In the world of swing trading, earnings season offers a myriad of opportunities for astute traders. One strategy that stands out is the utilization of breakaway gaps to project bullish moves leading up to earnings announcements. These gaps, with their distinctive characteristics, serve as potent bullish signals for stocks. In this blog post, we will delve into the importance of breakaway gaps and explore why traders should consider them as valuable tools when navigating earnings season.
What Are Breakaway Gaps?
Breakaway gaps are significant price gaps that occur on a stock chart after a period of consolidation or a significant event, such as an earnings announcement. They manifest as an opening price that is substantially higher than the previous day’s closing price, creating a gap on the chart. Breakaway gaps often symbolize a shift in market sentiment, indicating a substantial influx of buying interest and potential bullish momentum.
Why Are Breakaway Gaps Bullish for Stocks Going into Earnings?
- Momentum Ignition: Breakaway gaps are akin to a spark igniting the fuel of bullish momentum. When a stock exhibits a breakaway gap, it signifies a positive market sentiment and confidence surge. This bullish momentum can carry the stock higher leading up to and beyond the upcoming earnings announcement.
- Price Discovery: Breakaway gaps often occur when new information or significant developments propel a stock into uncharted territory. As the stock breaks free from its consolidation range, it embarks on a journey of price discovery. Traders who identify breakaway gaps can ride the wave of price exploration, capitalizing on the potential upside as earnings expectations build.
- Psychological Implications: The presence of a breakaway gap instills a sense of optimism and excitement in market participants. It signifies that something noteworthy has occurred, sparking increased interest and attention from traders. This psychological impact often translates into increased buying pressure, fostering a bullish environment leading up to the earnings announcement.
Microsoft: Earnings in Focus
Here is an example of a breakaway gap in one of my favorite stocks, Microsoft.
This company experienced a bullish move last quarter post-earnings when it gapped up 7.7% and did not return to fill the gap. It has continued trading higher for the rest of the quarter.
Now, earnings are coming up in July. As you can see from the chart, Microsoft will be entering the 21-day pre-earning timeframe, what I like to call the Hot Zone. This is the time frame in which traders can look for a pullback to get into a stock in the direction of the trend going into earnings.
I have a symmetry support zone in Microsoft at $325, where you can see a cluster of blue lines. Ideally, MSFT could pull back to that level, giving me an even better edge on entry. However, thus far, MSFT is already bouncing after pulling back to around $332. This is very common with bullish stocks that we don’t see deep pullbacks!
Either way, this is one of my top bullish stocks to watch this quarter due to a combination of technical, macro, and fundamental factors, with the breakaway gap being one of them!
Microsoft is one of my top portfolio holdings, and I will also be trading it before earnings season. I’m targeting between $350-360.
Breakaway gaps serve as potent bullish signals for swing traders venturing into earnings season. These price gaps, borne out of increased market interest and positive sentiment, offer traders an opportunity to capitalize on the anticipated bullish momentum leading up to earnings announcements. By recognizing the significance of breakaway gaps and incorporating them into their trading strategies, traders can gain a competitive edge and potentially enhance their profitability during earnings season. So keep your eyes peeled for those breakaway gaps, and let them guide you towards profitable trading opportunities in the exciting world of swing trading and earnings season.
Want to learn more? You can find me at Simpler Trading in the Options Gold Trading Room three times per week. You can also follow me on social media for more free content!