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The News Is Opportunity For Those Who Wait

The existence of news can be vital to our trading.  Without news we would not have traders and investors reacting and thus creating the charting patterns of greed and fear that form the backbone of the technical trader's activity. Trading the news is a vital mistake made by most novice and beginning traders. Trading based on news releases is usually a losing proposition. 

Trading the reaction to the news can become most profitable for the experienced trader.  We have talked about trading the news before in a commentary dated February 15 2005 (You can also find it using the Topic Link in the resources section under the title of Trading the news). I think trading the news is important and deserves another look. 

Expected News
The stock market is the best discounting mechanism in existence. It will discount most news events that are expected. Thus a stock will rally for two or three weeks prior to its earnings release.  If it rallies prior to earnings it is most likely that the company will release results above analyst expectations.  The stock rallies prior because all the Wall Street analysts that cover the stock have anticipated the news and word leaks out to the firms and the stocks are bought up and have discounted the news before the news is actually made public.  For this reason we should always consider the chart pattern that existed previous to the news before we make a trade. Is this a stock that has pulled back towards support and now gaps up or is this a stock that has rallied for a number of days already and now has gapped up on the news

Unexpected News
Even if the news item is unexpected we as traders have to be aware of the market environment it occurs in. This is because the trend of the market prior to the unexpected news will usually dictate the reaction of the markets to the news event. The market makers and specialists when faced with overnight news will adjust their opening market quotes to make sure they will be able to handle the imbalance of supply and demand that the news might produce. Thus a stock or a market will gap up or down normally into a resistance or support level as those levels have proven to be previous areas of supply or demand where the market makers or specialists can look to fill the buy or sell orders.  We as traders need to determine whether the odds of a stock indicate a continuation of the move up or down (when they gap above resistance or below support) or whether the odds indicate a reversal resulting in the gap being filled. 

Act smart not necessarily first
Using the London bombing attacks a few months ago as an example let's look at that situation of unexpected news and how the market reacted.  The gap down in the overall market the morning of the London terror attacks was a good example of the over reaction to unexpected news.  Anyone that sold based on its perceived bearish undertones was slaughtered by the buyers that came in later that day and bought up shares.  As a result the opening gap down filled that day and the market began to rally and has been almost straight up since.  STHQ released a premarket alert the day of the bombings and suggested to our members not to sell at the open with the panicked crowd.  Our alert helped our members to be objective when facing this unfortunate news both in order to manage their open positions in an objective unemotional way and to profit from intraday opportunities created by the panic. 

When preparing for your trading by all means pay attention to the market environment and news as they can provide you clues and point to potential plays.  However never be in a rush to act because many times when trading news he who acts last may find themselves in much better positions then those who acted first.

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