By Sam Seiden, Online Trading Academy Instructor
Each day in the morning, the global equity markets are flooded with more news than anyone can possibly read, let alone process. To make matters worse, the news is often conflicting which only complicates the trader's task of processing news into a trading plan for that day, week, or month. New traders I meet either at an event or in the Extended Learning Track (XLT) program tend to have one more layer of confusion when it comes to news which seems to create the most complicated illusion of all. They think that when news is bad, market price must fall so they look for shorting opportunities in markets. Conversely, they think that when news is good, market price must rise so they look for buying opportunities. Much of the time, the thought of good news leading to higher prices and bad news leading to lower prices is completely false and there is a very specific reason for this. Instead of walking deeper down this confusing path, let's step out of this box and into the world of real trading of markets.
It never fails, I will be leading an XLT session during week one of our curriculum and some bad economic news will come out during one of our pre-market sessions and I will say, "Let's look for a low risk area to buy the S&P and/or related stocks." Right away, a new XLT member will say, "The news is bad, the market should go down, why are we looking to buy?" It is then that I welcome them to the world of real trading. What exactly happens when bad news hits the broad market? Depending on how strong the news is, stronger or weaker perceptions will be created. The strongest perceptions lead to trades or investments made in the market. Those end up being the red and green candles on your charts. So, we can conclude that "any and all influences on price are reflected in price."
Let's take a look at an example right out of an XLT session from April 1st. Below I cut and pasted a news headline and story for your review:
ADP Report Shows Bigger Than Expected Drop In Employment
4/1/2009 9:25 AM ET
(RTTNews) - Private sector employment fell by much more than expected in the month of March, according to a report released by Automatic Data Processing, Inc. (ADP) on Wednesday, with the data likely to raise concerns about Friday's Labor Department report.
The report showed that non-farm private employment fell by 742,000 jobs in March following a revised decrease of 706,000 jobs in February. Economists had expected a decrease of 663,000 jobs compared to the decrease of 697,000 jobs originally reported for the previous month.
- RTTNews
This negative news story came out right before the opening of the U.S. Stock market and it was very bad. It showed that more jobs in the U.S. were lost than was expected. Jobs are one of, if not the most important part of the economy right now. It is the key report that people around the world are focused on at the moment. How does this relate to market price? Let's look at a chart of the NASDAQ that day, just as we did in the XLT.
Figure 1
The grey shaded circle on the chart is April 1st, right around the time of that news release. The news was REAL BAD, and many people SOLD. These sellers that heard the bad news sold and prices declined. When we look to the left of that shaded circle, we see that price declined right into our pre-determined demand (support) level. That level is demand because the chart tells us there are many more willing buyers than sellers at that price level, that's why price rallied so strong from the demand level in the first place. It represents the pattern we identify as demand: Decline – Base – Rally (pivot low). So, what exactly happens? When many market players heard that bad news, they sold after a drop in price and right into a price level where demand exceeded supply (Demand: more buyers than sellers). As soon as the last seller sells at a price level where demand exceeds supply, market price shoots higher, which it has to when that equation is true. The key here is to filter your perception of the news through the objective supply and demand equation from the chart. In other words, before you sell based on the news, make sure price is at a level where supply exceeds demand, not at a price level where demand exceeds supply.
The strong move up in the NASDAQ from that level happens because so many people are caught on the wrong side of the market and the news event was the invitation that led sellers to take that novice action.
Be careful putting any of your hard-earned money at risk before thoroughly understanding how markets really work. As you can see, if you are still in the camp that falls for the illusion trap often set by news, you may very well be providing income for astute traders whose buy and sell orders help set the trap.
For more information on the details of this topic, please see prior articles found on the Online Trading Academy website. Hope this was helpful.
Have a great day.
- Sam Seiden sseiden@tradingacademy.com
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