Article Reviews, Trading

Never Initiate a Directional Bet Close to an Earnings Announcement

I just came across this CNBC video (link here) where Tom DeMark called a bottom in Apple (AAPL) on January 15, 2013 (AAPL was trading around 483-499 that day).

Tom DeMark is a famous creator of a set of market timing indicators that are being used by hedge funds and traders (link here).

AAPL Top Call

He successfully called the top in AAPL on September 21, 2012 (AAPL was trading around 699-705) when his primary Sequential indicator had a reading of 13 that day.

His target was 494.97. The way he calculated the target was to:

  • Take the length of the “free fall decline” from ~705 (September 21, 2012) to 505 (November 16, 2012), i.e. 705 – 505 = 200
  • Find the high of the rally, i.e. ~595 made on December 3, 2012.
  • Subtract half of the length of the free fall decline from the high of the swing high, i.e. 595 – 0.5*200 = ~495

That is an interesting way of projecting price targets, basically assuming that the next leg in up swing is half of the previous leg, which kinda makes sense in that you would expect trends to be strong at the early stage and gradually weaken before it turns. I did a quick test using AAPL’s up move from the consolidation area during the August – December 2011 period.

  • Length of move from 353 (low made during the consolidation) to 644 (high on April 10, 2012) = 644 – 353 = 291.
  • Swing low on May 18, 2012 = 522
  • Price target = 522 + 0.5*291 = 667.5.
  • AAPL exceeded that 667.5 price target, but it’s not a bad prediction.

AAPL Bottom Call

He was calling the bottom on AAPL at around 494, as his indicators were all lining up, with his Sequential indicator at a reading of 12 (a level of 13 signals potential price exhaustion). He highlighted that

  • This looks like a very strong rally of at least 22%
  • We wouldn’t be surprised tomorrow to see Apple gap up above 494, 495 despite trading lower in the aftermarket today, and it will just move forward right from there and be strong for the next couple of weeks and reach 600.
  • If the market were to decline further from here, we could see another 100, but don’t see that happening.
  • Tomorrow we should produce a 13, which is a bottom. Even if we have a down opening tomorrow, that 13 will appear and there is no way we can erase it, the market is exhausted.
  • We pride ourselves on being anti-trend, or identifying trend exhaustion in a downside trend wave. We are very confident that it has exhausted itself.
  • The bottom is in today (Weds) or tomorrow (Thurs).


Well, we all know what happened to AAPL. It cratered when its earnings were announced after hours on January 23, 2013. Dropped more than 12%, and another 2+% drop the next day, for a total of ~15% drop so far.

To me, the lesson to be learnt here is that, you DO NOT initiate a directional bet in a company so close to the earnings announcement date, no matter how strong your conviction is to the upside or downside. Your judgement is not infallible, and taking a directional bet just before an earnings announcement is akin to playing Russian roulette. How many times can you play it before you get wiped out?




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