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The earnings flag is an event pattern
that occurs after a company announces earnings. Price makes a large upward move,
consolidates, and then resumes the uptrend.
An earnings flag is the best performing event pattern. Discovered by Thomas Bulkowski in the
late 1990s. For more information see pages 893 to 907 of the book
Encyclopedia of Chart Patterns,
Second Edition and the following...
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Important Bull Market Results
Overall performance rank for upward breakouts (1 is best): 1 out of 6
Break even failure rate for upward breakouts: 10%
Average rise: 34%
Throwback rate: 63%
Percentage meeting price target for up breakouts: 86%
Identification Guidelines
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Characteristic |
Discussion |
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Trend |
Performs best in an upward
price trend. |
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Earnings announced |
When the company announces
earnings, the stock makes a large move up or price gaps upward the next day if the market happened to be closed. |
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Flagpole |
Look for a near vertical price
run, preferably lasting several days. |
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Flag |
Near the top of the flagpole,
price consolidates and usually trends downward. The appearance can be a flag, pennant, or an oddball shape. The best performers
are tight congestion patterns, not loose price structures with the stock meandering up and down. |
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Breakout |
A breakout occurs when price
pierces a flag or pennant trendline or closes above the high in the pattern (including the flagpole). Don’t trade unless
you get an upward breakout. |
Trading Tips
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Trading Tactic |
Explanation |
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Measure rule |
The figure to the right shows the measure rule. Compute
the height from the highest high in the pattern (A) to
the announcement day low (B) and then multiply it by
the above “percentage meeting
price target.” Add the result to the flag low (the lowest low to the right of
the flagpole, C) for a price target.
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Confirmation |
Buy when price pierces a flag
or pennant trendline (D in the figure to the right) or
rises above the event pattern’s high (A), but
not before. |
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Yearly low |
The best performers occur
in a price uptrend but they are within a third of the yearly low. |
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Sell signal |
If price shows weakness in
the first week, consider selling. Be prepared to take profits quickly.
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 The Measure Rule
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Example
The above figure shows an example of an earnings flag event pattern. This one appears as a pennant (outlined in
red), a small price
pattern bounded by two converging trendlines. Earnings were announced and price jumped at the market open (point
A) and then the pennant formed. When price pierced the pennant at B, that was the buy signal.
Trying to make money from this pattern would be difficult. Entry would be easy for
a quick trader, but deciding when to exit would be the problem. The second pennant in March makes things easier when
price stages an upward breakout. Price throws back to the pennant base but keeps going down. A perfect trade would earn about
three points.
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