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Sirius XM (SIRI) has yet to officially announce the date on which its first quarter earnings will be reported. However, if we use previous reporting calendars as a gauge, we can take an educated guess that Q1 report will likely fall between May 2nd – 11th. But if pressed to be more specific, I would say May 3rd, but I reserve the right to be wrong. After all, Sirius has had an uncanny ability to make many intelligent people look foolish; more specifically its doubters. Ok, you’re wondering “so what?”

The announcement dates are very important, not only to Sirius investors, but even more so to Sirius traders. Neither camp is ever fond of the other. The Sirius investors often refer to traders as being complicit in what some believe are manipulative practices of the stock. The Sirius traders often refer to Sirius investors as being less astute to macro environments who often leave “gains on the table”. Regardless of your approach as a market participant, it is clear that one’s personality and ideals often preside over not only the stock of his/her choice, but also whether he/she is an investor or trader.

In this article, we are going to attempt to incorporate not only both strategies, but also some fundamental and technical analysis to capitalize on some obvious chart patterns that Sirius has demonstrated over the past several quarters leading into earnings announcements. Let’s keep in mind what started this topic. I have made some assumptions that Sirius will likely report its Q1 earnings between May 2nd and the 11th. But more specifically, I will use May 3rd as the focus and basis for my analysis and the numbers that follow.

The difference between buying a company and buying a stock

There is a famous quote on Wall Street that offers the advice “don’t buy stocks, buy companies.” From a fundamental standpoint that quote would be absolutely correct. But it implies that this is the only way for investors to make money. Traders, on the other hand, tend to buy stocks. Technical indicators often predict when a stock is at a good point of entry. You may find that a solid company with great earnings has a stock that does not reflect the growth on its balance sheet. Conversely, there are instances when a company has had little to no earnings, yet the stock gradually rises over a period of time. This often leaves investors to scratch their heads.

Traders use moving averages as a key indicator for entry and exit points. Investors, who focus on the fundamentals of the company, will rely on historic and projected earnings, as well as how the company guides. But if a stock is under various or possibly all of the key moving averages (20day, 50day, 100day, 200day and 250day), then that stock is probably headed lower regardless of how strong the fundamentals may look. Nevertheless, the most astute market participant quickly realizes that in order to achieve top results, both elements are a necessity. So as soon as you are considering buying a company or a stock, we may want to first ensure that is it moving in the “right direction”. I didn’t say “higher” for obvious reasons, as there are those who bet on the stock to move lower. But that will be for another topic.

Sirius’ trading pattern and how to play it

A Seeking Alpha commenter recently posted about Sirius’ well-known “pre and post conference-call” stock pattern. I think he deserves much of the credit here, and hope that he does not mind. I am going to highlight two of the four noteworthy observations in his post: The February 25th 2010 earnings run-up and the one that occurred on May 4th 2010.

His post stated:

FEB 25, 2010

Run up began 8 trading days before reporting date for a gain of 26%. The price peaked 2 days before reporting. The price began to fall the day before reporting and didn’t stop for 4 days.

May 4th, 2010

Run up began 14 days out for a gain of 28%. Peaked day before earnings at 1.23 but hit 1.20 3 days before. Price began to fall the day before reporting and didn't stop for 4 days. *Keep in mind that the month of April the share price climb steady. April 1= .84 April 30=1.18 but there was a marked up swing beginning the 13th.

The graphics below illustrate the rise and fall precisely as they were called (click to enlarge images):

FEB 25, 2010 trading pattern

Now, to be perfectly fair, these were not purely technically driven. There were some catalyst that lead to the prolific rise from $.91 cents to $1.18. It is worth noting that during the same time periods where the trades above were conducted, Sirius was not only in the early stages of its recovery, but it had just reported one of the best financial quarters since the lows of March 2009.

They pre-announced that they ended the year with 18.7 million subscribers with a net addition of 257K new subscribers in Q4 2009. This was a remarkable number, considering that in the 2nd quarter of the same fiscal year (2009) the company reported a net subscriber loss of approximately 186K. In Q3, they reported a net add of 102K and finally in Q4 they reported 257K; all of this while keeping churn contained at around 2%. So investors could see that the company was turning things around and now trending in the right direction.

The second graphic below illustrate the rise and fall precisely as it was called for May 4th announcement.

May 4th 2010 Trading pattern

In both instances, the red circles identify the lows leading to the earnings announcement, the highs prior to and during the call as well as the subsequent predictable drop after the conference call.

I thought it was a remarkable observation when I first saw it. The truth is, I have been trading Sirius for several years and one can always point to certain predictable price movements and reversals. Then the logical question is: Why don’t Sirius' investors use this information?

Following the recent Q4 conference call, I have had to answer many questions. Someone once asked me, “Why did we buy above $1.85 when history shows the price would fall back to the 50 day moving average at some point”? I truly did not have a suitable answer to that question.

Sirius XM (SIRI) is not the only stock that I own and/or trade on occasion. Over time, one thing that I have learned to do is tailor my investment trading strategy to suite the type of pattern that has been detected in my portfolio. It makes sense considering that every stock’s fundamentals are not the same nor will they mirror each other on a chart.

What is our strategy?

Many technical experts believe that SIRI is following what is known as a decade “W pattern”. With this view, in order to maximize profits one can attempt to execute the strategy known as the buy-sell pyramid ladder plan. The plan is to buy SIRI stock at six predetermined levels. Walk with me through the following example.

To execute the pyramid ladder strategy, one has to first outline their total capital relative to the number of shares they wanted to acquire. We have to also keep in mind how long we need to hold the shares and time it with the price appreciation and expected re-trace leading to the quarterly conference calls as outlined above. With all of this in mind and what we know from last year, our first purchase of SIRI would be at $1. The second purchase would be executed at $1.30, and the third one being at $1.60. At each level, we would buy fewer shares. For example, we would buy 50 thousand at the $1 transaction, 20 thousand at the $1.30 transactions, and then 15 thousand at $1.60 forming a pyramid effect. Are you still with me so far?

Then it gets a little complicated from there. Because within each buy zone, as in the $1 purchase, we would buy 60% of the stock at the “buy level” (pre-conference call run-up) and 40% on the correction side that we expected (retrace). 85 cents would be a good target.

Now, as I have said we had pre-determined buy targets to build the pyramid. So obviously, we have to have predetermined sell points as well. To complete the execution of the strategy, one would have to conduct the pyramid in reverse order. When I am ready to sell, I flip over the order of execution. As in the example used above, I would sell the sixth buy first and the shares that I purchased at $1 last. I hope that made sense. This is how I have played SIRI’s somewhat predictable price movements in recent weeks and months.

You are probably wondering why should I use this strategy and does it always work for SIRI?

This is a fair question. One can never be certain that a true correction (retrace) will materialize once the share price goes up. This is true, then that is where we would need to visit a topic called “hedging your bets”. But this will be for another article.

Your decision

When SIRI's share price moves to a new high as it has done recently, you should consider selling a "significant" portion of your holdings, if not your entire position. Then wait for the typical 20 to 40 percent retrace of the stock that we have discussed. It is prudent that you do this before you re-commit your capital.

The price of Sirius' stock currently sits at $1.65 (20 days prior to report). If the above pattern is to materialize, my best guess if that the stock price with reach $1.90 by April 29th. It will likely commence its correction on May 2nd and then settle into a trading range of $1.75 to $1.85 by May 6th and possibly May 9th. You should consider buying at this level and sell two days prior to the announcement. While this is easy for me to say, I know it is not easy to pull the trigger when you are faced with the decision. In fact, it might be one of the hardest decisions you ever have to make. But the decision will be yours.

In summary

This is only one of many strategies that I use that involves technical analysis. But I am not of the opinion that any strategy should completely replace nor ignore fundamentals analysis at all. After all, holding a stock for any duration is enough of a risky proposition as it is, than to ignore how the company makes what truly matters in investing; money.

By my count and using May 3rd (unofficially) as Sirius' next quarterly announcement date, this leaves traders and investors with 20 days (market closes on April 22 for Good Friday) to execute the plan above.

Will you use it? I am curious to know why or why not?

Source: Sirius Stock Patterns: How Investors Can Benefit Ahead of Earnings