Share price jumps after earnings. What’s next?

As earnings season approaches, companies release their earnings reports one after the other.

When a company releases its earnings report, the stock price can go up or down a lot.

Suppose stock price jumps after a better-than-expected earnings announcement, what would you do?

● If the company has reported an earnings beat, you may be able to track the price.

●If the good earnings result is already priced into the share price, you might become bearish on the share.

● If you believe the stock is overvalued, you can wait for a possible pullback in price before making any decisions.

Your choice may depend on your financial goals, risk tolerance and other personal situations.

In this article, we will introduce an event pattern called the earnings flag, which can potentially help you manage your investment decision after an earnings beat.

The earnings flag is an event pattern that can occur after a company announces earnings.

Price makes a big move up, consolidates and then resumes the uptrend.

A merit flag was first identified in the late 1990s by Thomas Bulkowski.

Investors interested in identifying investment opportunities based on earnings announcements may find the earnings flag event pattern particularly useful, as it is driven by the company’s earnings.

Bulkowski listed the following conditions before identifying this pattern in actual trading.

Earnings Announced: The pattern is dependent on the earnings announcement. When the company announces better-than-expected earnings, the stock either rises by a large amount, or there is a price gap upwards on the next day if the announcement is made after the stock market closes.

Flagpole: Then you can look for a price run that appears almost straight up on the stock price chart and lasts for several days. This run should look like a vertical flagpole. Generally, silk top is a highlight of the pattern.

Flag: As the flagpole approaches its highest point, the share price often consolidates and begins to trend downward. This creates a rectangular flag or pennant that looks like a flag hanging from a flagpole. That is why this pattern is called a merit flag.

Break away: When the price breaks through the trend line of a flag or pennant pattern or closes above the highest point in the pattern (including the flagpole), it is referred to as a breakout. When relying on this pattern, it is important to wait for an upward breakout before considering taking action.

How can investors use this pattern to identify potential buying and selling opportunities? Thomas Bulkowski has summarized some trading strategies based on the characteristics of this pattern.

Measuring rule: To estimate the target price or how much the price can be expected to rise, you can use the measure. First, calculate the formation height from the highest high in the pattern (A) to the lowest low on the day the earnings result is announced (B). Then add this difference to the lowest low in the flag part of the pattern (C). This will give you a predicted target price. According to Bulkowski’s statistics, the price can reach the price target 86% and 84% of the time in bull and bear markets, respectively. [1]

Buy signal: The pattern is confirmed when the price breaks above the highest high or breaks through a trend line. There are two potential buy signals associated with this pattern. The first potential buy signal occurs when the price closes above the trendline of the flag (D). The second potential buy signal occurs when the price closes above the highest high of the pattern (A).

Sell ​​Signal: Trading this pattern can be difficult because the price can rise quickly and then fall significantly. If the price shows weakness in the first week, you may consider exiting your position. It may be important to consider taking potential profits relatively quickly when trading this pattern. If the price continues to rise after a short pullback, you can consider buying again and riding the uptrend.

It is important to remember that the earnings flag pattern is just one tool to help investors spot potential buy and sell points. When deciding whether to buy, you should also consider analyzing the company’s fundamentals and using other technical indicators to make informed decisions.

[1] Source: Encyclopedia of Chart Patterns. Page 893.

Let’s look at Pinduoduo’s stock price chart which showed an earnings flag pattern.

When Pinduoduo released Q3 earnings, the stock price rose sharply on that day and continued its upward momentum for the next few days, forming part of the flagpole. The share price then entered a consolidation phase and formed a flag pattern. After breaking out of consolidation, the share price continued its upward trend.

As the stock price pulled back, it formed a second flag. After breaking out of this flag, there was another wave of rising prices.

The earnings flag pattern can be a useful tool for traders to identify potential trading opportunities.

By monitoring when companies release their earnings, traders can use the earnings flag pattern to help them predict the stock’s price movement after the release.

In the US, listed companies are required to publish their financial reports four times a year. These periods are known as earnings seasons.

However, the specific timing of each company’s earnings release has not been set. To help identify which companies release earnings each week, you can refer to the earnings calendar on moomoo.

Open the app and tap Markets > Explore > Earnings Reports. On the left side of the box you can see how many companies will release financial reports each day. Click on it to see which companies release their reports.

A flag of merit pattern is an event-driven short-term bullish continuation pattern.

It helps investors predict a stock’s price movement after an earnings announcement.

However, it is important to remember that the pattern is not always guaranteed to be successful and can produce false signals.

Therefore, it is beneficial to consider other fundamental and technical analysis indicators to help make informed trading decisions.

Additional Disclosures: This presentation discusses technical analysis, other approaches, including fundamental analysis, can provide very different views. The examples provided are for illustrative purposes only and are not intended to reflect the results you may expect to achieve. Specific security charts used are for illustrative purposes only and do not constitute a recommendation, an offer to sell or a solicitation of an offer to buy any security.