Power Earnings Gap Strategy
Let’s get straight to it…at the end of the day, the stock market is a place where people are constantly bidding businesses up and down. Over the medium to long term, a stock’s performance heavily depends on the company’s ability to stay relevant, grow its business, increase earnings, and continue giving investors a reason to put capital into it.
In the short term, though, stock prices can move for very different reasons. News, economic data, interest rates, overall market sentiment, geopolitical events, earnings, company specific developments, and other catalysts can push a stock higher or lower, sometimes regardless of what’s happening with the underlying business.
Most of the time, short term reasons can only influence a stock’s price for a brief period before it “fizzles” out. But there’s one catalyst that can completely change how investors view a company and continue attracting buyers (or sellers) for weeks or even months after the initial reaction:
Earnings
This is what the P.E.G., or Power Earnings Gap strategy, is build around.
If earnings are what ultimately drive prices in the long run, then a near term report reflecting those numbers can be very influential, especially if a company reports a surprise. Before we go any further, let’s clarify that a Power Earnings Gap can happen to either direction, not necessarily bullish. With that in mind, you can either go long (bullish) on a stock, or go short (bearish) on a stock depending on which direction it moves and if it checks off all the “boxes” of what entails a P.E.G.
Not Every Earnings Gap is Worth Trading. We’re only focusing on a bullish approach here. What to Look for:
- 5%+ move: the stock needs to move substantial enough to attract new eyes.
- A gap above a previous resistance or a significant moving average. This can signal that the earnings report was strong enough to change the stock’s existing trend.
- High short float % - not necessarily, but nice to have so you get a short squeeze (short sellers buying back a position).
- Strong volume - there’s no point of a move if the volume isn’t there to support it, you especially want to look for RELATIVE STRENGTH against SPY. The Hyper Terminal gives you this reading.
- A LEGIT earnings catalyst - this is where you have to do the digging and decide if the earnings warrant a big move or continuation. This comes from analyzing and knowing what investors are looking for when it comes to that specific stock (or how it contributes to the sector). For example, if Intel suddenly becomes a major semiconductor fabrication company and it shows up on their numbers in a strong way + it gaps up, that’s a meaningful move with a high probability of continuation.
What makes this trading and investing strategy special is that it’s easy to tell if “it fails.” All you have to look for is whether or not the stock holds that initial gap up from the first 1-2 days it posts the move. If price action begins to move lower and starts to fill the gap (substantially), then buyers aren’t buying it up and it may be time to cut losses (this is why it’s best to scale in slowly instead of buying a full position). However, if the stock continues to rise and it breaks above the gap up highs, we have a multi-day / multi-week / or even multi-month runner. You can track the 10 / 20 / 50 DMA as support on the way up.