Select Energy Services Inc

NYSE:WTTR   4:00PM EDT
11.29
+0.16 (+1.44%)

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Pre-earnings Momentum Trade With a Technical Trigger in SELECT EGY SVCS



SELECT EGY SVCS (NYSE:WTTR) : Pre-earnings Momentum Trade With a Technical Trigger


Date Published:

Disclaimer

The results here are provided for general informational purposes from the CMLviz Trade Machine Stock Option Backtester as a convenience to the readers. The materials are not a substitute for obtaining professional advice from a qualified person, firm or corporation.


Preface

There is a bullish momentum pattern in SELECT EGY SVCS (NYSE:WTTR) stock 3 trading days before earnings. Further, we use moving averages as a safety valve to try to avoid opening a bullish position while a stock is in a technical break down, like the fourth quarter of 2018.

LOGIC

The logic behind the test is easy to understand -- in a any market there can be a stock rise ahead of earnings on optimism, or upward momentum, that sets in just 3-trading days before an earnings date. That phenomenon has been well documented by Capital market Laboratories in our seminal webinar on market patterns. Now we can see it in SELECT EGY SVCS.

The Bullish Option Trade Before Earnings in SELECT EGY SVCS

We will examine the outcome of getting long a weekly call option in SELECT EGY SVCS 3-days before earnings (using trading days) and selling the call before the earnings announcement if and only if the stock price is above the 50-day simple moving average.

Here's the set-up in great clarity; again, note that the trade closes before earnings, so this trade does not make a bet on the earnings result.



And here is the technical requirement -- note only one is "turned on," and that is the 50-day moving average requirement.:



If the stock price fails the technical requirement, it's fine, we just put a pin in it and check next quarter.

RISK MANAGEMENT

We can add another layer of risk management to the back-test by instituting and 40% stop loss and a 40% limit gain. Here is that setting:



In English, at the close of each trading day we check to see if the long option is either up or down 40% relative to the open price. If it was, the trade was closed.

RESULTS

Here are the results over the last three-years in SELECT EGY SVCS:

WTTR: Long 40 Delta Call

% Wins: 100%
Wins: 3 Losses: 0
% Return:  95.9% 

Tap Here to See the Back-test

The mechanics of the TradeMachine® stock option backtester are that it uses end of day prices for every back-test entry and exit (every trigger).

Notice that while this is a 3-year back-test and we would expect four times that many earnings triggers (4 earnings per year), the technical requirement using the 50-day moving average has avoided 9 pre-earnings attempts. In other words -- it's working.

We see a 95.9% return, testing this over the last 3 earnings dates in SELECT EGY SVCS. That's a total of just 9 days (3-days for each earnings date, over 3 earnings dates). This has been the results of following the trend of bullish sentiment into earnings while avoiding the actual earnings result.



This is not a magic bullet, rather it's a bullish strategy. In the short-term it hasn't seen any losses, but more importantly, whether or not it loses on any given earnings run-up, the 95.9%  return in less than two-full months of trading is predicated on an idea of consistent momentum.

Setting Expectations

While this strategy had an overall return of 95.9%, the trade details keep us in bounds with expectations:
      The average percent return per trade was 30.24%.

Checking the Moving Average

You can check to see if the 50-day MA for WTTR is above or below the current stock price by using the Pivot Points tab on www.CMLviz.com.

Back-testing More Time Periods in SELECT EGY SVCS
Now we can look at just the last year as well:

WTTR: Long 40 Delta Call

% Wins: 100.00%
Wins: 2 Losses: 0
% Return:  89.6% 

Tap Here to See the Back-test

We're now looking at 89.6% returns, on 2 winning trades and 0 losing trades.
      The average percent return over the last year per trade was 42.5%.

WHAT HAPPENED

This is how people profit from the option market, its empirical testing, not luck. Now it's your turn.

Please note that the executions and other statistics in this article are hypothetical, and do not reflect the impact, if any, of certain market factors such as liquidity and slippage.