Feb 2: Part 2: The Simple (Basics of Stock Trading) – Trading with the Market Trends – News and Sympathy Plays

by David Jenyns on February 2, 2006

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 send a stock`s price plummeting. And, like everything else market trends, are not whether the news is really good or bad, but what the market perceives it to be. You might not think the market trend`s 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 trends.

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? This news will take precedence over the split trend.

Unless the market trends decide it doesn`t care about this news, which is not likely, the company`s 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 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 a trend in which stocks usually go down, significant good news about the stock should send it back up.

Now that we`re on the subject of news, let`s look at a related trend: 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 the 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 isn`t how the 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 trends` 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 trends 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 all the market trends needs to hear.

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 haven`t 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 trend.

Remember, news overrides other trends. Sectors go through hot and cold phases. Knowing which sectors are hot is especially useful in uncertain market trends. Whenever there`s a sudden general market trends rally, only the stocks in the hottest sectors will participate in the rally. Stocks in cold or dying sectors will remain flat or neutral.

Always be aware of which sectors are hot or `in play` so that you`re ready to trade into the right stocks when the market trends rallies. At the same time, be aware of which stocks are overvalued so that you`ll know what to sell short when the market trends make a downturn. As a trader, your goal is to be positioned in the strongest stocks and sectors when you buy, and in the weakest when you sell short.

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