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Secret 14

Watch the reaction to “the news”

This is important: It's not the news but how the market reacts to the news that's important. Certainly it's the news that sets the public perception, but you must be alert for divergences between the news and market action. It all has to do with expectation versus reality. Look for the divergence between what's happening and what people think is supposed to happen. When the big turn comes, the general public will always be looking the wrong way. Consider the following ways to analyze reactions to news (or even a lack of news):

  • If bad news is announced and the market starts to sell off in large volume, it's a good bet the market's going lower.

  • If the market doesn't react much to good news, it's probably been discounted.

  • Moves of importance invariably tend to begin before there is news to justify the initial price move. When the move is underway, the emerging fundamentals slowly come to light. A big rally (decline) on NO NEWS is almost always bullish (bearish).

  • It is generally not good practice to buy after a lot of bullish news or sell after an extremely bearish report, because both good and bad news is often already discounted in price. Of course, you should always consider whether the trend is down or up when the news is made known. A well-established trend generally continues, regardless of the news. I remember getting caught in the emotion of a bullish corn report in January of 1994. Looking back, this news was the very top. An opposite (very bearish) report the following year made a significant bottom, which turned out to be the springboard for the biggest corn bull market in history. The move wasn't over until corn prices doubled a year later.

    Consider this breaking news from 2003—March 18: BAGHDAD (AP)—“Iraq's leadership on Tuesday rejected the U.S. ultimatum that Saddam Hussein and his sons leave Iraq or face war, and the United Nations pulled its weapons inspection staff out of the country as battle appeared inevitable.” On that day, world oil prices collapsed by 10% (before the war had even started), because the market had already discounted the worst outcome.

  • When unexpected news occurs (news that the market has not had time to prepare for), and the market opens in a wide range, or gaps, lower or higher, sell out your longs, or cover your shorts and wait. Watch the market for 30 minutes to an hour. If the market opened sharply lower with heavy selling and was not able to trade much lower than that, it's into support and can be bought at the market with a tight risk point. Watch the market closely at this point. Note the tone of the rally. If it is small and the market is able to again fall under the levels made when the bad news came out (or above the good), it is safe to assume the market is going lower (higher).


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