Earnings Season: How to Trade Post-Earnings Drift
Earnings season is in full swing, and while many traders focus on the immediate reaction to a company’s results, consider longer-term trends following earnings announcements that may deliver returns long after the earnings release— Post-Earnings Drift (PED) .
PED is based on a simple yet effective concept: stocks that react positively to strong earnings tend to continue drifting higher, while stocks that react negatively to weak earnings tend to continue drifting lower. This drift can persist for weeks or even months, making it one of the most efficient ways to trade earnings season.
Let’s break down how to identify these potential opportunities, which may have a positive risk-reward profile, and manage positions effectively.
Step 1: Fundamentals – The Catalyst for the Drift
Post-earnings drift is strongest when there’s a clear fundamental catalyst behind the move. Not every earnings beat leads to sustained upside, and not every earnings miss results in prolonged weakness. What matters is whether the report genuinely shifts market expectations.
Key factors to look for:
· Stronger-than-expected revenue and profit growth – The market rewards companies that deliver above expectations.
· Forward guidance upgrades – If management raises expectations, it signals confidence in future growth.
· Margin expansion and improving financial health – Investors want to see profitability improving alongside revenue growth.
· Shifts in business strategy – Companies that announce major structural improvements, such as cost-cutting initiatives or new revenue streams, often see extended moves.
The key is that the earnings report must provide a reason for continued buying or selling pressure. If the reaction is based on short-term noise rather than a fundamental shift, the drift is less reliable.
Step 2: Market Reaction – Confirmation of the Catalyst
Once you’ve identified a strong fundamental catalyst, the next step is looking at the market’s reaction. Not every stock gaps after earnings, but the reaction should provide evidence that the earnings release is driving demand.
Signs of a strong bullish reaction:
· Above-average volume – Institutions don’t place all their trades in one day. High volume suggests big money is stepping in.
· A decisive move higher – A stock that closes strong after earnings has a better chance of continuing higher.
· Follow-through buying in the days after earnings – If the stock remains bid up after the initial reaction, it suggests real demand rather than a temporary spike.
Signs of a strong bearish reaction:
· Heavy selling on high volume – Institutions unloading shares is a warning sign.
· Failure to bounce after the initial drop – Weak stocks tend to stay weak, especially if buyers don’t step in.
· Breaking key support levels – A stock that falls below major technical levels often sees continued selling.
Step 3: Trade Entry & Risk Management
Once you’ve identified a stock with a strong earnings catalyst and a clear market reaction, the next step is executing the trade.
Entry Strategy
For bullish trades: Enter on the first meaningful pullback after the initial earnings reaction. Look for a retest of intraday support or a consolidation period before the next leg higher.
For bearish trades: Enter on a weak bounce that fails to recover key levels, or on a breakdown below the post-earnings low.
Setting Stops Using ATR
The Average True Range (ATR) is a useful tool for setting stops, as it accounts for volatility. A common method is placing a stop 1.5x to 2x ATR below your entry for long trades (above for shorts). This ensures your stop is wide enough to avoid getting shaken out by normal price swings.
Managing the Trade with the 21-EMA
The 21-day Exponential Moving Average (21-EMA) is an excellent trailing stop for PED trades.
· As long as the stock stays above the 21-EMA, the drift remains intact.
· A close below the 21-EMA is a signal to exit the position.
This method allows traders to ride the trend while avoiding premature exits.
Real-World Example: Netflix’s Post-Earnings Drift
Let’s look at how this played out with Netflix (NFLX) after its Q3 2024 earnings report.
On October 17, 2024, Netflix reported:
· Earnings of $5.40 per share, beating estimates of $5.12.
· Revenue of $9.825 billion, slightly above expectations.
· A strong subscriber growth report, with 5.1 million new additions—exceeding forecasts by over 1 million.
· Ad-supported subscriptions surging past 50% of new sign-ups in available countries.
· Price hikes announced for Spain and Italy, signaling confidence in pricing power.
The stock reacted positively, gapping up nearly 5% on above-average volume.
Over the next two months, Netflix continued drifting more than 20% higher, confirming the post-earnings drift effect. The trend remained intact until the stock eventually closed below its 21-EMA, marking the end of the move.
Netflix then repeated the pattern in January 2025, beating earnings again and gapping higher on strong subscriber growth and revenue. Since then, the stock has drifted more than 10% higher and remains above its 21-EMA.
Netflix (NFLX Daily Candle Chart
Past performance is not a reliable indicator of future results
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