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In this issue, we'll be talking about news and how news impacts our trading.
First, I trade the charts. I do not go chasing after stocks because they are in the news, either good news or bad news. At the same time, however, we cannot be ignorant of the news. It is often the news that impacts the price of a stock.
When a company issues a bad quarterly report, for example, the stock price will usually go down. But I have seen the price go up because the report was not as bad as feared. So, what impacts price is the investment community's opinion about that news, rather than the news itself.
This may seem like a minor distinction, but it is critical. When we use the technical indicators to trade the charts, then we are taking a measurement of investor sentiment. This sentiment is accurately reflected in the candles, RSI, and volume. We gauge sentiment via these indicators and trade (long or short) depending on how sentiment is moving.
It should go without saying, but investor sentiment is a very fickle thing. In recent months, we have seen how the slightest bit of news can affect buyer sentiment. Prices can move quickly. Because of this, I tailor my trading to the market. If the market is showing a lot of moodiness, whipsawing prices back and forth, then it can be helpful to look at another time chart to see the overall sentiment for that stock.
What I mean by that is this: if you are using a 5-minute chart to buy a stock, then you must realize that this price can change quickly. If the stock is experiencing a lot of volatility, then it might be helpful to look "one chart out" and go to the 10-minute chart. The MACD will smooth out in the larger time frame. The RSI will show a longer curve. But you also have to be careful here. Don't go to the next chart out just to rationalize a bad trade. In this case, if the 5 and the 10-minute charts are saying the trade is over, then get out and preserve your capital.
Let's apply the topic of news to two different stocks.
Best Buy (BBY) has been enjoying a nice run since before Christmas. It was below $18 at the end of November and reached a peak of $31 on January 6th - a nice swing trade. Part of the reason for this rise in price has been the fact that Circuit City announced it was in trouble. Best Buy being the big gun standing, demand for the stock rose and so did the price.
In the chart below, I've taken a snap shot of what happened on January 16th. News broke around 10:30 AM that Circuit City was going to immediately liquidate all of its stores. Unable to work out alternatives, this was their only option.
You can see what happened to the price after that.
You can look at the full chart on your own trading platform.
The MACD crossed over around $27.50. RSI went past the 10-minute 45% mark. The price hit $30.00 before coming back down.
So, this is an example of an intraday play in which the news impacted investor sentiment, creating a change in the technical indicators, and creating a day trading opportunity.
This sort of thing happens all the time. It is one reason I like playing the gap down stocks. Whenever investor sentiment is running high, either bullish or bearish, then there is a trading opportunity for us.
The next chart I'll discuss is UYG. UYG is an ETF based on the financial sector. If you have read any papers in the past few months, then it's no surprise that this ETF is in the toilet. Bank stocks have taken a beating over the past few months. So, no surprise here, the ETF based on these stocks has gone down. Further, this ETF is an Ultra, which means it trades 2X the normal movement of the financial sector. (There is a new Ultra, FAS, that trades 3X the financial sector.) Just remember, reward X 2 and risk X 2.
Take a look at this chart for the past 4 months.
Well, the past few weeks has seen a series of bad reports on the financial sector. So, this price is really low right now. At the same time, change is in the air. It is no surprise, really, that the banks have been hurt by bad loans. But we have a new administration now. And there is a LOT of talk right now about what the new administation will do to help the financial sector. The common belief is that the economy will not get going again until the banks start lending money. And the banks will not start lending money until they know their bad debts will not sink their boats.
One of the options being discussed is the creation of a "bad bank". This bad bank will hold bad debts for the banks until a certain point in time, alleviating their bank debt, freeing up capital for loans, creating new interest payments as revenue for these banks.
Now, I do not have a crystal ball and I cannot predict the future. But, I think this news is worth watching and UYG is worth watching in light of this news.
The stock has been making a bottom over the past few days. I'm not going to tell you to buy the stock. But, I think it is worth watching closely. The daily RSI is still very weak. Stochastics have been crawling along the bottom for nearly two weeks. But the MACD is trying to form a confirmed bottom. So, it's worth watching.
This stock could be played on an intraday basis, or as a swing trade. But I think it is safe to say that the Obama administration is not going to let the financial institutions flounder for long. And I would expect some major announcements within the next two weeks.
So, enough for this e-zine. I hope it was helpful.