What is a "Power Earnings Gap?" & How to Trade it!
Updated: Oct 3, 2021
Hey folks !
I get this question often from newer AOT members so in this post, I'll explain in full more detail what is a "Power Earnings Gap" (PEG) and why they are so awesome!
I use this PEG strategy often to create watchlists, it's actually the primary watchlist I use to generate my stocks ideas for trading! The 'AOT Top Picks' and almost ALL the setups you folks see me posting on the @TraderStewie twitter, are trade ideas and setups that I generate from the PEG list!
Power Earnings Gap Public Watchlist
A few years ago, I "developed" this strategy for generating HIGH QUALITY stock ideas that are EXPLODING HIGHER due to a strong reaction to an earnings report! However, a strong earnings report is NOT enough for me to add a stock to the PEG list. I need to a big nice GAP UP in the stock price but MOST IMPORTANTLY, I want to see the stock CLOSE STRONG as well. A stock that gaps up on strong earnings only to reverse and close in the red is NOT what I want to see in a PEG candidate.
The way the stock closes is equally, if not more important than the actual initial gap open!
A "Power Earnings Gap" (PEG) is basically; A stock that gaps up after reporting strong earnings and closes the day by printing a very strong candle.
A candle that closes at or near HIGHS of the session is THE MOST ideal and perfect 'Power Earnings Gap' candidate!
Volume will be automatically HUGE, since it's coming on news of an earnings report, so that's going to add even more conviction to the MOVE, since institutions are piling into the name! Remember, us small fish need to follow the foot steps of the BIG FISH, the Insiders, The movers and the shakers.... They know stuff we could never dream of knowing but luckily for us, we can see their "foot steps"(via stock price action and volume patterns) and following these foot prints can be extremely profitable if you know what to look for!
Stocks that gap up on HUGE volume and close near the day's highs, are doing that for a VERY good reason... if the big whales want in, I want in too!
A picture is worth a thousands words, so let me show you some chart examples!
This AVAV chart below is a perfect example:
***Note: The stock GAPS UP after reporting strong earnings, then note HUGE VOLUME as accumulation volume indicates institutions are piling in the stock en mass (an especially powerful signal when you see multiple accumulation volume days over recent few days or weeks), and of course note the strong close (a big strong candle that gaps up, rallies strongly intra-day and then closes near highs of the session)...
Here's another example of a good looking "Power Earnings Gap"…
The basic premise behind this "PEG" strategy is that stocks that make strong powerful earnings and gap up and strong on strong candles tend to keep running for multiple days if not multiple weeks/months after these big earnings gaps... so now my job is to create a watchlist of these awesome, bad ass stocks and pinpoint entries in these stocks using my technical analysis skills and feel for the market and stocks which have taken many years to fine-tune.
Technically speaking, I want to be looking for bull flags, bullish pennants, mini wedges, coiling patterns, inside day candlestick patterns etc.. to pinpoint an entry in these winners! This is where having decent technical analysis skills will really be helpful! (and I also have a specific DAY TRADING or very short term strategy to trade these awesome PEG stocks but this strategy is only shared with AOT members for now)...
So essentially I am marrying "strong fundamentals" due to strong earnings and "strong technicals" because I'm looking for stocks that gap up and close strong on huge volume which in due time should propel these stocks higher. Of course, like most other strategies, I also factor in a lot of other things such as overall market strength/health, geopolitical issues/news, a stock's short interest (stocks with high short interest that gap up on strong earnings will create spectacular short squeezes) and also sector strength...
'Power Earnings Gap' candidates that have SHORT INTEREST of 10% or higher will tend to be the BIGGEST and MOST aggressive movers on upside! So try to pay attention to Short Interest: I like to use ShortSqueeze.com or Finviz.com to find out a stock's short interest.
Here are some older examples of stocks that had high short interest before going into their earnings reports! Look at how powerful the move became!
AMD had +17% short interest going into the earnings report:
And here - Check out this example of $ROKU. At the time this name had 18% short interest! That's pretty big short interest making it a price SHORT SQUEEZE candidate!
Do you see the idea from looking at the above charts? Are you getting it a better idea now of how it works? I Hope you can see the thought-process behind this strategy?!
So in conclusion:
1: No need to take the big stressful risk and hold a stock thru earnings! A successful 'Power Earnings Gap' stock will run for many days, weeks or months AFTER earnings!
2: A 'Power Earnings Gap' name has already proven itself!! There's no guess work here! The Big Fish have spoken and they want in!
3: The bigger the short interest the better! +10% or higher is most ideal! +30% short interest or high is ridiculous! get ready to see some spectacular squeezes!
4: Chart Pattern recognition will help you pin point entries in these winning names! Bull flags, Pennants, Wedges, etc... Learn to spot these!
I also created the Hashtag #PowerEarningsGap on twitter so that everyone can track and see how these stocks move and/or setup after they make 'Power Earnings Gaps"!
Keep this link handy: Power Earnings Gap Public Watchlist
I hope you all found this helpful!
If you're looking for more premium educational content, weekly watchlists, and an engaged private trading community, consider subscribing to Art of Trading Today!