Market pops and drops are many times caused by either a scheduled or unscheduled news announcement. For scheduled news events the pop or drop typically comes because of a deviation from what was estimated. For example, if Non-Farm Payrolls are expected at + 150,000 and the number comes out at +70,000, that is actually a miss of 80,000. This would most likely result in a sharp down move in the equity indexes and a rally in the bond market. While the initial reaction is extremely important, sometimes the second leg of the move can be the best trading opportunity.
This Thursday was a perfect example of the anatomy of a news trade. There were actually two scheduled news events that rate about the same as far as impact goes. The Philly Fed Survey and Existing Home Sales were both scheduled for 9:00 am central time. The Philly Fed and Existing Home Sales both ended up missing their estimates and the market had what we have found is a typical reaction. Note the three stages of a news move:
Stage 1: Initial Reaction: This is the initial spike/drop following a news event. In Thursday’s case, the e-mini SP futures were trading around 1382 prior to the news and dropped about 3 handles immediately following the release.
Stage 2: The Retrace: At some point in time (usually), the market will come back to the scene of the crime, we call this number the news pivot. After dropping initially, the e-mini SP futures actually traded back up to 1382.75 (just above the news pivot).
Stage 3: The Move: This move has been referred to as more of a Model-T trade than a corvette because it is slower developing but based on how the market reacts to the news pivot, it can setup for either a reversal trade (in this case going long) or a failure trade (in this case going short). In this scenario, after the initial selling took place, the market retraced to the news pivot, could not hold above it and then proceeded to drop picking up momentum and eventually taking out the lows of the day. Remember if you happen to miss the initial reaction to a news event, just like a bus, another trade will come along.
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Tom Busby is the founder, President and Chief Instructor of the Day Trading Institute in Mobile, Alabama. Tom has traded the S&P 500 every day (but six) since its inception in 1982, and is well known throughout the trading community. In 1996, he founded the Day Trading Institute to teach others his unique method of using the S&P 500 as the market leader for trading futures, options, equities and other securities. The Day Trading Institute teaches its students how to approach the market using technical analysis combined with risk management techniques. More information about Tom Busby and the educational and informational services of the Day Trading Institute may be obtained by calling toll-free 800.745.7444 or by email to firstname.lastname@example.org. Visit their web site at http://www.dtitrader.com.