Audio stack available at the end of this post. Note that the audio only covers the criteria and principles — not the charts.
Can you believe I’m just six days away from this Substack’s first anniversary? I first posted 24 May 2023.
Looking at myself a year ago, I’m rather embarrassed.
And not just because of the writing.
My thinking lacked depth
My first Qullamaggie stream notes showed awareness of three episodic pivot (EP) criteria only:
Price
Volume
Catalyst
That’s it.
My first stack with Anthony Shi (aka Dolan V. Kent), published 6 April 2024, addressed far more nuance around EPs:
Theme
Neglect
Swing cycle
Chart history
Why such nuances are important
Paying attention to detail is a core principle behind developing your edge.
After all, if the edge lay in strategy or setup alone, as Tom Dante puts it, “everyone learning it would be banking”.
An edge lies in knowing or having something of value that others lack. Often, that comes down to the details. The small — and often hard — stuff most people don’t bother with.
Today’s stack is going to delve into more EP nuances, with the view of answering one key question:
What makes an EP more explosive?
Spoiler: many of the criteria that also make for a more explosive breakout!
Study material
These Pradeep Bonde (Stockbee) videos are well worth watching, which were the main inspiration behind this stack.
What makes EPs more explosive?
Best sectors for EPs
But, as per my usual approach, I’m connecting Pradeep’s teachings with ideas I’ve picked up from other people and places, as well as things I’ve personally observed.
One thing I’m doing a bit differently today, however, is the way I’m presenting examples. Specifically, examples of catalysts.
With my Qullamaggie stream notes, I described what companies did and EP catalysts in my own words. Today, I’m presenting those catalysts via screenshots, of news and earnings.
This wasn’t to be lazy. I wanted to make your reading experience more realistic of what you might deal with, in real time, on a day-to-day basis. After all, I won’t be there to filter out the noise for you.
Instead, I want to show how you can leverage a handful of free tools (with paid upgrades available). As Jeff Sun always advocates, it’s better to mitigate avoidable costs, particularly when you’re not yet consistently profitable.
Six criteria that make an EP more explosive
Sector
Neglect
Low float
High short interest
Low fund ownership
Analyst price target raises
These six contribute to the explosiveness of an EP. As you’ll see, most also apply to explosive breakouts. Plus, several criteria are also CAN SLIM characteristics.
That said, please note that EPs which meet only a few of these criteria can still end up working very well. However, the more of these criteria you can tick off, the better your odds.
As ever, trading is about stacking the odds in your favour.
It’s also about stock picking. And the best picks, in which you’ll have most conviction, are where you see confluence: multiple setups/strategies appearing simultaneously.
But ‘bad beats’ happen. Nothing is certain in trading.
So, risk always comes first.
1. Sector
Explosive movers are more likely to be within certain sectors (or themes) over others. Pradeep points out three: health, technology and cyclical stocks.
A. Health theme
I.e. companies in, or linked to:
Healthcare
Biotechnology
Medical technology
Pharmaceutical drugs
EPs are most likely to occur in biotechs. This is inherent to the type of news they’re prone to. Catalysts like good trial results, FDA clearance, or collaborating with another (larger) company to develop a new drug are all inherently game-changing, so can trigger a big upward thrust.
Here are some examples — I’ve added blue arrows on the charts, pointing to the EPs (on both price and volume). We’ll then talk about ways to capitalise on biotech EPs.
$WGS
GeneDx ($WGS) “offers Centrellis, an AI-driven health intelligence platform that integrates digital tools and artificial intelligence allowing scientists to ingest and synthesize clinical and genomic data to deliver comprehensive health insights” (source).
$WGS had an EP on 30 April 2024:
$ELEV
Elevation Oncology ($ELEV) is “an oncology company, focuses on the discovery and development of cancer therapies to treat patients across a range of solid tumors with significant unmet medical needs” (source).
$ELEV had an EP on 5 January 2024:
$CADL
Candel Therapeutics ($CADL) is “a clinical stage biopharmaceutical company, engages in the development immunotherapies for the cancer patients” (source).
$CADL had an EP on 4 April 2024:
$CRBP
Corbus Pharmaceuticals Holdings, Inc. ($CRBP) “develops CRB-701, an antibody drug conjugate (ADC) that targets the expression of Nectin-4 on cancer cells to release a cytotoxic payload of monomethyl auristatin E (MMAE), which is in Phase I clinical trial; CRB-601, an anti-integrin monoclonal antibody that blocks the activation of TGFß expressed on cancer cells for the treatment of solid tumors; CRB-913, a peripherally restricted cannabinoid type-1 (CB1) receptor inverse agonist for the treatment of obesity” (source).
$CRBP had an EP on 26 January 2024 — albeit not a great one:
The “two-stage move” of biotech EPs
$CRBP’s EP is characteristic of a biotech EP: following a big gap up, it makes a big move intraday (in $CRBP’s case, >100%), but gives up most of those gains by day two, even if it makes a good move later.
This brings us to an important take-away: biotechs can make huge moves and, as discussed earlier, are inherently likely to see a lot of EPs.
However, they’re also extremely volatile, and come with significant gap risk, so you can’t put on big size. (With maybe the exception of biotechs that actually have earnings and sales.)
With that in mind, Pradeep suggests capitalising on this “two-stage move” (his phrase):
Capturing the initial one- or two-day move (blue arrow in the above screenshot).
Taking advantage of the PEAD and breakout further down the line (yellow arrows in the screenshot above; you can observe similar opportunities in the other biotech examples covered above).
B. Technology
Technology stocks are also prone to big moves, because they inherently have the ability to, as William O’Neil used to say, change the way we live, work or play.
So, where a technology shows promise, and is backed up by strong earnings and sales, that can make for a superb EP, with good PEAD.
In other words, once a technology stock gets going, it can make a more persistent move. One example that stuck with me, from Qullamaggie’s 18 May 2023 stream, was:
$SMCI
Supermicro (Super Micro Computers, Inc.; $SMCI) “develops and manufactures high performance server and storage solutions based on modular and open architecture in the United States, Europe, Asia, and internationally” (source).
$SMCI had an earnings EP on 3 May 2023:
The numbers for that quarter weren’t exactly amazing:
However, the forward-looking numbers were very good:
On top of that, it really had theme going for it. At that time, AI was hot, and the press release said:
Equally, you can see technology names making a good move on non-earnings news, without strong fundamentals, in which case you’re looking at something like:
$AISP
Airship AI ($AISP) “offers AI-driven video, sensor, and data management surveillance platform in the United States” (source).
$AISP had an EP on 5 March 2024:
C. Cyclical stocks
The third sector (or theme) more likely to produce strong EPs are cyclical stocks. These have, well… a cycle. The associated companies do well in good economic times, and poorly when times are bad.
Which also means that, when the economic outlook improves again, these types of stocks — especially in retail — can turn around and make a big, sustained move. Don’t forget: in a bullish super cycle, you’re typically looking at a seven-year uptrend (though this will occur in multiple ‘legs’, and remember not to obsess over ‘exact’ data).
Such a turnaround typically happens on the back of an EP, triggered by surprisingly good earnings. $ANF provides a good example of this:
$ANF
Abercrombie & Fitch ($ANF) “operates as an omnichannel retailer in the United States, Europe, the Middle East, Asia, the Asia-Pacific, Canada, and internationally. The company offers an assortment of apparel, personal care products, and accessories for men, women, and kids” (source).
$ANF actually provided two earnings EPs, for two consecutive earnings reports: on 24 May 2023 and on 23 August 2023:
From the first EP, it went on to make an extremely big, sustained move: if you’d bought the EP and held, you’d have quintupled your money in 9½ months. Those types of moves are characteristic of a good cyclical stock, with low average daily range (ADR) and strong earnings.
More specific than just strong earnings, you need an earnings surprise: look at those figures I’ve put a purple rectangle around!
The first EP had an earnings surprise of +880%; the second had a +547% earnings surprise. A powerful catalyst to ‘fuel’ this move!
We’ll discuss catalysts in more detail later. First, I want you to notice something else about most of the above charts — particularly on a weekly and monthly time frames — that helped make these EPs more explosive:
2. Neglect
Let’s come back to the technology theme, and take the following example:
$ROOT
Root Inc. ($ROOT) “offers automobile, homeowners, and renters insurance products. It operates a direct-to-consumer model; and serves customers primarily through mobile applications, as well as through its website. The company’s direct distribution channels also cover digital, media, and referral channels, as well as distribution partners and agencies” (source).
Note that in these types of cases, it’s helpful to have a high-level overview of what the company does, and not just look at the sector/industry categories provided by your charting software! This is technically an insurance name, but operates through technology.
$ROOT had an earnings EP on 22 February 2024:
Look at that monthly chart! This stock had been going sideways for years before better earnings (see the purple rectangle below) jump-started the more lively chart:
Looking at the numbers, this was the biggest earnings surprise in more than a year. And the market reacted accordingly.
In short, the combination of neglect plus a strong catalyst is super explosive.
$SMCI (again)
In our first collaboration, Anthony and I talked about neglect, giving $SMCI as an example, but from a different time period — 19 January 2024 — than the example I gave earlier.
For several of us, $SMCI was a massive winner earlier this year. Look at that base! It had been consolidating since August 2023.
But why did it need consolidation?
I showed you the chart earlier: the stock had just made a big move. Even better-quality names like $SMCI need time to digest big gains.
The better digested the initial move, the more explosive the next leg up will be, once the stock is ready to go. And the longer the base, the more traders get tired of waiting and take their eye off the ball. To quote Anthony:
“High octane investors get sick of waiting, or think it’s overvalued and sell.”
This is why many CAN SLIM-inspired traders like big bases. I’ve lost count of how often I’ve heard David Ryan say in interviews that he likes to see long bases!
Nuances around neglect
Neglect doesn’t just come from price going nowhere for an extended period of time. Neglect also means a drop-off in volume, along with little news flow.
Basically, you want everyone to have forgotten about the stock!
Using Stan Weinstein’s stage analysis, you’re looking for a stock that was in stage 1 — that is, until the price gapped up, on heavy volume, following a catalyst.
But other types of neglect are positive signs, too.
Coming back to $SMCI:
It had four failed breakouts from the range it was building. This frustrates traders, leading to selling and/or blacklisting.
The stock rejected a new all-time high, which also leads to selling and/or blacklisting.
Another type of neglect is a stock moving sideways after a previous leg up — like $SMCI, but $PI offers a good case study, too:
$PI
Impinj ($PI) “operates a cloud connectivity platform in the Americas, the Asia Pacific, Europe, the Middle East, and Africa. Its platform wirelessly connects items and delivers data about the connected items to business and consumer applications” (source).
It had an earnings EP on 25 April 2024:
Pre-EP, this stock was drifting sideways — not because it was totally forgotten about, but because it had recently rallied.
Chart history
This ties in with another point from my stacks with Anthony — looking at chart history. And not just in the sense of the character of the stock, i.e.:
Random chop;
Choppy strength;
Linear strength;
Extended; or
Parabolic.
But also, when does the stock tend to make its big, sustained moves? Intra-earnings? On earnings? On other news?
If EPs previously worked on this name, chances are the next EP will too.
If EPs previously failed, chances are the next one will too.
How different setups interplay
By extension, a stock that tends to have a successful EP, with PEAD, then consolidate, is more likely to have been neglected by the time the next earnings report is due.
But if the EP failed, that doesn’t have to mean the stock crashed and burned.
It simply means that if you bought the EP correctly, and put (and honoured) your stop at a technically logical level, you’d have been stopped out.
But a good stock could have easily undercut the low of the gap-up day, particularly if it had been drifting higher coming into earnings (due to anticipation), then consolidate for a bit before convincingly breaking out on volume.
To quote Anthony again (with some copy-edits):
“If earnings season doesn’t result in big moves, breakouts are more likely to work. The main concept I’m talking about is how EPs and breakouts are interrelated, and not independent. […]
“In November and January, EPs worked very well. Good earnings reports (ERs) catch people off guard, and PEADs price in the discrepancy between price and the report.
“Now, after a four-month run, not only has the ER been priced in; the next one has been priced in too. That is why we see gap downs on OK reports… Because they were not as amazing as the price suggested/market expected. […]
“How do we use that information going forward?
“All price action gives us clues. We can view this earnings season as a ‘filter’.
“Stocks that got crushed can get taken off our radar. That means that more time is required for the company to catch up to market expectations. We can revisit in a few seasons.
“If the ER was good, and price went nowhere, then we should keep it on watch for a delayed reaction, because it means that stock met market expectations. Just because it didn’t continue higher, doesn’t mean we stop watching it.
“If the market heats up again after digesting the four-month move, these are the candidates for market to start pricing in the next ER and break out.”
Adding my own thoughts to that, it took starting this Substack for me to realise that even if you only master one setup, you need to have a basic understanding of others — because all these different setups and patterns are interrelated.
That does not mean strategy hopping.
Choose your setup, but gain a basic understanding of others so you deepen the understanding of your own setup.
We tend to define one thing in relation to another
Two weeks ago, I wrote about the human mind’s tendency to define one thing in relation to another. For instance, to gain an appreciation of light, we have to have experienced darkness.
As a writer, it took learning different types of writing (tweets, emails, short blogs, white papers and books) to truly appreciate the one that seems to sit best with me: the long blog.
In fact, because I wrote this stack thinking about how to translate it into a different medium — audio — I worked out new ways of improving my writing:
Don’t write in a way that makes me stumble over my own sentences when I say them out loud.
Avoid having copy that repeats the following or preceding subheading.
I hope you see what I’m driving at here for you as a trader. By understanding when a different setup appears and works, you better appreciate when and why your own setup might work.
Having a better understanding of more setups will also allow you to recognise the confluence of factors better — more on that later.
3. Low float
I’ll be brief here.
Stocks that have a small float — like many of the examples covered above — are much more likely to move explosively when strong demand comes into the stock. That’s irrespective of whether we’re talking EPs or breakouts.
It’s the ‘S’ in CAN SLIM — shares outstanding (or ‘scarce supply’). Which shows you how timeless this criterion is!
4. High short interest
In my second stack with Anthony, we discussed the anatomy of a high tight flag (HTF).
Remember the ‘cocktail’ that can create an explosive breakout in a flag?
New buyers take a position.
Weak hands (who offloaded as the stock built the ‘flag’) rush back in.
Short sellers find themselves underwater and are forced to quickly cover.
Similarly, with an EP, if someone short sold a stock that gaps up on huge volume, they’d better be covering — fast!
5. Low fund ownership
I have to admit this isn’t something I pay much attention to myself, on the back of a Qullamaggie stream where Kristjan mentioned that fund ownership was a lagging indicator (assuming you use a source like MarketSmith).
That said, low fund ownership is a valid criterion (and another CAN SLIM letter: ‘I’). It reflects another fundamental truth of the market: you need institutional sponsorship — i.e. big buying — for a stock to be able to really explode upwards.
As I said in the HTF stack, the big players that want to own this company can’t all be holding shares in it already. You need new buying and, preferably, new buyers.
6. Analyst price target raises
Using $PI as our example again:
Five different analysts raising their price targets following earnings. Plus, their increases were pretty substantial: before earnings, $PI was trading at $120.91. Following earnings, the analysts raised their targets to $150–$160.
As Pradeep points out, analysts only do that with new, game-changing information. Also, this is the type of data retail traders tend to miss, but the players that matter — institutions — pay attention to.
It reflects that the earnings surprise was big. Specifically in this case, the consensus was beaten by 91% and at least 279% for the current and next quarters respectively.
As Pradeep pointed out (4:58):
“When the information comes as a surprise to the market, […] the market reacts very violently.”
The market tries to price in the new information. Consequently, the stock made a huge move on day one and, at the time of writing, is having some nice PEAD.
In summary, price targets aren’t useful information in a ‘direct’ way. Instead, look at price target raises (or drops) as a signal for how the market received the earnings or other news.
The more analysts raise their price targets, the better. Ideally, you want to see at least three analysts raise their targets.
Coming back to CAN SLIM
To me, this corresponds pretty well to another key CAN SLIM characteristic: good earnings. As David Ryan explained:
“I think what [O’Neil] laid down, and the characteristics he originally found, is really the truth of […] how the market works.
“So, there’s so many parallels between what [O’Neil’s] discovered and what God laid down[:] this is how stocks operate. If a company has […] a great product, they’re going to have great earnings, people are going to want to own that company, and the stock price is going to go up.
“I don’t know how that’s going to change, unless there are [taxes] that clamp down on entrepreneurship, and we don’t have any new products, and nothing new is made.”
However…
Story EPs and short-term opportunities
To let Pradeep take the lead with his tweet:
This isn’t a million miles away from the big moves biotechs without earnings can make in a day or two following a news catalyst.
You also get ‘thematic’ EPs — meme stocks are the obvious recent example, but not so long ago, weed did well following a US government policy change. For these types of moves, no earnings are necessary.
This is different from ‘secular’ themes — the ones that don’t just last for a few weeks or months, but can go on for years. Like AI and quantum.
That’s not to say that every big mover with an AI theme is going to make multi-month moves, never mind multi-year, but we’ll likely see some very big players with some insane earnings in the years to come.
Confession: I completely lost track of how many hours this stack took!
But I genuinely learnt a lot from this one. In fact, I don’t think I’ve ever learnt more from a single solo stack. So, I hope you learnt something too.
Given that you’ve gotten this far, chances are you did.
If so, I’d love it if you bought me a coffee. This Substack will never be paywalled — I made that decision from day one — but voluntary donations really do help support future work.
Reflection
I only started studying the EP setup a year ago, when this Substack was born. In the course of that year, I increasingly realise how much I still have to learn.
All the nuances covered in this stack are a reflection of that. Some of the criteria for identifying which EPs are likely to be most explosive include:
Sector
Neglect
Low float
High short interest
Low fund ownership
Analyst price target raises
When you dig into these criteria, a startling number overlap with the CAN SLIM characteristics — or indeed strong breakouts generally.
Furthermore, it’s increasingly dawning on me just how much all these different setups are linked. EPs, breakouts, pullbacks — they’re all part of the stock market and trading ecosystem.
Anyway. Nuances.
As the number of things to consider grows, keeping a checklist becomes increasingly useful. The more items you can check off, the better your odds. Besides, using a checklist improves your consistency — a vital ingredient for long-term outperformance.
Furthermore, paying attention to detail is a core principle of an edge. Otherwise, you won’t be able to spot what others miss. As Pradeep always says: “Depth creates edge”.
One way in which you can add depth is being aware of the confluence of factors. The more items you can check off, the better your odds of the setup working.
This also works at a strategy level. I remember Leif Soreide talking about this in a Richard Moglen interview — if you see two or more setups/strategies appear at the same time, demand will be stronger, and an explosive upward move becomes more likely.
To give Pradeep the final word:
“If you start using these kinds of discretionary factors to determine where to focus your attention, you’ll find more success [with] EPs than just [buying] EPs in any random stock.”
As a rule of thumb, the less experience you have, the more mechanical you should be trading. Dr. Mansi’s videos are particularly good for that, in my opinion.
But as you gain experience, and grow the ‘database of events’ stored in your head, you increasingly gain an intuitive ‘feel’ for the market.
That’s when you can apply more discretion.
Listen to this stack
Note: The audio doesn’t cover charts; just criteria and principles.
The absolut best summary of the criterias of an EP i have ever read! Great work!
Yet again a great written work, thank you. 🤝