Everyone wants to trade the news, but it's often a fruitless exercise. In most cases, the big money has already acted upon the news by the time you read or hear it. So how can at-home traders take advantage of news-related opportunities without becoming the ultimate bag-holders?
News events generally fall into three categories: economic, company and institutional releases. Economic releases are scheduled well in advance, with most of them hitting the airwaves at 6:30 a.m., 9:45 a.m. or 10 a.m. EST. Company releases can come at any time, but they surge in the weeks following the end of a quarter. Institutional releases spike on Monday mornings but continue throughout the week.
Of the three categories, economic news reaches traders with the shortest delay from the source. Earnings reports comes in second, because full-disclosure rules force companies to distribute news through a wide variety of sources at the same time. Institutional releases are the slowest of the three by a wide margin. Traders should assume that preferred clients hear about analyst upgrades and downgrades well in advance of the public.
Realize that your real-time news feed doesn't get you most of the news in real time. Even with government releases, institutions and funds will be at the point of release and acting upon the news before you receive it. They will typically initiate program trades that act instantly to remove perceived inefficiencies triggered by the data.
Traders face a bigger obstacle trying to decipher cause-and-effect relationships between news and price movement. Often they'll assume that good news is good, and buy a stock that's already risen for a few days. But smarter money has already bought the rumor and is now selling the news. The trader is left holding a loss that may persist for weeks or months.
Trading earnings news requires considerable discipline and patience. Start by standing aside through most releases, or exiting positions minutes before the news hits the airwaves. Save your capital for releases that fall well outside current expectations for future revenue and per-share results. It's best to avoid all positions based on prior performance, because that performance is measured by managed numbers that are highly manipulated.
It's still dangerous to play extreme releases, because after-hours trading can be very thin. Reduce your size and place a limit order only when you've done your homework and know the exact price you want to own or sell short. This is typically a few cents above major resistance or below major support. Selling short during extended hours can be quite rewarding, because the Nasdaq has no uptick rule during this time of day.
The best entry often comes during the afternoon following the earnings release, or two to three days later. Here's the theory: Everyone who wants to buy or sell the news takes action within the first few hours after the release. Once they have come off the sidelines, there's no one left to take the side of the market that pushed the stock in its initial direction. A strong shakeout then begins, and it's your time to get to work.
Pull up a 60-minute chart and pick out the most obvious support and resistance levels. Assume a selloff will get a ride back to the 50-period exponential moving average before there's a substantial recovery. Be ready to hold positions at a loss until the underlying trend reasserts itself or your stops get hit. Place tiered limit orders and enter the trade one small piece at a time. This way you'll be positioned if the market turns ahead of schedule.
When there's a sharp pullback following an early rally, conservative traders should stand aside and wait a few days. This price action suggests that the smart money is selling the news into the hands of an overeager public. This type of reversal often lasts two or three days before profit-taking runs its course and lets the stock move back to the highs. Be patient during this initial selloff and wait for a low-risk entry.
Selling pressure often will end with a breakout from a simple pullback pattern, such as a bull flag. Although you're making the trade a few days after the earnings release, the intraday chart still generates the feedback needed to find your entry. Once you get in, watch the highs of the earnings day very closely. If a double-top pattern starts to form, exit the position immediately.
These techniques should give you enough courage to jump in the next time your favorite company blows away earnings expectations. But what about those government releases that move the markets every day? How can at-home traders turn a profit at the same time the big boys are firing their biggest guns? Let's start by looking at the market clock.
Many government reports, including monthly unemployment numbers, get released one hour before the market opens at 9:30 a.m. ET. It's vital that you're awake and focused at this important time. Better yet, watch the index futures for at least an hour before the release. This premarket price action reflects an important bias that will get supported or faded, depending on the news.
Don't trade the release directly. Instead, take note of price boundaries hit by the futures after the release, but before the open. The key observation is whether they trade into or through obvious support-resistance barriers. Trading into a "line in the sand" suggests the broad market will reverse shortly after the open. Trading through a barrier can trigger an equity breakout or breakdown within the first 45 minutes of the regular session.
The strongest trend days appear when there's synergy between the prerelease bias and subsequent news. The broad market can gap up and hold above the opening price easily when these two forces work together. But watch out for a shakeout day when the unemployment numbers give neither side an advantage.
These choppy sessions often present good opportunities to build swing positions for the following week. Pick your prices early and step in slowly as the shakeout pulls the market into your numbers. Then hold tight through the weekend and look for follow-through on Monday or Tuesday.
Don't try to interpret the news on a fundamental basis -- just stick to the charts and play the numbers. When you second-guess yourself because a release looks bullish or bearish, you'll hesitate just as the best trade is being offered to you. The bottom line is, we're not smart enough to understand the news and what it suggests about the economy. But we can see how everyone else is interpreting it and then take appropriate action.
Remember that you're a trader, not a gambler. Never buy or sell before economic numbers just to play the release. These are lottery tickets that have no place in a sound trading discipline. It's even worse if you make money by doing it because the profit reinforces a horse race mentality that leads to disaster.
Many lesser economic reports are issued at 6:30 a.m., 9:45 a.m. and 10 a.m. ET. Some news is even released during the lunch hour. Keep in mind most of these reports are not market movers and will be traded as excuses rather than responses. In other words, focus your attention on the periods when the reports hit the airwaves, but don't get hung up on the data.
This strategy becomes very important when releases take place 15 or 30 minutes into the new trading day. The big boys often paint the numbers into the news and then fade that direction. Beneath the surface, they're using the release to find better prices to sell short or shake the public out of long positions.
You can often predict this reversal through a simple convergence-divergence analysis. Consider where the market closed the prior day and the sentiment at that time. A common scenario is a selloff day that closes near the lows. You wake up the next morning expecting a red screen and a gap down. To your surprise, the index futures are up a few ticks and look ready to rally.
Then you recall there's an economic release coming out at 10 a.m. A rally continues into the report, and then the market sells off on relatively good news. It turns out a bid was being kept under the index futures so big money could sell short at higher prices.
This is typically done with reports the public thinks are market movers, but institutions recognize as old, flawed or inconsequential data. Gross domestic product reports, like the one released last week, fit perfectly into this category. Durable goods numbers, regional manufacturing data and even inflation indices such as the producer price index and consumer price index also fit into this category.
Traders can still take advantage of real surprises on these secondary reports. Watch for economic numbers that fall well outside standard deviation. Earlier this year there was a massive rally following the relatively obscure Empire State Manufacturing Survey. The number was so far above expectations that everyone had to stop and take notice.
All bets are off when the market spits out one of these unexpected events. The good news is you're standing on equal footing with the big boys when this happens, because they're just as surprised as everyone else. It's a perfect time to keep it simple and trade the trend.
