Spot and Trade Episodic Pivots
How to find these profitable trade setups
The Episodic Pivot
Legendary trader, Paul Tudor Jones once said, "Anything greater than an 8 percent move in stocks in one day is probably because of something either so fantastic or so bad that taking more than another day to think about it is a good thing."
And as I said, this man is a legend. The insight from this quote leads to one of the most profitable stock trading setups known to man - the episodic pivot.
I've seen stocks start rises of 50%, 100%, and even 500% by showing an episodic pivot one day. Now these gains don't happen overnight. But if you hold for a few months, you can achieve these gains.
In this article we'll talk about what an episodic pivot is, the kind of events that can trigger one, and how to properly trade this strategy.
Episodic Pivot Criteria
An episodic pivot occurs when there is a fundamental shift in the market that causes a dramatic change to the price of a security—and it doesn't happen every day. This type of event usually generates significant buying interest among traders because the market suddenly shifts direction.
The first thing we look for is a stock that has shot up over 8% on any given day. Note: It helps if you can do this screen on premarket price action so you can get a jump start on the day's trading.
Next look for a surge in volume. When the day is over for it to be a true episodic pivot (EP), volume will be over 300% higher than its average daily volume over the past 100 days.
Sometime a stock will even surpass its average trading in the pre - market activity. This is a sign of a prime candidate for an EP.
This leads us to the next criteria. This is where the manual work comes in... And it requires a bit of judgment. While a move greater than 8% and a surge in volume is an easy criteria to set up in a screener in even the most basic of trading platforms, the next one is not.
We want to find a stock that has been forgotten about by Wall Street... Or even hated. To do that we want to see sideways or down-trending price action of the past six months or so.
Markets are NOT Completely Efficient
Episodic pivots work because markets don't accurately price in data immediately. It takes time for the prices to reflect the true economic value. And that's our opportunity.
I believe markets aren't efficient in real-time. Despite what some market "gurus" will tell us, it is possible to beat the market trading off the news and events like this.
That's because we need to add a qualifier to the efficient markets hypothesis. And that is to add "eventually" to it.
Markets are efficient... eventually.
It takes time for news to be fully priced into an individual stocks. And we can earn superior returns if we know what to look for.
Academia has quantified this phenomenon. It's called the Post Earnings Announcement Drift (PEAD)... Studies show that stocks with an amazing earnings surprise tend to drift higher the following 60 days.
We can see this happen after Cheniere's amazing earnings release in November 2020. After trading sideways for months, it broke higher... And rose about 40% in the following weeks.
Academia has produced hundreds of studies with thousands of examples of PEAD. It's a market beating strategy. But the way to make it even better is to find great earnings in stocks that have been forgotten. Like Cheniere was forgotten in late 2020.
Earnings Announcements are Common Catalysts for Episodic Pivots
Earnings season is a great time to look for EPs.
When a stock crushes its earnings expectations and also increases earnings guidance, it will likely trend higher in the coming months.
And trades after earnings reports almost always contain above average volume. So it fills that quota of an EP as well.
As we mentioned, the best candidates for big gains are those stocks that have been forgotten buy Wall Street. We want to see low volume over the prior months. And if possible, have fewer than 3 Wall Street analysts following the stock.
But earnings aren't the only time we can see an episodic pivot
Other Catalysts for an Episodic Pivot
FDA Drug Approvals - these events are major catalysts for biotech companies. However, to do this well it helps to understand the biotech space and the science behind what the FDA is saying.
Top Sector EPs - These tend to happen in the later stages big move in a sector. If a sector is red hot, stocks within the sector can make big jumps and gap higher overnight. This often happens with no news. Seeing these have a momentum on their side, they can be profitable EP trades. To find these look for Top sector by Investors Business Daily relative strength.
Media Mentions - Sometimes a big media mention can bring attention to a stock. If a stock gets mentioned in Barron's, on Reddit, or by Cramer on CNBC we can see a volume spike. These are one of my least favorite kinds of EP... But with the emergence of Reddit, some stocks could get a mutli-week rally. This also can happen from pumping on Twitter.
Analyst Upgrades - Also one of the weaker EPs. This needs to happen in stocks with very little coverage if it's going to have any legs to the rally.
CEO Changes - If a new CEO with a track record of turning a company around takes the helm, it could be a good time to invest.
New Products - If the company releases a new product which will bring considerably more sales and investors start buying shares, that's a good sign. Apple releasing the iPhone 48 is not an EP product release.
Shortages - If the company supplies something that has an impending shortage, we may get a sustainable move on that news. For instance, natural gas is in shortage in Europe in the fall of 2022. Europe can't produce enough natural gas to run their economy the way they'd like. So they are importing liquid natural gas (LNG) from the U.S. This has created sustainable rallies in U.S. LNG companies.
Regulatory Changes - After Biden was elected in 2020, coal companies surged. Investors knew it was likely his administration would stop issuing new permits for coal mines. Since then Peabody Coal has rose about 30x. We could also see a rally in cryptocurrency companies if the SEC/CFTC/whoever provides sensible regulations around cryptocurrencies.
Rate Increase - No, we're not talking about Fed rate hikes here. But a rise in the rate companies can charge for their good or service. This is particularly important for companies in a commodity business. An increase in the price of gold is good for gold miners. An increase in the Baltic Dry Index is good for shippers.
Contracts and Partnerships - if a small company signs a contract with a large company, good things can happen.
How to Enter an Episodic Pivot Play
Everyone has a different method for entering into a position intraday. But one method you can take is to look at the highs and the lows in the trading range pre-market. Then if the stock price goes above that range high, enter into a position.
Ideally we'll see the EP end the day near it's highs. That shows investors bought into the stock all day and were more excited as the day went on. Few investors took early profits.
That's why we wait for it to break out above the opening range. We want to avoid the times a stock gaps higher but then just falls on the day. That is the danger of investing in an episodic pivot - a decent sized move already happened... And we could be selling to profit takers. Be careful.
As time goes on and we play more of the episodic pivots, you'll develop an intuition for whether the move is for real and likely to be extended, or if the price surge will fade lower.
How to Pick an Exit
For all trades, it's important to establish the point at which you will sell the position if it starts to go against you.
I tend to use two different stops at different times. For the first few days of the trade, I'll use the low price from the daily range on the episodic pivot day. If price dips below there, it's a weak sign.
But after a while the 50-day moving average will trend higher than this point. From then, I'll use the 50-day moving average line as my stop loss. If the price breaks decisively below this line, it's time to sell.
And there you have it.... One of the most powerful trading strategies to put in the trading arsenal.
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