It's Always Too Late to Trade the News

 | Sep 15, 2011 | 2:48 PM EDT
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Lately I've been hearing about how an event or story from Europe or how this or that comment from someone important is turning the market up or down. That's ridiculous. Only people who don't own a computer and have no access to charts would think such nonsense. I am not arguing the point that the market responds to changes in perception. That's not the issue. What is at issue is whether you can trade off the news. You can't. Because the news, by the time it gets to you or me, is always too late. Yes, always. Here's what's not too late: support and resistance levels, gaps, congestion areas, occasionally moving averages, even sentiment indicators and the market's overbought and oversold condition (stuff which I typically talk about). This is the stuff that matters. You wait for the news to turn positive and you will buy more tops and sell more bottoms than just about anyone you know.

On Wednesday afternoon, you may recall that the market was trading right on the highs about 30 minutes before the close. The Dow was up 280 points at that juncture. The S&P 500 (SPX) was trading just above 1200 at the 1202 level. Then all of a sudden, out of nowhere, the market collapsed. The Dow lost half its big gains in the next 30 minutes. From a gain of 280 points, it was cut in half to +141 at the close. Did someone in Europe sneeze? Did Bernanke say that the euro was finished? I don't think so, but who cares?

The SPX sold off from the 1202 level because it was above 1200 and the SPDR S&P 500 (SPY) was above $120 and there are about a million puts and calls at the $120 strike of the SPY, which are being closed out (generally short puts and short calls being covered by professionals as they approach 0 ) and likely being rolled into the next cycle, October. That's why the market sold off from that level yesterday. You want to find an explanation in the news? I'm sure there are plenty of them out there, but they have little to do with what is driving the market on a daily, and especially on an intraday basis.

SPDR S&P 500 (SPY) -- Monthly
Source: optionsXpress

So after the market sold off yesterday afternoon, there was another sharp pop this morning. Did you notice where this one stalled? This time the SPX popped up to a high of 1204.22. So what's so special about that level? Well, first, it's just a couple of points above yesterday's highs, so it suggests a nice little stop hunt to take out the stops placed above yesterday's highs. But, second, and more importantly, is that it was just 0.20 from the still unfilled gap from Sept. 2. That Sept. 2 gap was at 1204.42. Recall last week the SPX topped out at 1204.40, but didn't quite fill that gap. From there, over the next two sessions, it sold off almost 70 points to the 1136 level. So now, a few days later, the market is back and the gap at 1204.42 is again in the market's sights. This morning's high was 1204.22, and from there it was back down to the 1191 level. That's not a coincidence.

S&P 500 (SPX) -- Monthly
Source: optionsXpress

A move above that gap points higher, but until then, it's the level to sell against. Depending on how the market is looking at today's close, I may do some additional selling of mutual funds, assuming the SPX is still struggling in that area. If it blasts through, I will likely maintain my positions at Rydex, which I have already trimmed.

As for the indicators, they are also warning that the good news may be just about factored in for the near term. Note that on the sentiment front, at least the Market Volatility Index (VIX) is no longer suggesting lots of bearishness. It is now back to the low 30s after popping up to the 43 level earlier this week -- on Monday as the market sold off to the 1130s in the SPX. As I've been saying pretty much nonstop over recent weeks, I want to buy the market when the VIX is popping up into the low-to-mid 40s. That happened earlier this week, not now. I'll let the usual crowd view the current drop in the VIX as bullish as they now rush in to buy stocks (and mutual funds) that I am selling. It's not my cup of tea to buy stocks after the SPX pops up almost 70 points in a few days.

Along the same lines, it's not my cup of tea to buy the market when it gets overbought -- and, don't look now, but that's on the verge of happening. The McClellan Oscillator closed yesterday at the +87 level. It won't take much to get it back to overbought levels, which are above 100. In fact, a modestly higher close should do it.

Market Volatility Index (VIX) -- Monthly
Source: optionsXpress

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