Lessons from the Pros


Does It Really Matter?

One thing that novice traders mistakenly do is place too much emphasis on the news or events when they are trading. While I was teaching a class at our Minneapolis center, we experienced several events that in the end did nothing to move the markets beyond what they would have done based on the charts and supply and demand anyway. The two events were the release of the Federal Reserve meeting minutes and the infamous NASDAQ shutdown.

Fed watchers (traders and talking heads on CNBC) were eagerly anticipating the release of the minutes from the last meeting. They were specifically concerned for any talk about possible tapering of the massive Quantative Easing Program that has helped keep the equity markets floating since the 2009 bottom. Just before the release, the leading market index was the Russell 2000. Those of you who regularly follow my articles know I use a comparison chart to identify the leading market and use it as an indicator for potential reversals. The Russell 2000 was approaching a supply zone after having clawed back into positive territory. A the supply zone I was looking for a price drop.

fed rut pre

When the minutes were finally released, there was a lot of disappointment as it looked as there may be some easing in the September meeting. The broad markets immediately sold off.

fed rut post

Most traders were caught off guard. The markets dropped very quickly for about 10 minutes. Dropped right into demand that is. Of course, as an astute trader, I was looking for stocks that had been performing strongly against the market throughout the day. I did this to look for a long opportunity at demand as the markets were going to bounce from demand once the scared novice traders finally exhausted their selling pressure. I found my opportunity with Cognizant Technologies(CTSH). This was a stock that was bullish throughout the day, even when the market was weak. It also struck a demand zone at the same time as the Russell 2000 index. I was able to enter into a long position in the class and ride the bullish move for profits.

fed ctsh

The next day provided more excitement as there was an unexpected shutdown of the NASDAQ market due to a glitch in their system. Many traders immediately turned to the futures markets as a way to hedge stock positions or to profit from the panic that ensued. Those traders who were already watching those markets would have been a bit bearish. The price of the NQU13, (the Nasdaq 100 futures), had put in a lower high and lower low. They were bearish. Again, the futures markets and the indexes dropped to a demand zone. Smart traders took advantage of this and were able to buy the demand zone and profit as the equity futures rallied into the close after the NASDAQ came back online.

nq q shutdown

So when there is news or even a major market or economic event, the simple strategy of trading the trend and buying demand or selling supply will still work. We need to pay more attention to our charts and less to the noise that surrounds us everyday. If we can do this, we have a great chance of succeeding in trading.

DISCLAIMER This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.

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