Earnings season happens four times a year. January, April, July and October. While most of us know that the bulk of earnings come out in those months, there are still a lot of stocks that deliver results between earnings periods. The topic for today is to share a pattern that sometimes sets up around earnings periods for the last 8 years. Essentially, as the earnings month draws to a close, the market makes a top and then resumes a rally near the first of the following earnings month. The example this year would be the market topping January 26th and rallying April 1, 2018. There is a second component to it, and that is that the price usually rallies through to month end as the tech companies release earnings in the second half of the month. As you can't trade 'usually', you can watch to see if similar setups exist.
On the chart below, notice how many times the market tops near 1/3 after a vertical line which would be near month end of an earnings month. Secondly, notice how many times the market bottoms at or near a vertical line which would be the first day of the earnings month.
- Red arrows happened where they were supposed to.
- Orange arrows either direction didn't fit the plan.
- Green arrows marked rally attempts near the first of the month in earnings season.
That's the big picture. Let's go look at the rallies from 2010. Pretty much textbook.
The bottom line is that when corrections happen, there is a likelihood of this pattern setting up. You can go back to review the rallies off the lows, but I think most of them extend to the end of the earnings month.
Anyway, it was one of my thoughts heading into the lows of April 1. You can see the article I wrote for ChartWatchers suggesting the lows might be in and the April 9th low marked a right shoulder to a base. Rocky Indexes Frustrate Bulls And Bears. The purpose of reviewing this setup is too help remind me not to get too bearish when the indexes start to fall. Many times the rally into the earnings month can be strong and help investors gain back some significant profits, especially in strong stocks.
While we don't know where the indexes are heading, it is important to continually look for good setups when the televisions are screaming bearish commentary. Those who can do the homework during downturns catch the big moves in the upthrust. The other thing to note is the market rarely goes straight down. Bigger downtrends have interim rallies that can be very profitable. I have to step aside when the markets roll back over.
Greg Schnell, CMT, MFTA