This Week’s Battle Plan
The Icky Bug
No screwing around this week. As you can see from the title of
this section, I’m in a serious mood and we’re going to get right down
to work today. And the first thing we’re going to do is take a test.
First, you’ll need a #2 sharpened pencil and a clean piece of paper
for this. Got both? Good. Now, I’m going to ask you two very tough
questions (especially the first question). Ready? Let’s begin.
Question 1: Which number is greater?
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a) 49
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b) 51
If you answered a) 49, congratulations! You really are a financial
genius. You are among the elite of the elite. The creme de la creme.
You are in rare company. Today you are now amongst a small group of
elite analysts, many of whom (only coincidentally) work for the same
Wall Street firms that handle the investment banking business for
Microsoft. Yes, 49 is greater than 51. And yes, Microsoft really
did beat their numbers. And now, because you are smarter than the
rest of us, you can move onto your new career as a market analyst
making a few million dollars a year. But, I want your career not only
to be successful, I want you to be a man amongst men. I want you to
conquer Wall Street. So, I’m going to buy you a book. Devour it, read
it over and over and over. I know. It’s a tough read. But you can do
it. And after you’re done understanding its principles, share it with
your fellow brethren. Once they’re done with it, I know it will
forever revolutionize how they attack their job and how Wall Street
calculates earnings. Warn them about how tough a read it is but assure
them it will be well worth their while if they can get through it.
Just click
right here and help change Wall Street forever by applying the
principles in this little known book!
Question 2
Now, let’s move onto question two. I hope question one didn’t exhaust
you. Yes, it was difficult, and if it is any consolation, I got it
wrong. My 4 year old son Dylan, also got it wrong. But, we never
started him on the Icky Bug Book of Counting. Unfortunately, I
fear because of this, it may be too late for him to consider a career
as a Wall Street analyst (thank goodness).
Here is question 2:
Microsoft, after the close, hypothetically announces that they
missed their top line and bottom line number for the quarter (IÂ
know they didn’t miss the numbers! It’s just a hypothetical). They
also give downward guidance for the next quarter. Upon this
announcement the stock loses up to four points in after-hours trading.
At the same time, EBAY, announces earnings and the stock trades down
three points in after-hours trading. These two announcements occur
just after the SOX has a 3% sell-off for the day.
Where will the market open tomorrow morning?
a) higher
b) lower
c) lower
d) lower
e) b, c, and d
If you answered A, you may want to order another book on Amazon.com. Here
it is.
If you answered b, c, d or e, then we’re in the same company and let
me tell you how I reacted to this news.
My Story
At 4:13 pm on Thursday MSFT’s earnings hit my Bloomberg terminal. And
within seconds another 10-12 headlines on the earnings come across my
screen. And I immediately knew the earnings and revenues were light,
as the numbers came in 49 cents versus the 51 cent estimate. And
within a few seconds after that I’m short the futures. I don’t often
trade like this. But when the opportunity arises, I pounce. A minute
or so later the futures close (at a very healthy discount to fair
value) and I watch MSFT’s stock. And it is getting hit. And it
continues to get hit. And at the same time, EBAY is getting hit. And
now my juices are flowing. I KNOW that tomorrow (Friday) is
going to be down. BIG. When Globex opens up 30 minutes later, I get a
bit more short. I’m not getting carried away but I KNOW
we are going lower in the morning. In my mind, based upon what MSFT
and EBAY were doing, I’m expecting us to be at 1110 on the June
futures real quickly. But, much to my amazement, Globex opens down a
bit but goes no lower. It touches 1116.50, about six points below
where it went out a half hour before, and then it starts to uptick to
the 1118 level. And it holds. Four hours later, I decide to go play
some ball with my kids and when I return, it’s still in the 1118
range. And now I know something is wrong.
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It doesn’t make sense…
Doesn’t the world know that MSFT missed the numbers? Doesn’t the
world know EBAY was down big? Doesn’t the world know that the SOX just
had a swing reversal day to the downside on extreme weakness? WHAT IS
WRONG WITH EVERYBODY? And instead of going lower as one would
rationally (and correctly) think, over the next few hours Globex
futures start upticking. And at 10 pm (PDT) I turn to my wife and tell
her I have to go downstairs and do a trade (she’s used to this by
now). And as much as I have RATIONALIZED that the market MUST go
lower, that all these pieces together say THEY HAVE TO go lower, the
market’s action said otherwise. And when I made this decision to cover
my shorts and scratch the trade (a trade I thought I would make good
money on), I knew I was doing the correct thing. Yes, 49 is NOT
greater than 51. Yes, EBAY was down and yes, everything in the world
said we were going lower Friday morning…except the price of the S&P’s.
You’ve Heard It Here Before And I Will Say
It Here Again…
“Price Over-Rules Opinion.” It over-rules logic, it
over-rules oscillators, it over-rules overbought and oversold
conditions, it over-rules everything on Wall Street! When you live
with this fact, your trading life becomes simple. Last week we talked
about Philosophy, Strategy and Money Management. “Price
Over-Ruling Everything Else” is part of that core philosophy. You
need to accept this and make it part of your life. And, even though I
knew that 49 is less than 51, I did not now that the shenanigans were
being put into place. All I knew is what the market told me.
And it told me that something beyond my understanding and information
base was occurring. I knew that everyone in the world had the
same information as I did. And yet, prices were rising. Made
absolutely no sense to me. But I did the right thing. I got out and
essentially scratched the trade. And when I opened my eyes the next
morning, the S&Ps were higher. And had I rationalized things the
night before, had I gone into denial and said “No, this thing has
to go lower,” I would have been hit with a healthy loss. But I
didn’t. I acted in accordance with trading reality. And at the end of
the month, when I look at my P+L, no matter what happens, no matter
what crazy things may occur, my number will be higher. And it will be
higher because I was disciplined enough to put my ego aside and walk
away. My month-end number will be higher because I didn’t argue with
the fact that 49 really is less than 51. On Thursday night and Friday
morning, 49 was greater than 51. That’s just the way it is. And I
swallowed my pride and walked away. And, I was rewarded by not getting
hit with a big loss.
Price Over-Rules Everything In Trading! Over the past few
months, I have suggested you tape specific things to your wall. Put
this one on top.
This Week
Most weekends there is usually some sort of edge going into the week.
But this week, at least early on, we are in neutral territory. Last
week we discussed the fact that we had multiple signals telling us we
were oversold and due for a bounce early in the week. And we got that
bounce on Tuesday to the tune of a 200-point rally. But this weekend,
no such edge exists. But that will be short-lived. It always is. Watch
the Market
Bias page for the signals.
Conclusion
Trading is no different than life because it’s a small microcosm of
life. One attempts to create as much structure as possible into one’s
life and the same goes for successful trading. There is no stopping
the many different things that will creep into a trading day. But,
these things can be minimized by having a set of rules and by abiding
by those rules. And, on the days that 49 is greater than 51, you don’t
need to be blindsided and run over. You simply stand aside. And keep
yourself healthy in order to play on the days when 49 really is less
than 51. And on most days, it really is.
Have a great week trading (and don’t let your kids become Wall Street
analysts)!
Larry Connors and
Brice Wightman
Larry Connors is CEO and
co-founder of TradingMarkets. He is also the author of four books on
trading, including “Street
Smarts,” co-written with Linda Raschke, “Connors
on Advanced Trading Strategies“, and his latest release,
“Trading
Connors VIX Reversals.“
Brice Wightman is a Market
Analyst at TradingMarkets.com.