How often have you seen a stock trade higher after terrible news? I’m sure many veteran traders and investors have seen this happen all too often. However, if you are new to the trading business then you are likely unaware of the games being played. Therefore, you react to the initial news event by selling out of the stock.
RULE OF THE TRADE: it is always better to follow the market reaction of a particular equity, not the news event.
Many times when a stock reports really bad news it is actually a positive for the shares. In most cases, this is because the market already knew that the news was going to be as bad as it will get for the company. The conditions for the company will generally get better from the news event, and that is why stocks tend to 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 apex. I have seen this so many times throughout the years. This is why it is so important to watch the reaction of 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 as it projects 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 he or she will have a clear advantage in the market going forward.