The Power Earnings Gap
Earnings season gives birth to opportunities that can last for weeks or even months beyond the day the data is released. In fact, one of our five main strategies is called the “Power Earnings Gap.” We didn’t invent this strategy, but through more than a decade of trading experience, we’ve found it to be one of the most effective.
What is a Power Earnings Gap?
Most companies in the U.S. market report earnings four times a year, once each quarter. Earnings season doesn’t have an official start and end date, but it typically stretches over 6–8 weeks as thousands of companies report. During this time, you get a direct look at how businesses performed financially and what they expect going forward. This matters because, at its core, earnings season helps investors decide whether to buy, sell, or hold a stock.
Standout earnings usually look like this:
- Stronger than expected revenue or profit
- Raised forward guidance
- A company finally turning profitable
- A clear path laid out toward future profitability
- Announcements of major contracts, partnerships, or growth initiatives
When a company delivers results that surprise the market, the stock often gaps up on heavy volume the next day. What makes the “Power Earnings Gap-up” so powerful is that these moves don’t usually end on day one. Strong earnings often attract institutional buyers, trigger analyst upgrades, and create momentum that can fuel multi-week trends.
What to look for on the chart:
- 5%+ Gap-up
- Stronger volume - the strength can be measured against the stock’s average volume
- A breakout above a key resistance on the gap-up (preferred but not required)
Additional notes:
If the stock is in a downtrend, an earnings gap up may help it reverse on the macro charts towards its 52 week highs or next strong resistance level, which would be the first price target (on the technicals).
If the stock is already in an uptrend, strong earnings can quickly get a rally going as buyers were already present.
If the stock has been range trading for months or years and it finally gets an power earnings gap-up out of that range, it may be setting up for a multi-month, or even multi-year rally.
Red flags:
- Gap-ups with no volume may not hold.
- Gap-ups that immediately sell-off on the day of earnings or the next day could’ve been a trap.
- Gap-ups without fundamental backing may not hold…this is when a stock gaps up, but there was no evidence in their earnings data backing the strong move.
It works both ways:
If a stock gaps down on earnings, it may indicate that a downtrend is forming, especially if it’s backed by weak financial data.
Overall performance and valuation matters:
There are many undervalued companies out there, but many just haven’t been found. Earnings are a time where little-known companies suddenly see the spotlight, and those that have “cheap” valuations based on earnings performance can run longer than those who are already stretched. Remember, the whole idea here is that the business performed well and now it’s worth buying…if the business presents an undervalued case, it’ll attract more buyers.
That doesn’t necessarily mean that a single quarter will change everything. Often times, a company will need to perform well for multiple quarters before getting a big push. There are a few cases however, that a company that has been performing poorly for a long time suddenly posts a strong quarter and it increases on earnings…be careful with those as one quarter alone can’t support a full on reversal.
Disclaimer: This article is for informational and educational purposes only and does not constitute financial advice. Investing involves risk, including the possible loss of capital. Always do your own research or consult with a licensed financial advisor before making investment decisions.