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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. For more information
see pages 868 to 879 of the book
Encyclopedia of Chart Patterns, Second Edition and the following...
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Important Bull Market Results
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%
Identification Guidelines
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Characteristic |
Discussion |
|
Price trend |
Upward leading to the announcement
for the best performance. |
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Market |
This event pattern works best
in a bull market. |
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Announcement |
The company announces earnings
and the stock makes a large upward move that day or the next if the market was closed. |
|
Wide swing |
Look for announcements in which
price makes a large intraday price swing, 2 or 3 times the average daily intraday price swing over the last month. |
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Yearly low |
For best performance, select announcements
that occur within a third of the yearly low, just make sure price is trending upward. |
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Upward breakout |
A breakout occurs when price
closes above the high posted on the announcement day. |
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Volume |
Select patterns with heavy announcement
day volume, above the 30-day average. |
Trading Tips
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Trading Tactic |
Explanation |
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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
(C). |
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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
the right). |
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Trend |
Trade with the trend. Buy
an upward breakout only if the market and industry are trending higher. |
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Swingers |
Place an order to sell if
the stock hits its price target. |
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Caution |
Failure rates are high. Almost half
(48%) rise just 10% before tumbling and that occurs in less than 2 weeks. |
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 The Measure Rule
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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.
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