Although I trade in a variety of time frames, the trades that produce the best returns are those that develop over the course of weeks or months. The strategy I use can be applied over a shorter time frame but typically if you are looking to play news flow it will require some patience.
One stock that I'm stalking is Aurinia Pharmaceuticals (AUPH) . I've mentioned this a number of times in the past as I like the fact that they have two drugs with big potential. One is for the treatment of dry eyes and had surprisingly strong results earlier this year. The second is for the treatment of lupus nephritis and has a significant commercial market.
Aurinia is set to release Phase 3 results of the lupus drug probably around November. The exact date is not known at this time.
I believe that at some point market players are going to start anticipating the news. There is a tendency for stocks to be run up as that news approaches and that is where the potential lies.
AUPH sold off on Wednesday following its earnings report. There wasn't any significant news and there is nothing that changes the situation with the lupus drug. It was simply traders selling in reaction to a news event without any regard to the news. Price action of that sort scares those that don't know much about the stock and they then avoid it which helps to offer a better opportunity.
I currently hold a position in the stock and will be looking to add to it as it develops further. The chart looks very poor right now as it has fallen out of a long trading range in response to earnings. I don't think that is meaningful and don't view it as predictive, however I have been wrong about such things before.
The key to this trade is to be patient and to buy incrementally. I'll leave plenty of room to add to the position over the next 60 days and then will start to look to average up when there are some signs that there is interest in the potential lupus results. I intend to cut back the position into the actual news but the run-up into the news should be relatively low risk.
The secret formula here is patience, a potentially positive catalyst and a stock that is being ignored and inefficiently priced. The chart provides a framework for managing the trade The same formula can be applied to many other stocks and works particularly well with smaller cap stocks that are not well known.