How Technicals Lead Fundamentals
For
a day where the market was up across the board, the action left
a lot to be desired, from an intermediate-term perspective. Follow-through from
Friday’s turnaround off of support levels was weak. Volume was relatively
low and the indices all reached their highs around 10 am and spent the rest
of the day selling off.
I don’t see overwhelming
evidence for either the bull or bear case and would continue to use caution
on both sides. (Again, using caution doesn’t mean passing on ideal setups;
it means being more selective, trading reduced size, and perhaps using tighter
stops. If the trade is there — take it — always.)
In last
Wednesday’s column I wrote: “Some stocks didn’t even wait for
their earnings to disappoint before breaking down on huge volume.
(
TRDO |
Quote |
Chart |
News |
PowerRating)
and
(
VMSI |
Quote |
Chart |
News |
PowerRating) are two examples. Both are due to release earnings in the next
couple of days. This means someone with a big stake in these companies thinks
they know something, and they’re getting out before it all hits the fan.
More often than not, they are right, earnings disappoint, and a further selloff
may ensue. If they are wrong, and earnings come out better than expected, look
out for a big gap to the upside as those that sold will be forced to pay up
if they want back in.â€
So guess what happened?
Earnings came out and they both sold off further. (Charts were created over
the weekend. VMSI bounced back a little today.)
A stock’s action
right before an earnings release (or other significant news event) can be very
telling. This is why is it always so important to pay close attention to the
technical picture just before key anticipated news is released. While you won’t
get tip-offs all of the time, it is fairly common.
Another recent example of
this would be
(
ABCO |
Quote |
Chart |
News |
PowerRating).
As you can see, ABCO broke
below multiple support levels leading up to the announcement. These levels include
its pivot point from the recent base, price supports, and the 50-day moving
average.
One more example is
(
CGFW |
Quote |
Chart |
News |
PowerRating).
CGFW broke support in a big way the day before its earnings release. Especially
telling is the 10-minute chart of CGFW.
In the last ten minutes of trading before earnings were released the stock dropped
over ten percent, and more shares traded in those 10 minutes than were traded
the entire previous day. Nobody is selling that many shares that quickly without
being fairly certain what the news is about to be.
These are four examples of how technicals lead fundamentals. All of these examples
occurred within the last four trading days. As you can see, insider trading
based on impending news is not uncommon. By paying close attentio, you can many
times get out when the insiders do.
Good trading,
robhanna@rcn.com
P.S. Since Wednesday will be my last column of the month, I will once again
be giving my complete market overview. This, as always will include my UUWNHI
(Unofficial, Unscientific, Working/Not working Hanna Indicator). While I will
offer my observations of what’s working and what isn’t with my own
trading, it’s always helpful to gain a broader perspective when I hear
from Tradingmarkets members. I’d welcome any comments you’d care
to share regarding what strategies have worked well for you and what has been
difficult lately. Thanks.