As the earnings report season arrives, US companies are successively releasing their earnings reports.

Experienced partners may find that after a company's earnings report, the stock price could experience huge fluctuations, potentially rising sharply or falling significantly.

If the company’s earnings report exceeds expectations and the stock price rises sharply, what would be your response?

• The company's performance is good, so buy on the rally.

• The performance has already been priced into the stock, bearish.

• It's risen too much, a pullback might occur, so wait and see.

No matter which option you choose, it is based on your judgment of future price trends.

This article introduces an event pattern: the earnings report flag, to assist investors in better judging the trends after the earnings report.

What is an Earnings Reports Flag Pattern.

The Earnings Reports Flag Pattern is a type of event shape.

This pattern occurs after a company releases its Earnings Reports, where the stock price experiences a significant rise, consolidates, and then continues to rise.

The Earnings Reports Flag Pattern was discovered by Thomas Bulkowski, the author of the Chart Patterns Encyclopedia, in the late 1990s. He believes that the Earnings Reports Flag Pattern is one of the patterns with the highest probability of success.

Since this pattern is an event-driven shape influenced by Earnings Reports, it is suitable for those investors who like to discover potential investment opportunities from Earnings Reports.

Characteristics of the Earnings Reports Flag Pattern.

In practice, to identify this pattern, Bulkowski listed some conditions for recognizing it.

Earnings Reports Release: This is the key to the formation of the pattern. After a company releases its Earnings Reports, if the performance exceeds market expectations, it drives the stock price to rise significantly or gap up on that day.

Flagpole: Afterwards, observe if the stock price has another wave of straight increases, preferably for several consecutive days, appearing like a vertical flagpole on the stock price chart. The highest point of the flagpole is considered the peak of this pattern.

Flag: At the highest point of the flagpole, the stock price begins to consolidate downward. It usually forms a downward rectangular flag shape or triangular flag shape, resembling a flag hanging on the flagpole. This is why this pattern is referred to as the Earnings Reports flag pattern.

Breakthrough: When the stock price crosses above the trendline of the flag or the closing price is above the highest point of the flagpole, the pattern is considered to have broken out upwards. Generally, traders determine buy and sell points based on whether a breakthrough occurs. It is best not to engage in trading before the pattern breaks out.

Trading strategy

As an investor, how should this pattern be used to find potential buy and sell points?

Thomas Bulkowski summarized some trading techniques based on the characteristics of this pattern.

Calculation formula: The potential upward movement after the stock price breaks out of the pattern can be predicted using a formula. First, calculate the length of the flagpole by subtracting the stock price low (B) on the day the Earnings Reports were announced from the highest point of the flagpole (A). Then, add this height to the low point of the flag (C) to calculate a potential Target Price. The likelihood of the stock price reaching the Target Price in a bull market and bear market is 86% and 84%, respectively.

Buy signal: When the stock price crosses above the trendline of the flag or the closing price is above the highest point of the flagpole, the pattern is confirmed. Generally, there are two buy points here. The first potential buy point occurs when the stock price closes above the trendline of the flag (D). The second potential buy point is when the closing price is above the highest point of the flagpole (A).

Sell signal: The sell point of this pattern is difficult to confirm because stock prices usually rise quickly and fall quickly as well. Therefore, if the stock price shows weak performance within a week, consider selling to prepare for a quick profit-taking. If the stock price resumes rising after a pullback, consider buying again.

It is worth noting that the Earnings Reports flag pattern is just one method to assist investors in finding suitable buy and sell points. When making a buying decision, it is essential to consider the company's fundamentals and judge in conjunction with other Technical Indicators.

What should investors do?

To utilize this pattern to find more opportunities, it is necessary to know when the company releases its Earnings Reports.

Companies listed on the US stock market must announce their Earnings Reports four times a year, and the time when companies release them intensively is called Earnings Report season.

However, the timing of each company's Earnings Reports is not fixed, so we can use the Earnings Reports calendar to find out which companies are releasing their Earnings Reports each week.

On Futubull, there is an Earnings Reports calendar. Open the App, click on "Market," select "Opportunities," and find "Earnings Reports." In the left box, you can see how many companies will release their Earnings Reports each day. Click in to find out which specific companies are releasing Earnings Reports.

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