How often have you seen a stock trade higher after terrible news? I’m sure many traders and investors have seen this happen very often. Unfortunately, if you are new to the trading business then you might just react to the initial news event and sell out of the stock. A rule, it is always better to follow the market reaction of a particular equity than the news event. Sometimes when a stock reports really bad news it is actually a positive for the shares. This is usually because the market knows that news is going to be as bad as it will get for the company. The conditions for the company will generally get better and that is often why stocks rally on bad news. Remember, when stocks rally on the back of bad news it is a very bullish sign.
On the flip side, when a stock peaks or tops out on great news it is the market’s way of saying that things will not get much better and the company has reached its peak. I have seen this so many times throughout the years. This is why it is so important to watch the reaction in the stock after the news is reported. This notoriously occurs after an earnings announcement or a major upgrade / downgrade. While it is impossible to really know how a stock will react after major news it is the reaction that must be watched closely. Remember, the market is always looking forward. It does not look in the rear view mirror, it looks to the future and not the past.
The bottom line here is to learn how to read the charts. Once a trader learns to read the charts they will have a clear advantage in the market going forward.