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How to Trade Earnings Announcements With Technical Analysis

Predicting the reaction to an earnings announcement is notoriously difficult. Even if a company misses on revenue and income, the stock price could rise sharply higher if the market’s expectations were low, future guidance was better than expected, or the conference call contained some bullish language. The sharp reactions to earnings can also blow up technical charts as prices move beyond strong support and resistance levels.

Let’s take a look at how technical analysis is best used to capitalize on earnings announcements.

Pre-Earnings Trading Strategies

Some traders place directional or volatility-related bets prior to earnings announcements. While these strategies can be risky, the payoff can be much higher than post-earnings trades since there’s greater volatility following the earnings announcement than afterward.

The two most common pre-earnings strategies are:

  • Directional Bets: Predictive models incorporate analyst estimates, earnings history, and price movements since the prior earnings to quantitatively predict the market reaction. While not every reaction is predictable, better-than-average prediction rates can be a profitable trading strategy over time.
  • Volatility Bets: Technical analysis can be used to determine likely support and resistance levels on the upside and downside for a given company. Using these levels, traders can place volatility-related bets using options rather than trying to predict direction.

Post-Earnings Trading Strategies

Many traders avoid placing trades prior to an earnings announcement due to the directional uncertainty but still try to capitalize on the volatility after-the-fact as the market struggles to reach an equilibrium. These strategies have less risk, but also less upside potential.

The two most common post-earnings strategies are:

  • Fading Strategy: Many day traders watch stock prices following an earnings announcement and try to predict an inevitable fade in the price following the strong initial move. Take-profit and stop-loss points are often placed using support and resistance levels established earlier in the day or week.
  • Swing Trades: Swing traders often look for earnings announcements that serve as a turning point. By applying technical analysis following the announcement, these traders identify where the price is likely headed over the coming few sessions.

Example: Apple’s Earnings Announcement

Apple Inc. (AAPL) cuts its revenue guidance for the first quarter in early January 2019, sending the stock about ten percent lower. Bearish earnings from NVIDIA Corp. (NVDA) and other companies seemed to confirm that the tech sector was underperforming during the fourth quarter of 2018. The stock recouped most of those losses throughout January, so many traders naturally assumed that the stock would break down following its Q1 announcement.

Traders relying on that premise would have been very wrong after the company reported its actual first quarter financial results. The stock opened more than five percent higher—above key resistance levels—and would have likely triggered immediate stop loss orders. The pre-announcement set new expectations that were exceeded by the disclosure of its service margins and the sentiment that Chinese orders would improve later in the year.

$AAPL chart showing the reaction to an earnings announcement.
Apple Earnings Reaction. Source: TrendSpider.

In this case, traders may have been better off analyzing the stock post-earnings to capitalize on the change in trend. For example, the above chart shows an ascending triangle pattern that predicted a breakout higher. The pattern’s upside price target stands at about $166.00, while the breakdown target could have been set closer to $152.00. Depending on the post-earnings direction, traders could enter a long or short direction bet.

The Bottom Line

Trading earnings announcements can be challenging due to the high level of uncertainty and volatility, but there are several trading strategies used for pre- and post-earnings trades. These strategies can help traders cut through the noise and find profitable opportunities.

TrendSpider can help automate the process of finding support and resistance levels in pre- or post-earnings trades. With multi-timeframe analysis, you can even identify support and resistance levels across hourly, daily, or weekly charts to see where key decision points stand.