How To Trade On News Events
Hey Dave, They Got Him!….What Should I Buy?
I got an email on Sunday (actually more than one):
“They got Saddam!!….What
should I buy on Monday!?!”
My reply: Nothing!
Do not chase news events. Often, markets gap higher
(lower) on these events but quite often this turns out to be the high (low) for
the day. A better play is to look for plays opposite to the news events.
Let’s look how this created an opportunity in Pulte Homes
(
PHM |
Quote |
Chart |
News |
PowerRating) (and in
other homebuilders), a stock
mentioned as a potential short on Friday. Notice that the stock gapped higher on
the open but the stock quickly found its high (in fact, the open turned out to
be the exact high). In a case like this, day traders or nimble swing
traders can look to short the stock on a break down of its opening range and use
a tight stop just above intra-day high. For more on this, see my recent column
“How To Get A Head Start On A Swing Trade”, written on 12/05/03.
Looking to the indices, on Monday, the Nasdaq gapped open
on the Saddam news but quickly found its high. It then sold off hard for a solid
trend day lower. This action has it closing
poorly and puts it back below its 50-day moving
average.
The S&P tailed to new highs but reversed to close
poorly and in the minus column.
Looking to the sectors, as one would expect, the
“mother-of-all-turnarounds” is a major negative. This action has
virtually all of tech, like the Nasdaq itself, stalling below multiple tops. It
also further confirms that weaker areas (lately) such as the semis are poised to
continue lower out of a First Thrust. Many other areas also look poised to
continue lower out of a transitional setups (i.e. early trend). Retail and the
homebuilders are two notable standouts.
So what do we do? Since I wrote a bearish
column on Friday, I have to admit I cringed yesterday (after my initial
excitement quickly wore off) when I heard the Saddam news. However, after
collecting my thoughts (it was nice of them to do it on a weekend so I had time
to think!), I realized that markets often have news reversals–as suggested
above–the real reaction is often opposite of the initial reaction. And, as
implied above, it created opportunities in areas such as the homebuilders. I
think there could be something much bigger than a one-day affair though. As
implied above, many sectors could be in trouble. Therefore, on the long side,
stick with commodity related stocks. On the short side, look for opportunities
in those stocks that could be attempting to make a transition lower from high
levels. Again, the semis, retail and the homebuilders stick out here.
Looking to potential setups, Cypress Semiconductor
(
CY |
Quote |
Chart |
News |
PowerRating),
in the aforementioned semis, looks poised to continue lower out of a First
Thrust/Inverted Cup and Handle.
Best of luck with your trading on Tuesday!
Dave Landry
P.S. Reminder: Protective stops on
every trade!
P.P.S. Learn my best swing
trading strategy in my new interactive CD-ROM. Click
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