$ASYS – Anatomy of an Earnings' Trade

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  • on August 23rd, 2010

Earnings’ season is a time of elevated volatility. Volatility brings opportunities. For some stocks their earnings’ report becomes a catalyst that alters market participants’ perceptions of value and starts a process of re-pricing – a beginning of a major price appreciation/depreciation or a move to a new trading range.

Let’s take a look at the conditions that need to be in place for the occurrence of a successful swing earnings’ trade (these are necessary, but not sufficient conditions for profiting; proper risk management is needed for the latter):

1) Catalyst: Amtech Systems Inc. guides its Q3 2010  sales above the estimates. The company expects a revenue of $42 millions, which is 227% higher compared to the same quarter of 2009.

2) Market reacts favorably to the announcement, sending $ASYS above its recent price range. The stock went up 10% on 10 times its average traded daily volume.

3) The stock is neglected – it traded in relatively tight range since March of 2010; before the guidance announcement, the average daily volume was under 50k; The float is extremely thin – only 8m shares. Small float stocks tend to have monstrous moves due to the lack of enough supply.

4) After the initial breakout, $ASYS consolidated sideways in a tight range, low volume fashion. At the time the 10 day MA was rising above the 50 day MA, which was rising above a 200 day MA. During its uptrend move $ASYS bounced several times from its rising 10 days MA. Holding above such a short-term MA is a clear indication of strong demand and lack of supply. There is nothing magical about the 10 day MA or any other MA for that matter. When enough market participants believe that certain level will be hold and act on their beliefs, then the expectations turn into self-fulfilling prophecy. This is how TA works in general.

5) Price moves are sustained by catalysts. On Aug 5th, $ASYS reported record earnings, beating its own guidance. The stock bounced sharply.

6) The industry of $ASYS was in favor at the time. Amtech Systems Inc. is a producer of capital equipment used to manufacture solar cells. You can see below how the solar ETF – $TAN significantly outperformed the Qs for the period of $ASYS price appreciation.

$ASYS is currently overextended and it is likely to experience a pullback, probably to a longer time-frame MA – 20 day or 50 day. Let see if the previous zone of resistance around $12-$13 will turn into support.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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