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What is the first step (and often last) for the new
daytrader? Turn on CNBC and wait for the news, of course (don't deny it, you
have been there). Then when you hear the late breaking 'real time' news, you
buy good news (or sell short bad news) in an attempt to beat the other 8
million listeners. Sound
like a winning plan?
After realizing that is kind of hit or miss, you decide to
fire up the 'real' real time news service. Of course, at this point, it hasn't
dawned on you. It is not just the fact that you are not really 'beating' anyone
to the news. You begin to realize, even if I do have the news first, what do I
do with it?
Have you ever heard of a stock gapping up big on fantastic
earnings; then selling off for 2 weeks? We have all seen it. Good news reacted
to in a negative way; bad new reacted to in a positive way. Or, good news
reacted to in such a positive way, that the stock gaps so far you are not sure what
to do.
How do you make sense of all this?
First of all, you may want to just turn off the news. Yes,
that is correct. You can keep a list of the stocks that are 'in the news' for
your watch list if you like. However, you can skip the part about researching
the news. This does not sit well with many traders. They feel it is 'their job'
to research these things. The truth is, you cannot. We play people's reactions
to the news, not our personal view of what the news is. We do this by looking
at charts.
Below are some examples. Two of them resulted in plays. Take
a look at what happened, compared to the news. These three were picked because
they all solicited a strong view from many traders, even by email. "Did
you know that xyz had bad news today and are playing it?
Take McDonalds on Dec 24, 2003. You may remember the mad cow
scare that day. All 'hamburger places' gapped down, and the overwhelming
consensus was (even CNBC told us this) that this scare is the end of the
American Hamburger. It would be a 'no brainer' to short these stocks, as they
are certain to fall more.
Well, if they are certain to fall more, why didn't they open
at that lower price?
You see; there are no gifts. The news was out and was
digested by the public. What the stock does after that is not a function of
'good or bad' news. It opens at equilibrium; and then the move can be in either
direction. The chart pattern (without any concern for the news) was bearish,
but it did not form a 'pattern' that we recognize as a trade. No play was made,
though there were possibilities for intraday plays once the trend was set.
Notice how long the 'bad news' continued to 'hurt' the stock. Why did it go up?
Who knows. Well, there were many commentators and analysts that told us the
answer after the close. One of the stories was that the shock sent beef prices
tumbling, which would reduce the operating costs of fast food restaurants. Now
why didn't we think of that?
Next is Marathon Oil. Here there was little chance for
failure. The company was doing a 'secondary offering' or something similar. On
the morning in question, they actually came out and priced the stock below the
current price (below where it opened even). Certainly this stock had to go down
further. Well, this time, the chart showed a pattern we know well; a tactic
known as a Gap play. How could a stock go up in this situation? Read the
McDonalds paragraph above. All the answers are the same. We don't understand
enough about secondary stock offerings to try to explain it. Or, if we do
understand, it is not worth explaining. That is the point. The best way to play
this was to have no knowledge of the actual news; just to know the stock was
gapping so you can find the play.
Last was a past play on Delta Airlines. This is a favorite
because we had the analysts, coming in to help us determine when to buy and
sell stocks.
The big news posted was that Delta may have to file for
bankruptcy. Well, we guess that means the stock is worth 'zero'? Or is it worth
'asset value'? That day the stock did not go below $4.53. On the next day, we
have a revision of Delta Airlines' outlook to 'negative'. The day after that,
Moody's decides it may cut Delta's ratings. The stock talks bankruptcy, and
then analysts downgrade it? Do we need to pay analysts for this keen information
and insight? Note, the stock had never traded under the low set on May 10th,
the day the news of bankruptcy was released. Notice the volume that came in on
that day. Notice that this volume came in after the stock already dropped 66%
in four months. Mr. Analyst, you are now down grading the stock? Where were you
during this huge fall? Waiting for the company to tell us they are in trouble?
This stock was played long on May 12th at $4.67.
News will move stocks. It can be a means of finding stocks to
watch and see if any technical patterns form. Do not get caught up in the game
of trying to make trades based on your 'analysis' of the news. Everyone is
different in how they handle thing. If you have a difficult time with news, we
hope this was helpful to you.
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Article Source: http://EzineArticles.com/?expert=Larry_Potter
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