Monday, July 12, 2010

Trade the reaction, not the news

It was a dull, slow day on the Street. Not a huge surprise there with earnings coming after hours. I thought the markets held up pretty well until I looked at some data a few minutes back, but we will come to that later. I wont put up a daily S&P chart as nothing much has changed since yesterday. Overall, the chart still looks bearish and I think the edge lies with the bears over a longer period of time. However, in the short term, today's consolidation was good for the bulls. Below are updated 15 minute charts as pertaining to S&P and Nasdaq. The resistance levels remain the same as I had marked yesterday.

Now, let's come to some interesting stuff. We know that the markets ended positive today. However, how did the internals looks like? Have a look at advancing and declining issues and volume from today. They make quite an interesting reading. Here is the link. Quite interesting, isn't it? 

Moving on to the main event, Alcoa reported after hours and (surprisingly!) not only beat the numbers, but also raised the forecast. Now, obviously that seems like very good news and the shares are up over 3% after hours. But remember, as short term traders, it is very important that we do not trade the results or the forecasts, but the reaction to the news. We have been up 5 days in a row now. Do we sell on news? I don't know but in the light of good news, it is important not to get carried away and remember that the above scenario always remains a possibility.

Personally speaking, I got out of HSP early in the trading day for little more than breakeven. Not that it was acting badly, just that I was uncomfortable with my large long positions, and wanted to lose some of my longs. But then I saw the markets holding on really well and some opportunities presented themselves that I just had to take. The first was ENTR for which I placed an order an 6.60 as that was the support. That turned out to be the low for the day. Below is an updated version of the chart I posted on twitter during the day.

Then came ADCT, which I really like over here. I got in at 8.50. It successfully tested support today and the volume seems to be encouraging too. Both ENTR and ADCT are from the watchlist I had posted last night.

And here is a weekly chart of ADCT. Do I need to say more?

To wrap things up, I still think being long is the right play here. But just because the earnings numbers are coming out good, doesn't mean that one gets carried away. Remember, the market has a tendency of taking the path of maximum pain.

Take care and good luck!

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