Written by and copyright © 2005-2013 by Thomas N. Bulkowski. All rights reserved.
For more information on this pattern, read
Encyclopedia of Chart Patterns, Second Edition,
pictured on the right, pages 868 to 879. That chapter gives a complete review of the event pattern, including tour, identification guidelines, focus on failures, performance statistics, trading tactics, and sample trade. Below is just a sliver of the information contained in the book.
A good earnings surprise is an event
pattern in which a company issues an earnings announcement and the market interprets it as
better than expected. But, almost
half peak after rising 10% in less than 2 weeks. Discovered by Thomas
Bulkowski in the fall of 2003.
The Ideal Good Earnings Event Pattern
Important Bull Market Results for the Good Earnings Surprise
Overall performance rank (1 is best): 5 out of 6
Break even failure rate: 29%
Average rise: 24%
Throwback rate: 41%
Percentage meeting price target: 76%
The above numbers are based on hundreds of perfect trades. See the glossary for definitions.
Good Earnings Surprise Identification Guidelines
|Price trend||Upward leading to the announcement for the best performance.|
|Market||This event pattern works best in a bull market.|
|Announcement||The company announces earnings and the stock makes a large upward move that day or the next if the market was closed.|
|Tall swing||Look for announcements in which price makes a large intraday price swing, 2 or 3 times the average daily intraday price range over the last month.|
|Yearly low||For best performance, select announcements that occur within a third of the yearly low, just make sure price is trending upward.|
|Upward breakout||A breakout occurs when price closes above the high posted on the announcement day.|
|Volume||Select patterns with heavy announcement day volume, above the 30-day average.|
Good Earnings Surprise Trading Tips
|Measure rule||On the announcement day, subtract the intraday low
(point B) from the high
(A) and multiply the difference by the above
“percentage meeting price target.” Add the result to
the intraday high (A) to get a price target
|Confirmation||Wait for price to confirm the pattern
because traders may push price down instead. An upward breakout (confirmation)
happens when price closes above the high posted
on the announcement day (point A in the figure to
|Trend||Trade with the trend. Buy an upward breakout only if the market and industry are trending higher.|
|Swingers||Place an order to sell if the stock hits its price target.|
|Caution||Failure rates are high. Almost half (48%) rise just 10% before tumbling and that occurs in less than 2 weeks.|
The Measure Rule
Good Earnings Surprise Example
The above figure shows an example of a good earnings announcement event pattern. Price makes a large price swing
when earnings came in better than expected. Price climbed 7%. But, over the next three days, price retraced its gain and
staged a downward breakout (price closed below the red line). The following day, price recovered and climbed to a new high. Then, as is so common with
this event pattern, price rounded over and headed back down during the next several weeks.
-- Thomas Bulkowski
Copyright © 2005-2013 by Thomas N. Bulkowski. All rights reserved. Never try to out stubborn a cat.