How to Swing Trade Earnings – The Earnings Flag (2020 Update)
Later in August is one of our favorite times to play big earnings flags.
During and after each earnings season, a lot of great ones set up on stocks with the most impressive results and raised outlooks in their earnings reports.
In the fifth video in our free swing trading course below we talk about trading earnings and our top 2 strategies to make money around the time a company delivers an enormous earnings beat.
One of the favorite strategies to play big earnings beats by top swing traders is through trading earnings flags. We find these throughout the year for clients.
After a huge earnings beat and raise, a bullish earnings flag chart pattern often develops. Especially if the earnings beat and raise meets all the criteria in the earnings eruption videos and has a strong, clean initial breakout.
Why Use Technical Analysis after Earnings
Talk and opinion on stocks abound online, but the big money speaks louder than words. You can follow the big money using technical analysis to identify the strength of the long-term trend and earnings flag consolidation.
The earnings flag is one of the best swing trading setups in the market. The earnings eruptions strategy is more of a day trade (sometimes the trade is held for a few days or more) but an earnings flag is a trade that is normally held for a few days or longer.
As a bonus, the earnings flag generally has much less volatility around the entry point. With hundreds of earnings reports coming out each day during earnings season, many large investors will sift through the reports and other information and begin to take large positions days or weeks later after the volatility settles down after earnings.
We find and trade earnings flags a lot in our own trading and identify the best ones for clients subscribed to the weekly and daily alert.
Earnings Flags vs Pennants
The earnings flag is a sideways or sideways to lower consolidation after a big move higher right after the earnings release. The move higher after earnings may last a day up to several days or more. Usually, the big initial move higher right after the earnings report is over within a few days.
Then the price generally either starts to move sideways or make lower lows on a daily candlestick chart. A “pennant pattern” occurs when a consistent downward slope to the pullback develops with another trend-line connecting the lows in the consolidation.
If we draw a line connecting the highs and the lows in the consolidation, the tend-lines will converge at some point in the future. This creates the pennant or triangular shape in the flag portion (consolidation portion) of the pattern. If the 2 lines are roughly parallel, the consolidation is a flag but not a pennant.
Ideally, I want to see the flag portion of the pattern last four weeks or longer after a large move higher right after earnings.
In a pennant, we should be able to draw a line connecting the highs and lows in the consolidation and have several touches or near touches of this line as in the example below on COHR – a great earnings flag we featured to customers (note: the line connecting the lows in the flag is not drawn in the chart below).
Swing Trading Earnings Flags – Entry & Exit Points
After this swing trading setup is featured on the site you would just click the chart each day. When you click the chart the latest chart comes up with the downtrend resistance line already drawn for you.
You can see when the entry signal is reached with a quick glance each day on the subscription site just by clicking the chart.
The entry signal occurs once the price closes above the short-term downtrend resistance. After the price closes above it, we put a market order to buy for the open the next day.
Or, you can put a text alert with your broker to notify you if the price goes above the prior days high the next day for further price direction confirmation and higher win rate while giving up some of the potential upside.
This makes it very easy to play this setup whether you work full time or not. You would be surprised how often you get a good entry price just by buying the stock at the open the next day with a market order placed after hours. Again, you are often in the trade for multiple weeks using this strategy.
Then once the order fills you can put a stop about .5% below the prior swing low on a daily chart. So, in the case of COHR below, the prior swing low once the price reached the entry point was about $180. A good hard stop would be a little below that level.
Or, if there is a confirmed uptrend support, as in the case of COHR, you could just cut losses if it closes below the uptrend support if it goes the other way as shown in the chart above.
Earnings Flags on Lower Priced Stocks
We definitely would not do this with penny stocks or nearly all stocks under $10. Or even stocks under $20. Also, we usually avoid stocks that were recently below those levels.
These lower priced stocks too often collapse suddenly which lowers the win rate and average profits while increasing risk during most market conditions. Its also difficult to focus on work and other matters knowing lower priced stocks can drop 20% or more suddenly.
Profiting 20% on half your trades and losing 20% on your other half would take you down a path to losing a lot of money as explained in this blog post.
Earnings Flags that are not Pennants
If the stock makes the big move after earnings for a few days, then consolidates sideways rather than sideways to lower in a pennant, the entry point is a move above the high in the flag.
Its best if the stock is breaking into all-time highs to reduce overhead resistance. Some traders and investors will want to get out near breakeven if the price was at that level within the past year or longer.
You also have to consider valuation at that point. Ideally, we want to see a stock with very strong, consistent growth in sales and earnings followed by a recent acceleration in growth.
Or, we are looking for a stock that crushed earnings expectations, raised guidance significantly and is still reasonably valued. In both cases, its best to have a new catalyst such as a significant price target raise from a well known, respected analyst.
Profiting on Earnings Flags
Once we are up 4% to 10% you can sell some of your shares and put in a stop loss around your entry point. You could also just sell the whole thing on the initial move higher out of the flag which usually occurs within a few days.
We like to find the nearest support on a 10 minute chart below our entry and place the stop a few cents below that point when we raise our stop after taking some profits. As always, its critical to get in near the ideal technical entry point.
As the old saying goes – “You chase, you lose”. I find that to be true in general. The one exception is if the price goes through the technical entry point on massive volume with a very big move that day.
In the case of COHR, we had a real nice more horizontal consolidation rather than a sharp descent in the flag. And we had a real nice fibonacci retracement of the move from around $140 to $200. Projecting this from the low in the flag, $180, would give you a target of nearly $240 which is a 33% profit.
In the more recent chart below we can see that COHR easily reached this more aggressive target several weeks later. The advantage of trading stocks with rapidly improving fundamentals is that you can get big moves over a long period of time like this while you do other things and spend a lot less time trading.
The video above goes over how we trade earnings flags in more detail. Other swing trading beginner course videos can be found on the blog.
In Summary
By using technical analysis, we can enter at a point very near a firm support as its breaking out of a flag in this case – setting up a great risk/reward ratio. This is one of several very bullish technical patterns explained more on the site.
Earnings flags are a favorite of top traders and a great swing trading strategy. We actually mention another real nice earnings flag breaking out now on our site for valued customers.
My List of Stocks with Rapidly Improving Fundamentals Poised to Move This Week
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