The Secret Recipe to Finding Stocks BEFORE They Go Parabolic

Trading Floor Podcast - Episode 11: Catalyst Play Breakdown

Key Concepts:

• Catalyst Play: Trading based on significant company events (like earnings reports) expected to cause substantial price movement.
• Pre-Market Extended Hours Percent AVAL Scanner: A custom scanner identifying stocks with unusually high volume (as a percentage of average daily volume) in pre-market trading, indicating potential for a strong intraday move.
• AVAL (Average Volume at Launch): Volume traded in the initial period of trading, often used to gauge initial market interest.
• Inflection/Acceleration Quarter: A crucial earnings report indicating a significant shift in a company’s growth trajectory, often marked by a substantial increase in revenue growth and profitability.
• Theme Tracking: Categorizing stocks based on broader market trends and identifying potential beneficiaries of those trends (e.g., AI, edge computing).
• First Clean Profitable Beat Quarter: The initial quarter where a company reports a profit, signaling a potential turning point.
• Good Stock Continuing to Crush It Quarter: A subsequent quarter following the inflection point, demonstrating sustained strong performance.

I. Identifying High-Potential Catalyst Plays: The Five Checks

The podcast centers around a five-step process for identifying and grading catalyst plays, specifically focusing on earnings-driven moves. The goal is to filter out weak setups and concentrate on those with the highest probability of significant returns.

1. Volume (Pre-Market): The primary initial screen utilizes a “pre-market extended hours percent AVAL scanner.” This scanner identifies stocks exhibiting volume in pre-market trading that is at least 20% (and ideally much higher) of their average daily volume. Fastly (FSLY) was flagged due to an exceptional 200% AVAL, immediately drawing attention. The rationale is that high pre-market volume indicates institutional interest and a higher likelihood of a trending day. Volume below 20% is generally considered insufficient to warrant further investigation.
2. Higher Time Frame Technicals: Analyzing the chart on a higher timeframe (daily/weekly) to assess the overall trend and identify potential breakout opportunities. Fastly was breaking out of a weekly base, providing a positive technical signal.
3. Earnings Report Analysis – Identifying the Inflection Point: Moving beyond headline numbers (EPS, revenue beats) to determine if the earnings report represents a fundamental shift in the company’s trajectory. This involves comparing current results to previous quarters to identify an “inflection/acceleration quarter.” The focus is on identifying a significant jump in revenue growth after the company has achieved its first clean profitable beat.
4. Theme Identification: Determining the broader market theme the company aligns with. This involves categorizing companies based on their industry and potential impact from macro trends (e.g., AI, digital infrastructure). Fastly was correctly identified as belonging to the “digital infrastructure” theme, specifically benefiting from the growth of edge computing, rather than being categorized as a traditional software company.
5. Market Environment: Assessing the overall market conditions and how similar earnings plays have performed. A weak market environment can diminish the potential of even strong catalyst plays.

II. Deep Dive into Earnings Report Interpretation

Tim Beldin detailed a systematic approach to analyzing earnings reports, moving beyond simply checking if a company “beat” expectations. He categorized earnings reports into distinct types:

• First Clean Profitable Beat Quarter: The initial quarter where a company reports a profit.
• Acceleration/Inflection Quarter: The quarter demonstrating a significant jump in revenue growth after achieving profitability. This is the most desirable type of report for a catalyst play.
• Good Stock Continuing to Crush It Quarter: Subsequent quarters with continued strong performance, but potentially less explosive growth than the inflection quarter.

The key is to compare current results to previous quarters to identify a clear acceleration in growth. This requires building a “story” of the stock’s performance over time.

III. Fastly (FSLY) Case Study: A Real-World Application

The podcast extensively used Fastly as a case study to illustrate the process.

• Initial Scan: Fastly was flagged by the pre-market AVAL scanner due to its 200% volume increase.
• Report Analysis: The report showed a double beat (EPS and revenue) with positive guidance. However, the crucial insight came from analyzing previous quarters. Fastly had previously experienced a first clean profitable beat, and the current quarter showed a significant acceleration in revenue growth (from 12% to 23% year-over-year).
• Theme Confirmation: Identifying Fastly as an edge computing play within the digital infrastructure theme, aligning with the broader market trend of AI-driven infrastructure development.
• Intraday Execution: The team executed the trade by initially buying on the pre-market high break and then adding to their position on dips to VWAP (Volume Weighted Average Price) during the first hour of trading. Cam, another trader on the team, identified a strong intraday setup and advocated for increasing position size.
• Result: Fastly experienced a 90% move on day one, providing a substantial profit.

IV. The Importance of Institutional Footprints and Market Confirmation

The discussion emphasized the importance of interpreting pre-market volume as a signal of institutional activity. High pre-market volume suggests that institutions are actively assessing the report and positioning themselves for a potential move. However, the team stressed the need for market confirmation – waiting for the price action to validate the initial thesis. A strong opening candle with high volume and a break of the pre-market high were key confirmation signals.

V. Notable Quotes

• “The whole game is having the information to ignore the maybe setups so you can focus on the overwhelmingly clear ones.” – Tim Beldin
• “Volume is always a big one on these catalyst plays… it’s the best way to find stocks in play.” – Garrett Dryen
• “We want to make sure there's interest [in the report]. Institutions can't do all their business in the pre-market… they've got people looking over these reports and the algos are on these things.” – Garrett Dryen
• “You can’t just look at [earnings numbers] in a vacuum. You’re trying to find an inflection in acceleration quarter.” – Tim Beldin

VI. Technical Terms & Definitions

• VWAP (Volume Weighted Average Price): A trading benchmark that gives more weight to prices based on volume.
• RPO (Remaining Performance Obligation): A metric representing the value of future revenue under contract.
• Short Float: The percentage of a company’s shares that are currently being shorted.
• Dispersion: A market condition where different sectors and stocks are moving in significantly different directions.

Conclusion:

The podcast provided a detailed and actionable framework for identifying and trading catalyst plays. The emphasis on pre-market scanning, thorough earnings report analysis, theme identification, and market confirmation offers a systematic approach to navigating the volatility of earnings season. The Fastly case study demonstrated the practical application of this process, highlighting the importance of combining quantitative data (volume) with qualitative analysis (earnings report interpretation and theme identification). The team’s collaborative approach and emphasis on letting the market confirm their thesis further underscored the importance of discipline and adaptability in trading.