positive reaction that lifts the sector.  Look for the laggards in the sector to play the anticipation rise.

Long Setup: Get positive earnings reaction in the sector leader stock then look to play the laggard ahead of the earnings.  Try to play three to five days ahead of the actual earnings report and sell 24 to 48 hours ahead of the release, depending on target levels and stock reaction.  The laggards are stocks in the sector that are at least two levels lower on the target chain.  Make sure that you get at least an intraday uptrend going first on the 60-, 13-, and 8-minute charts prior to entry.  A daily mini pup gives the stock higher probability and momentum.

For example, First Solar, Inc. (FSLR) blows out earnings and jumps six points above its daily upper Bollinger bands.  If SunPower Corp (SPWR) is still trading under its daily 5-period moving average, then the laggard factor applies since it is two levels below FSLR (the daily 5-period moving average and the upper Bollinger bands).  This gives enough room for SPWR to not only play catch-up, but continues to help fuel anticipation buying.

Primary Targets: The lagging levels of the sector leader stock and target chain if daily mini pups are present.

Stop Loss Trigger: If the pattern continues to diverge with the leader for more than two days and violates the next level down on the target chain, then keep stops.  This implies that there is something more damaging to this stock that the public doesn’t know.  For this reason, you want to make sure that a technical reversal forms on the charts.

Variations: The weekly and monthly target chain levels can and should be used to determine additional targets as well.  Mini pups on these time frames are very significant.