Reading gaps around earnings

Every track has one scheduled event that owns its reading lesson. For a single name it is earnings: quarterly, dated in advance, and delivered - by construction - as a gap.

The gap measures surprise, not results

The commodities expectation lesson transfers whole: by results day, consensus estimates for revenue, profit and guidance are in the price, and the gap prices only the difference. Good numbers against better expectations gap down; bad numbers against worse fears gap up - both routine, both baffling to anyone reading the results instead of the surprise. And guidance usually outweighs the quarter: the print is history, the outlook is the repricing.

Reading the gap itself

• Size against the name's own history: every liquid name has a typical earnings-move range - options traders price it, and module 8's track will show where to read it. A gap inside the usual range is a shrug wearing drama.
• Direction against the sector's season: in reporting season, peers' results move the whole group - part of any gap is the sector layer, and the decomposition applies even here.
• The first hours after: a gap that holds and extends through the morning found the surprise under-priced; one that fades found it over-done. The aftermath is a reading, not a rule - but it is the day's honest referendum on the auction's guess.

What gap reading is for

Not prediction - modules 4 and 6 handle the risk and the testing. The reading skill is calibration: knowing a name's normal earnings behaviour, so the abnormal one stands out. A habitual 3% gapper printing 12% has said something about the quarter; a habitual 8% gapper printing 6% has said almost nothing. As with every reading lesson on this platform, the baseline is the instrument, and information is distance from it.