Predicting Stock Price After Earnings Release
Trading into a company prior to an earnings announcement can be a risky move for most investors, yet profitable for those who can read stock charts. When a company releases its quarterly earnings report, the stock price almost always reacts with large price swings. Whether it is a positive or negative earnings surprise, the stock price will quickly move to a new trading range. In many cases, understanding basic stock chart patterns can help a trader predict the price target after the earnings report.
Look for Chart Pattern Set Ups
Just prior to an earnings release, a trader should review the short and intermediate term price action of the stock for any recognizable chart set ups. For an event such as this, a daily chart over a 2-6 month period should work for the intermediate term. After strong rallies, traders should be looking for bearish patterns such as double tops, head and shoulders patterns, bear flags, and rising wedges. After strong declines in price, traders should look for bullish patterns such as the double bottom, inverse head and shoulders pattern, bull flag, and bullish falling wedge.
Use Chart Patterns to Predict Price Movements
If one of these chart patterns is identified, it may help predict the post earnings release stock price. Most chart patterns have a target price level that can be calculated prior to a breakout of the pattern. The earnings announcement will likely cause the stock to breakout of the pattern and carry prices to the target price level. This can happen very rapidly and much faster than set ups not triggered by news events. Upon the earnings news, the stock will likely gap up or down and move rapidly towards the target price level. Traders who were unwilling to take the risky trade prior to the earnings announcement will likely miss out on the bulk of the move.
Bear Flag Predicted 23% Drop After Earnings
Using the daily chart of Groupon as an example, one can see how the daily chart could have been used to predict a sharp price decline after earnings. Looking at a 4 month chart, a perfect bear flag pattern had developed prior to the earnings event. Prices had even broken below the pattern just days prior to earnings, which made it an even higher probability trade. The target price of the pattern measured to the $8 level, or 23% lower than the breakout level at $10.40. On earnings day, Groupon results disappointed and prices gapped $1 lower and plunged until they reached the $8 target price level. A pattern such as this can normally take a week or two to fully play out, but the earnings announcement expedited the move and the target price was reached the very same day.
High Probability Trade with Risks Involved
Trading prior to an earnings announcement is no doubt a risky move, but can be profitable when a chart pattern is identified. Chart patterns make high probability trades, however they should not be mistaken for guaranteed results. A smart trader would have taken the high probability trade while using good money management for the increased risk.