Part 2: Influential Market Trends

Provided By Ultimate Trading Systems

How Can The Different Market Trends Affect Your Decisions?

News & Market Trends
Sharp rises in stock prices are often triggered by good news, either about the company itself or about another company in its sector if the sector is a hot one. The key to participating in 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 send a stock's price plummeting. And, like everything else in the market, what actually matters is not whether the news is really and truly good or bad, but whatever the market trends perceives it to be. You might not think the market's reaction to a piece of news makes any sense, but what you think is irrelevant to your trading. Always go with the market.

The primary market trends concerning news is that news overrides other market trends.

What does this mean?

Let's say you're holding a company heading into its upcoming split. The stock is in a hot sector, and it’s 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 company’s 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? News overrides other market trends. Unless the market decides it doesn't care about this news (which is not likely), the company’s run is over. You have to get out of the stock. When important news comes out, abandon other market trends. (Unexpected news is one of the main reasons why you must set stops on every trade.) In the same way, if you've sold short to ride a market trends in which stocks usually go down, significant good news about the stock should send it back up.

Short-Selling Weak Stocks & Market Trends
In both rising and falling markets, stocks can become targets for shorting as a result of market trends. Shorting is always a stronger strategy during a bear phase, but many short plays work extremely well in bull markets — in fact, some shorting opportunities don't even arise in bear markets because many shortable market trends are the after-effects of buyable market trends.

An example is extremely reliable market trends of weak stocks falling after they have run up on moderate news. Let's say the biotech sector has been hot during the last couple of weeks. Then a small pharmaceutical firm puts out a news release that it new drug has passed its trials and will soon go to market. The market's perception of the news is extremely positive, and the stock rises 30% in two days due to optimistic market trends. Your analysis says that the price won’t hold at that level. So you wait for what you believe will be the stock's final push upward, short it near the top, set stops to protect yourself, and wait for the stock to fall.

Stocks like this that rise on news can be traded during both parts of their journey - long on the way up, and short on the way down. They're ideal for trading because, once you've watched a few similar situations, you'll get an idea of just how far the market is willing to push them up. Typically, it’s individual traders who cause the increase, because the stocks are cheap and have a low market capitalization.

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