Setup Prioritization and EPs

“The world judges you by the decisions you make: never knowing the options you had to choose from”

- aptly applies to the market euphoria of last week.

The regret and pain if you are underperforming also reach all-time highs, along with indices, as there is no one else to blame.When capital is limited and there are many stocks breaking out, prioritization becomes critical. Here's how to:

When the market is in a euphoric run, like last week, you have the opportunity to buy as much as your capital allows. It is easier to trade good setups when there are very few bad options. However, in these markets, it is also easier to underperform by entering setups that may appear better at first glance but are weaker in terms of relative momentum.

A more effective method is to prioritize stocks that demonstrate FOMO in their momentum. These stocks are characterized by market participants experiencing stress and a sense of urgency to take action (buy/sell), triggered by factors such as surprise earnings reports, news events, sectoral demand, or under-ownership (IPO), among others.

The Episodic Pivot (EP) is a setup that operates based on the core emotion of FOMO. It is one of the oldest setups and is used by many super traders under different names, including @Qullamaggie and @DanZanger. However, since most of us learned it from @PradeepBonde, I will refer to it as EP for simplicity's sake. Its foundation is based on market principle of surprise information unlocking new value and FOMO in a stock, which, combined with the institutional need to secure a “good” allocation in their portfolio, sustains the trend for months, especially for low float stocks.

If the myth of a life-changing strategy or Holy-Grail is true, EP would likely be the one that comes closest to it. If you have not read about EP before, you can refer to the post on 15th August 2023 (link at the end).

This quarter, we have had one of the best EP seasons, with several stocks making strong post-result up moves, despite many results not meeting EP quality standards. It was likely a good prelude to the bullish follow-through that was expected after a choppy consolidation of ~6 weeks.There have been procedural efficiencies which have improved the execution of the EP over the last few quarters which will be useful to the readers-

Pre Trade ‍

Since I am unable to actively monitor the market and check earnings in real-time during trading hours, my EP universe primarily consists of earnings that are released after market hours, which has proven to be more than sufficient. But even tracking those were time and effort consuming, and could be made more efficient.

One of the primary requirements for an EP based on post-market earnings or news is for it to gap up the next day. If it fails to do so, it cannot be considered an EP because the market is not surprised by the results. Therefore, identifying potential EPs was restricted to stocks that gapped up in the pre-open session and checking if they had earnings the previous day during post-market hours, using the NSE result calendar. Even on peak result days, there are maximum of 5 potential EPs, and the 15 minutes of pre open time available for quickly scanning the results was sufficient. I was able to identify most of the EP's without the need to track results on a daily basis.

However, if you are starting out with EPs, I suggest forming a 5-6 member peer group to jointly fill in a Google sheet with the results - EPS and Sales (QoQ, MoM). This is necessary to develop procedural memory for numbers and the context in which the stock is gapping up. This will make the hack of skipping it more effective later.

Buying EP

On the day of EP -

A favourable context for the last EP season was that we had the first deeper pullback in September amidst a very strong bull run. As a result, most stocks were either consolidating or had temporarily lost momentum, causing them to move on the EP day itself.

Most entries on these days were at the opening range highs (1/3/5 min), with the day low as the stop loss. In many cases, the day low stop loss could have been adjusted to either the intraday breakout bar lows or the lower ranges of the opening 5 min bar. This would have helped avoid unnecessary risk cushioning and optimal position sizing.There is a lot more potential for optimizing trade management (by entering earlier with tighter stop loss and larger position size), as the premise of FOMO, when played out, should get the trade to a risk-free position immediately. Stalling or a deeper pullback will be viewed more negatively in this context.

Here are some of my EP day buys from this quarter -

EP Pullback -

Many EPs do not follow through on the gap-up day and often fail to break the highs of the opening range. Instead, they offer pullback entries within the next few days (1-10 days). These setups are higher efficiency trades, as they can be approached similarly to typical momentum burst trades with tighter stop losses.

Here are some examples of EP pullbacks from this quarter -

PS - I don't have any positions in these examples as my capital has been exhausted. These are just examples.

Deep Dive

A question that I am frequently asked is how to deep dive into a setup. For this, @swing_ka_sultan has written a fantastic thread that explains the whole process and leaves me with little to add. I have added his thread link at the end.

For starters, this is how you can review on the last EP season -

1) Scan for all the gap-ups between October 5th and November 15th, 2023., with your liquidity filters.

2) Check if the gap-up occurred on the next day after the release of results, and if the results were released during post-market hours. If not, remove it from the database.

3) Note the EPS and Sales figures in a spreadsheet, along with their % change QoQ and YoY. Ensure that these numbers are consolidated and not standalone. Also, check if the growth was influenced by exceptional items or accounting methods, such as deferred tax. If so, adjust the numbers accordingly.

4) Now, go through all the charts and simulate how you could have optimally traded them. This is where you need to scrutinize the execution process in as much detail as possible to develop procedural memory. For example, if you are looking to identify buy points on the gap up day, some of the consideration points can be:

Start by going to the intraday 1/3/5 minute charts at the open and review them bar by bar. Pay attention to the size and intensity of the first 1-minute bar. Then, observe the behaviour of the next four 1-minute bars. Look for any pullbacks, as they can present good low-risk entry opportunities.
Determine whether the 5-minute highs can be considered a general rule and identify any exceptions to this rule.
Analyse the points of breakdowns for the EPs that failed. Observe how their opening range movements looked like. Was the gap up failure evident from the first minute itself?
Identify the points at which the FOMO would be invalidated, as this will help you determine where to place your stop loss.

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