Trading With The Stock Market Trends
By Ultimate Trading
News & Sympathy Plays For Stock Market Trends
News, good or bad, trumps all other
market trends. Good news about a company, or about another
company in the same sector if the sector is a hot one, can trigger
sharp rises in stock prices. The key to taking advantage of price
runs started by news is to get in early, before everyone else has.
Obviously, if you're the last one in, you'll buy at the highest
price and then watch the stock price go down.
Likewise, bad news can cause negative stock market trends. And, like
everything else in the market, what matters is not whether the news
is really good or bad, but what the stock market trends perceive it
to be. You might not think the stock market trends reaction to a
piece of news makes any sense, but should not affect your trading.
Always go with the market. Remember, news overrides all other stock
Let's say you're holding a company heading into its upcoming split.
The stock is in a hot sector, and its a one to four split. The
stock is rising nicely, and the ex-date is three days away. The next
morning, you see unexpected news that business in the companys
sector has dropped off sharply in the last quarter and that this
slowdown is projected to continue for at least the next six months.
What's going to happen to the split run? This news will take
precedence over the split stock market trends.
Unless the market decides it doesn't care about this news, which is
not likely, the companys run is over. You will have to get out of
the stock. When important news comes out, all successful traders
abandon trades based on other stock market trends. Unexpected news
is one of the main reasons why you must set stops on every trade to
protect your capital. In the same way, if you've sold short to ride
stock market trends in which stocks usually go down, significant
good news about the stock should send the stock market trends back
Now that we're on the subject of news, let's look at related stock
market trends: sympathy plays. When a stock in a hot sector has good
news and begins to move up, the stocks of the other companies in the
same sector will often start to run up as well - in sympathy with
the original mover. Likewise, when a stock has bad news and begins
to fall, others in the sector will often start to trend down as
well. It may seem strange, but there is a reason for stock market
trends to act that way.
You would think that good news for one company would be bad news for
its competitors and would logically drive their prices down instead
of up. This isnt how stock market trends work. As long as the news
reflects well on the prospects of the industry or business the
news-making company is in, it will generate a sense of possibility
in the minds of market traders. If one company in the sector is
doing well, it's possible that demand for the whole sector's
business is growing or that the whole sector will develop its
products or market so that all the companies in the sector will do
well. It's possible, isn't it? The sector now has potential. And
that's how stock market trends tend to work.
A great way to evaluate sympathy plays is to look at all the stocks
in the sector to see whether others have started running with the
newsmaker. If so, look for stocks that havent moved as much, for
stocks that should also start running but haven't yet. By buying
slower movers, you'll get in at a good price and the stock will have
most of its run left. But make sure there's no other factor keeping
that particular stock from rising, such as bad news of its own that
will keep it from following the sympathy stock market trends.
Remember, news overrides other stock market trends. Sectors go
through hot and cold phases. Knowing which sectors are hot is
especially useful in uncertain markets. Whenever there's a sudden
general market rally, only the stocks in the hottest sectors will
participate in the rally. Stock market trends in cold or dying
sectors will remain flat or neutral.
Always be aware of which stock market trends are hot or "in play" so
that you're ready to trade into the right stocks when the market
rallies. At the same time, be aware of which stock market trends are
overvalued so that you'll know what to sell short when the market
makes a downturn. As a trader, your goal is to be positioned in the
market trends and sectors when you buy, and in the weakest when
you sell short.
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