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Thomas Bulkowski’s successful investment activities allowed him to retire at age 36. He is an internationally known author and trader with 30+ years of stock market experience and widely regarded as a leading expert on chart patterns. He may be reached at

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Bulkowski's Bad Earnings Surprise

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Market
Industrials (^DJI):
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Utilities (^DJU):
Nasdaq (^IXIC):
S&P500 (^GSPC):
As of 10/20/2017
23,329 165.59 0.7%
9,972 85.59 0.9%
749 1.35 0.2%
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23,700 or 22,700 by 11/01/2017
10,300 or 9,700 by 11/01/2017
775 or 725 by 11/01/2017
6,700 or 6,500 by 11/01/2017
2,625 or 2,525 by 11/01/2017

Written by and copyright © 2005-2017 by Thomas N. Bulkowski. All rights reserved. Disclaimer: You alone are responsible for your investment decisions. See Privacy/Disclaimer for more information.

For more information on this pattern, read Encyclopedia of Chart Patterns Second EditionEncyclopedia of Chart Patterns 2nd Edition book., pictured on the right, pages 855 to 867.

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A bad earnings surprise is an event pattern in which a company issues an earnings announcement and the market interprets it as worse than expected. Nevertheless, in a bear market 61% have upward breakouts! In a bull market, 43% breakout upward. For those with downward breakouts, almost half (47%) bottom in one week, and 60% bottom in less than two weeks. Most of the time, a bad earnings surprise is nothing to be worried about providing the stock doesn't make a large intraday move (a tall price swing). Discovered by Thomas Bulkowski in the fall of 2003.

 

Bad earnings event pattern

The Ideal Bad Earnings Event Pattern

Important Bull Market Results for the Bad Earnings Surprise

Overall performance rank (1 is best): 3 out of 5
Break even failure rate: 31%
Average decline: 13%
Pullback rate: 41%
Percentage meeting price target: 69%

The above numbers are based on hundreds of perfect trades. See the glossary for definitions.

Bad Earnings Surprise Identification Guidelines

CharacteristicDiscussion
Price trendDownward leading to the announcement for the best performance.
MarketThis event pattern works best in a bear market.
AnnouncementThe company announces earnings and the stock makes a large downward move that day or the next if the market was closed.
Tall swingLook for announcements in which price makes a large intraday swing, 2 or 3 times the average daily intraday price range over the last month.
Yearly lowFor best performance, select announcements that occur within a third of the yearly low.
Downward breakoutSince the price trend is downward leading to the pattern, trade only those announcements making a downward breakout. A breakout occurs when price closes below the lowest low posted on the announcement day.
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Bad Earnings Surprise Trading Tips

Trading TacticExplanation
Measure ruleSee the figure to the right. On the announcement day, subtract the intraday low (B) from the high (A) and multiply it by the above "percentage meeting price target." Subtract the result from the intraday low (B) to get a price target (C).
ConfirmationWait for price to confirm the pattern because traders may push price up instead. A downward breakout (confirmation) happens when price closes below the low posted on the announcement day (point B in the figure to the right).
Longer termFor investors or traders with a longer-term investment horizon, do nothing as the decline is likely to be small. However, one bad surprise is likely followed by another next quarter.
SwingersFor swing traders, consider selling a holding to minimize the loss. If price gaps downward and the gap is small, price may cover the gap in a few days.
ShortFor aggressive traders: In a bear market, wait for the downward breakout and then short the stock. It may bottom in less than a week.
Quick declineExpect a quick but shallow decline. Almost half the time price bottoms in less than a week and then rebounds.
More surprisesA bad earnings surprise follows a bad earnings surprise 74% of the time.
Bad earnings event pattern measure rule
The Measure Rule
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Bad Earnings Surprise Example

 pattern example

The above figure shows an earnings announcement which the market took as bad news. Price began a strong move up at point A. When the bad earnings announcement came at B, the stock was overbought and ripe to fall. Price traded in a large price range on the announcement day and then tumbled thereafter. Price pulled back, allowing nimble traders to either exit a long position or add to a short position before the decline resumed. Price dropped from over 70 to 55 and change.

-- Thomas Bulkowski

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See Also

Written by and copyright © 2005-2017 by Thomas N. Bulkowski. All rights reserved. Disclaimer: You alone are responsible for your investment decisions. See Privacy/Disclaimer for more information. Keep your ear to the ground. -- Van Gogh.