Earnings reports of generally one of the worst kept secrets in the market, and they rarely have the power to change the direction of the trend. They do however, often have the power to accelerate the direction of the existing trend.

Poor earnings reports released in a bear market accelerate the existing downtrend dramatically. Good earnings reports in a bull market have a smaller impact, although the initial reaction is often sharp and short-lived.

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The figures and reports from which the final earnings results are derived are compiled over many months. Inevitably some market participants get to know or suspect these figures before they are formally released. This knowledge is reflected in the patterns of trading behavior on the chart display. It could also be indicated by legal ‘insider trading’ positions taken by company executives and reported to the Exchange.

Earnings reports are most influential when the trend direction is already uncertain. This is exactly the case with the Bank of America

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[BAC  Loading...      ()   ] chart. The long-term trend direction remains bearish. The long-term group in the Guppy Multiple Moving Averages (GMMA) indicator is widely separated. This suggests investors are still heavy sellers. There is little evidence of compression in this group which suggests there is a low probability the recent price rally is sustainable.

Reversals of long-term downtrends are rarely sudden. There is usually a pattern of successively higher rallies. The first downtrend challenge is rarely successful. The success of each challenge is measured in two ways. First by the degree to which each new rally is able to penetrate more deeply into the long term GMMA. Second is the reaction of the long term GMMA to each new rally challenge. Compression in the long term GMMA shows investors have stopped selling and are becoming tentative buyers.

The chart shows the first of a potential series of challenges to the BofA downtrend. There is a  high probability this rally will retreat from resistance near $14.50 and retest support near $6. A poor earnings report will accelerate the fall to the support level.

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There is a lower probability of a strong breakout above resistance near $14. Any breakout encounters increasingly strong selling resistance as it moves towards $18 at the upper edge of the long term GMMA. An unexpectedly good earnings report will drive a rally rebound, but this is unlikely to have the power to sustain an uptrend in the face of continuing overwhelming bearish downside pressure.

Bullish traders will trade the earnings pop, selling at the rally peak to capture short-term profits. The bears will short the earnings pop and look for a continuation of the prevailing downtrend towards support near $6.

The pattern of chart behavior is in the preliminary stages of a trend change, but this is the first in the major tests of downtrend strength.

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