Submitted by toothdock: Do you ever play into the expected news prior to news release-that is for example-at earnings?
Larry Connors: No. I’m not good at that. My strength is playing the game after the news is announced.
Submitted by Eyyelove: In your preview article you mention stop ticks. Are they placed before the buy order? How does one do that?
More specifically, I bought SFE today. It gapped up open to 96+ (the close from yesterday was 89+). I bought it at 98 1/2. The stock closed at 91+. So a stop gap wouldn’t have worked if it were l pt. below yesterday’s close. I have an uncanny ability to buy stocks at their top. How can I prevent that. Thanks Ellin/ Eyyelove
Larry Connors: I won’t buy a stock/commodity in the direction of a very large gap as you described. There is no way of knowing whether or not the gap will hold or reverse as happened to your position.
Submitted by chroso: As far as news goes, would you ever intentionally not take a position in a market before a big news announcement, say, in the T-bonds before the release of a CPI number?
Larry Connors: Most mechanical systems traders will stay in the position in spite of the upcoming news. I am looking to be flat going into the news and then see if things start acting strange
Submitted by Eyyelove: From your response that you don’t buy gap-ups or wouldn’t have bought IBM because you wait for the stock to tell you what to do…my question is then at what point are you pretty much sure the stock will continue in the direction you want it to, i.e., if it’s a cup-and-handle and moving up, is there any way to perceive where the top will be? Thanks.
Larry Connors: No, I am not looking to trade in the direction of the news. I am strictly looking for it to act in the opposite manner of how it should and I will enter as the reversal is occurring.
Submitted by Jonny: What do you mean by the closing of the gap? Do you mean that you won’t trade the stock until the gap is filled?
Larry Connors: With the news reversal strategy, on an intraday basis, the answer is yes.
Submitted by pph: Is your system purely mechanical? If so, can you tell us some of the filters for stocks (i.e., futures should be doing this or that)?
Larry Connors: The entry on a pure news reversal is mechanical. The exit is discretionary. The other type of situation which is completely discretionary is looking at a market that is behaving opposite of how it should.
Submitted by larryd: With news breaking on hundreds of stocks daily, how can one person know which of the stocks to follow? Is there any particular variable to look for–like REALLY BIG NEWS or just plain earnings reports?
Larry Connors: That’s a very good question. The filtering is the hardest part. When I first wrote about this strategy in 1995 I was using it predominately in the futures market. The same is true today. The best advise I can give you with stocks is to attempt to focus on the biggest news stories of the day. CNBC and their stock editor Joe Kiernan will do that for you best.
Submitted by Moderator: Larry, with traders constantly bombarded by news, how can you figure out which kinds of news events might offer better trade opportunities than others?
Larry Connors: The question you have to ask yourself is how pertinent the news is and how is the stock or futures market reacted to it. Last nights news on IBM was important. If the stock dropped today you would have to ask yourself what was going on. In this example though, the stock did what it was supposed to do
Submitted by Eyyelove: Do you mean that if the stock gaps up 10 at the open and then comes down to the price it closed at the day before you would buy it and expect a greater profit? I’m not quite sure I understand.
Larry Connors: No short it.
Submitted by Tony Gomez: Can you explain the roll of an analyst? I am confused by their action. Why do they have such a big impact on a stock when they say something about a company?
Larry Connors: The analyst on Wall Street was traditionally the person who knew the company best. He was the shareholders eyes and ears with management. Today, that is much less true. These people are no longer unbised in their opinions. They are paid to establish banking relationships with the firms. That’s why there are next to zero sell recommendations given on stocks. I find it hard to believe the weight many of these folk still have on stocks. BTW-When was the last time you saw an underwriter of a new issue give a neutral or sell opinion in their initial opinion on the company?
Submitted by rbri: How often do these setups occur?
Larry Connors: With stocks every day. With futures on average 2-3 times/week.
Submitted by Tap: Do you ever buy a gap higher or sell a gap lower in either stocks or futures?
Larry Connors: No, there is no edge in doing this.
Submitted by jank: Will certain circumstances dictate whether a news reversal position is larger or smaller? Do you “hedge” your bet that way?
Larry Connors: No, I don’t hedge except with position size. Obviously, if a company announces terrible earnings, gaps lower and then fills the gap, it is acting in the opposite manner of how it should be acting. That’s where I want to be a buyer.
Submitted by pph: Is there a criteria for the type of stock (i.e., shares traded per day, or # shares on the float)?
Larry Connors: No. As with most traders it’s a personal choice. An example is Haggerty likes them very liquid and Cooper thinks the thinner they trade the better the edge he has.
Submitted by stormins: So you would short NSOL since it dropped quickly to yesterday’s closing price? But wouldn’t that mean you are sitting there sweating bullets all through wiggle time since there was no further downward movement until later in the afternoon?
Larry Connors: The correct price to short this today was near yesterdays high of 95. There is not much sweating since a protective stop intraday limits the loss. In this example it did what you wanted it to do and sold off late in the day. BTW-I have seen this occur many times. The action after entering is sideways and then late in the day the move occurs. Some of the examples I showed when I first wrote about this, play themselves out as you described.
Submitted by Moderator: Welcome to the tradingmarkets.COM Live Forum, featuring Larry Connors.
Larry Connors is a professional trader and the author of “Connors on Advanced Trading Strategies,” “Investment Secrets of a Hedge Fund Manager” (with Blake E. Hayward), and “Street Smarts” (with Linda Raschke), all best-selling financial markets books.
He has shared his trading insights, including his innovative work in the area of trading volatility, both in these books and through his widely read “Professional Traders Journal” (PTJ). Larry writes the “Market Volatility Commentary” that appears every week on tradingmarkets.COM.
Larry also is founder and Chief Executive Officer tradingmarkets.COM, M. Gordon Publishing Group, and Connors, Bassett & Associates, a money management firm. He founded these companies and became a full-time trader after a successful career with Donaldson, Lufkin & Jenrette and Merrill Lynch.
Larry will begin the forum discussing trading news events (and specifically, his “News Reversals” strategy). To ask a question, simply type it in and hit the “Submit Question” bar–that’s all there is to it. You also can create a short subject heading for your question in the title space (it helps if you do). Past questions appear in the left-hand portion of your screen for easy browsing.
This is a moderated forum, so we ask that you respect the other guests and our featured speaker. We try to get as many questions as we can, so please be patient. Shortly after the forum is completed, it will be archived and available for review.
Submitted by trtucker: Do you measure the gap from previous day’s high or close?
Larry Connors: High or low, not close.
Submitted by bwdavis: What happened in the case of IBM and CPQ? CPQ was going up before very bad news and IBM going down before very good news.
Larry Connors: CPQ hit 50 in late Jan and lost 40% of its value in a bull market before the announcement. In IBM’s case, as in many cases, the company did a good job of keeping the information confidential.
Submitted by james: As a technician, don’t you feel like trading news is more of a fundamental approach–that is, it’s not purely technical?
Larry Connors: I understand what you are saying but when it comes down to it, I’m interpreting price action, not fundamental information. If I was playing the fundamentals, I would not be entering in the opposite direction of the news.
Submitted by coachpaw: Why do stocks open sometimes much higher than their last close?
Larry Connors: Many reasons but the most common is because of brokerage house opinion changes and earnings.
Submitted by marko: Does this news technique apply to the general market just as much as individual stocks–i.e., S&P 500, Dow Jones, etc ? If true, then going short soon may be a good trading idea given the tremendous hype concerning 1st qtr. 1999 earnings?
Larry Connors: It applies only to the fact that prices are now taking into account the good news. I would not call it a shorting opportunity but more like a market that could be close to being fully valued short term based on expectations. As we have seen over the past many years, this leads to sideways movement as the market digests the run-up.
Submitted by Moderator:
Submitted by Larry Connors: Thanks for joining me tonight. If you have more questions or if I didn’t answer your question, please feel free to email them via the suggestion box. Larry Connors
Submitted by Moderator: This concludes our Live Forum. Thanks for taking part, and thanks to Larry Connors. Come back next Thursday, April 29, for our next forum.
This forum will be archived shortly for easy review.
Submitted by Moderator: News reversals
We have all seen a company announce better-than-expected earnings before the opening, gap higher, and then collapse. The same kind of thing happens in futures markets upon the release of important government reports or economic news. How do you take advantage of these quick, extreme swings in market sentiment? With a strategy called News Reversals.
A set-up occurs when a big news event is released after the market closes one day and causes the market to gap higher or lower the next day. For example, if a very bullish crop report was released on Monday after the close, excitement over the next day’s trading builds to a fever pitch overnight, and on Tuesday morning a buying frenzy takes place on the opening. The market gaps higher–much higher–creating a short-term overbought condition. Instead of rallying further, the market begins to sag.
Next, short sellers start pushing the market lower, forcing the nervous longs to abandon their positions; more sellers continue to enter the market, erasing the morning’s gains. What was originally thought to be a long-term buying opportunity turns out to be a short-term selling opportunity for shrewd traders who see the potential of bucking the herd.
These are the rules:
1. Wait for an extremely bullish or bearish event to occur after the close. For stock traders, this could mean an earnings report, takeover rumors, analyst recommendation, etc. For futures traders, it could be an economic report, crop or livestock report, weather report, and so on.
2. For a signal to occur, the day after the new release, the market must gap open above or below the previous day’s high or low. (In some markets, news may be released the same day long enough before the opening that it has the same effect as an announcement the previous day. In these cases, the trade is obviously taken the same day as the announcement, not the following day.)
3. When the market gaps up, enter a sell stop one tick below the previous day’s high. When the market gaps down, enter a buy stop one tick above the previous day’s low. (Stocks cannot be purchased with a buy stop; you must enter the order manually.)
4. Place a protective stop that risks no more than today’s low or high (or less, if such a stop level represents excessive risk). When the market moves in your favor, use a trailing stop to lock in profits.
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