All You Need... is a Chart

[firewalker 10]

This is my first post on TL and I hope it will be start of something refreshing. I've been a member of T2W, having learnt a lot over there, but recent turnoil and lack of interesting discussion made me leave that site. I won't be posting as much as I did over there :missy:, I'll focus on developing my own blog instead and will hope to learn something more along the way.

 

I would like to continue one thread, which I started two weeks ago, but unfortunately got derailed so many times that ultimately there was no point in doing so. From what I've seen, the odds of this happening here are next to zero, thankfully.

[firewalker 10]

In this thread I'll discuss why traders don't need to study anything other than a chart. I will try to illustrate that every news item, corporate report, monetary decision, in short anything fundamentally related to the economic situation of a stock or market, is printed on the chart first, long before the public becomes aware of it.

 

"The tape tells the news minutes, hours and days before the news tickers, or newspapers, and before it can become gossip. Everything from a foreign war to the passing of a dividend; from a Supreme Court decision to the ravages of the boll-weevil is reflected primarily on the tape." -- Richard Wyckoff

 

Undoubtedly people will tell me this can't be true, otherwise why would we have market analysts? Why would the newspapers print financial pages? The purpose of this thread is to inform, not to convince any disbelievers. All you need, is painted in the chart. Several concrete examples will be shown to support my case. The topic is open for discussion, but I hope this thread can become more than an evocation of "this is my opinion" posts. If you feel strongly about something, back up your point of view with some arguments.

 

Here's to the wonders of the chart

[firewalker 10]

Some traders are very anxious on the lookout of news, be it earnings season, rate cuts, important economic indicators, non-farm employment...

 

Before we talk about the effect news can have on the market, we'll enumerate four different possibilities:

 

(1) Good news comes out but the market fails to go higher: consider this to be warning signal.

 

(2) Good news comes out and the market rallies: could be positive, but buying on good news is often a risky thing to do, because smart money will try to unload when the public is buying in a frenzy.

 

(3) Bad news comes out, the market plunges: this often leads to a short lived down move. The public dumps the stock and believes the state of the business (or the economy in general) is getting increasingly worse. Smart money can easily pick up shares at low prices without driving price higher.

 

(4) Bad news comes out, the market doesn't drop: consider this to be a sign of strength. If the market fails to go lower on bad news, it means the worst is usually over and the news has already been fully discounted in the prices of shares.

[firewalker 10]

There is one important element still missing from the previous post, and that is "time".

 

Good news is omnipresent near the end of the bull market phase, usually characterized by a parabolic rise in price. This is one of the rare occasions that buying on good news might lead to profits, because price tends to continue in that direction in this phase of the market cycle.

 

Bad news, and "catastrophic news" comes out near bottoms. Selling on bad news usually means you'll be selling too late. This is not to say that prices can't go lower, but when bad news is released, the market already knows about it.

 

Therefore the first important rule here, if you want to play it safe, is to avoid trading the news. There are too many variables in play to determine what will happen seconds before the report or on the moment of the release itself. However, if you're in a position already, I'll show you there are a number of elements that have a high probability of assessing the initial reaction of the market.

 

The second rule is to pay attention to the reaction to the news and play that reaction technically, with complete disregard to the economical indicator, be it better or worse than forecast.

[firewalker 10]

The purpose of this thread is not only to discuss theoretical concepts, but to illustrate with practical examples too.

 

The first example serves to show that the market often tricks the public into buying on good news. Unless a technically important level (like support or resistance) is breached, the market often returns to it's previous trading level after the news. I know of traders who specialize in trading these 'news reversals'. The important however, is determining the odds that price will not reverse.

 

The third rule I suggest is that you scale out or exit your position if price moves in the desired direction on news. Scaling out gives you the opportunity to lock in profits quickly in case the news turns out to create a sharp spike. By leaving a part of your position open, you open yourself to the possibility that price continues even further.

 

The attached charts all illustrate this concept. The huge volume peak is where the news came out. Notice how in each DAX chart price returns to it's previous trading level and continues as if nothing was going on. I'll provide more recent charts in the following charts. These are some observations from in my early days. The two charts look very similar, but I can assure you they are from a different date and different context.

[firewalker 10]

"I would like to know if it's possible to predict the direction before a news-event?"

 

If you're talking about news reports or sentiment in general, I believe yes. For example, price was distributing on the major US Indices near the end of last year and made a lower high before the whole subprime crises became in the popular media and before all the financial institutions were screaming for more liquidity from the FED.

 

As for singular news-events, it's not always that clear. I believe this is in part because of the manipulation that it possible on smaller timeframes, and in part because so many people focus on trading around these reports. This can create some whippy action that catches both sides out.

 

Attached is a chart of an important news report (FOMC if I remember correctly). Notice how 'technical' price reacts. Yes, anyone trading this would need very wide stops, but in the first spike price bounces back higher off the lower support area. And in the 30 minutes after the initial release, all price bars (5-min chart) continue to close above support, indicating where the buying pressure is to be found.

[firewalker 10]

This happened only a week ago, and at the time - rather than at the end of the day - I described what I would do, depending on the market action. It underlines the importance of having predetermined scenarios, so that you'll know what to do, when you see it. Anyone reading this, should position themselves "in the flow" of the moment.

 

Within a couple of minutes we have the 'ISM Non-Manufacturing Composite' number which will have a definite affect on the markets. By determining beforehand what action is possible and where this action takes place, we can position ourselves better.

 

Now, there's not much time left (7 minutes) but I'm typing this as we go along.

Attached is a DOW futures chart, with important support and resistance levels drawn on the chart. I have 13030 and 12930 as resistance and support, the midpoint is 12980, which is often an important area where price returns to, when trying to find value.

 

Notice how on Friday price went slightly below 12970 but kept very much around the 80 level. Also today, since the open we moved lower and touched 12977 before going up again slightly. A long entry would be fairly aggressive there, but it's possible...

 

Now, what do we look for?

 

(a) if the news is bad, we'd expect price to go lower, but we'd like to see buying come in around the potential support at 12970. Going long immediately would therefore be risky, but if we get confirmation that price is holding support (for example by first spiking through it but then closing all the way up again above support), this could trigger a buy signal.

 

(b) if the news is bad and 12970 is broken straight away, we stand aside and wait for price to find support lower (preferably around 12920-12930)

 

© if we move up on the news than we missed our entry, but too bad. Then we wait and see how price reacts to resistance at 13030 and see if we get a short signal.

 

 

==============

 

And this was posted immediately after the news, after I made an entry:

The ISM number was 52, better than forecast. So we spike up... but, this is a spike into resistance. Now, like I said we wait to see what the reaction to 13030 is. However, by waiting I don't mean minutes, because by then the chance to get in early will have passed. That's why I attached a blow-up of the action, a 15-second chart. Notice how the bar closes at 13029. Coincidence? Of course not. This is where selling pressure comes in.

 

If you look at this from a 1-minute bar or 5-minute it's still easy to see that price fails at this level. Although, the longer you wait the less obvious it's going to be that a nice short entry presented itself, with a stop around 13040 or so.

 

Now, forget about the news for a minute and just observe. How does it help you knowing that there was news and what the figure was? It doesn't. The fourth rule therefore is that you don't need to know what moves the markets, you only need to see the resulting action. Whatever the cause, price is being pushed down because there's a lot of supply at that level. The volume is huge, price fails, what more do you need to know? This doesn't automatically mean price will plunge, but at least you have a trade that you can ride back to the opening low, where you should expect price to find support again.

 

This example is meant to illustrate that the cause of what happens is irrelevant. Even if this would turn out to be a losing trade, it doesn't change the fact that you can see everything you need from the chart, without looking at the news.

 

 

========

 

Anyone looking back at this day, without knowing when the ISM report was released can still see the high volume and the rejection of resistance. What matters is what you see in front of you, which is the effect - the net result - of the sum of all buyers and sellers. Knowing who is moving price or why price is moving in a certain direction, should not be our concern, unless we want to become financial analysts, instead of traders.

 

Note: below is a chart of the whole day so put things in perspective.

 

[firewalker 10]

A comment I received (dcraig1): "The fact is that mutual funds, unit trusts, investment trusts and pension funds are primarily managed by fundamentalists. Those who will tell you that for example fibs work because "lots of traders look at them", will then say fundamentals don't count ignoring the fact that fund managers swinging a bigger stick primarily make their decisions on based fundamentals.

A lot of big fund managers trade based on fundamentals. After all, it's big money that creates a pattern on the chart in the first place. This is why a fundamental shift in the economy comes out in the stock market (a chart) first, before it's translated into an economic indicator or a company report. Technicians look for these signals, perhaps through indicators or through price/volume movement, but they aren't responsible for initiating the moves themselves. This doesn't change the fact that fundamentals come out in the chart first."

 

Below is my view on fundamentals. I'd love to hear what others think obviously. Feel free to disagree!

 

Those who look for 'fundamentals' are usually looking at either - depending on whether they trade an ETF/index or a stock - statistics about the economy as a whole (GDP, CPI, interest rate, trade balance,...) or statistics about the company (P/E, dividends, earnings, projections,...). They forget that these numbers are nothing but translations of something which has happened before, these are by definition lagging indicators. Therefore, by following the fundamentals you are always two steps behind.

 

The market turns upwards or downwards because those with the big bucks have determined that the current prices are not correctly related to, what they perceive to be as, their fundamental value. But 'fundamental value' isn't translated into an indicator that comes out two or three months later. Which is why all those who think they study fundamentals, are only studying the effects of a fundamental shift that already took place.

 

A stock that is basing, is exhibiting patterns of accumulation because a select number of people (with "a bigger stick") perceive it to be lower then the real value. They believe the 'fundamentals' of that corporation are fine. But at this moment, the news is usually bad, earnings are worse than expected and jobs are being cut. The accumulation pattern however, comes out in the chart before - usually couple of months later - a rise in earnings or a increase in sales becomes public knowledge.

 

Yes, fundamentals have a casual relationship with price, technical analysts don't move price. It's not because a trendline breaks or an MA crosses over (or a Fib line is drawn somewhere on a chart) that price will move lower. Fundamentals are the driver behind the markets, but technicals are what helps you determine in which direction the market is moving, before the fundamentals become common knowledge.

 

Whether or not mutual/pension funds are managed by fundamentalists or technicians, I couldn't care. Fact is that a lot of hedge funds lost loads of money in the last year, pension funds continue to stumble and 'the professional money' has to fight with other professional money as well. It's not because it's big or professional money, that's it's per definition smart money all of the time.

[firewalker 10]

"Most people look at the state of the economy and believe that the stock market should mirror the current situation. They believe that a strong economy should correspond with rising stock prices. Unfortunately, the relationship is not that simple. The stock market discounts the future, not the present. It discounted the present 6-12 months ago. [...] In fact, the stock market is one component of the Index of Leading Economic Indicators, the government's main economic forecasting gauge. In other words, the stock market leads the economy, not the other way around."

 

- Jack Schwager in a book called 'Fundamental Analysis'...

[firewalker 10]

... regardless of the news.

 

People often look for the news to tell them what the market is going to do. Good earnings? Ah, market should go up, we buy! Bad news? Damn, let's dump this stock. Although we can never tell with 100% certainty what the initial reaction to the news will be, we can analyze the reaction of price towards technical levels, with complete disregard to what created or caused the move in the first place.

 

Those who follow stocks, will know that Cisco released it's Q3 report on May 6, around the close of the markets. Let's have a look at what affect it had on the Nasdaq.

 

Price went straight up from 1995 to 2002.50 and went on to touch 2005, the upper line of a resistance zone from the 2nd of May. Price then reversed and came back to the level it was trading at before. So, what good does it by knowing the news? If anything, the public is sucked into longs but doesn't realize 'the technical picture' on the chart.

 

There are plenty of these examples each day. I'm not saying there is a news reversal all of the time. On the contrary, price often breaks through S/R on news, because that's the easiest way for the smart money to position themselves. The take advantage of what the public is doing and use the volume provided by weak hands to their advantage. The news is nothing more than an excuse.

[firewalker 10]

"It is practically impossible for any man or organization to absorb, analyze and digest the many so-called fundamental factors which influence the course of the stock market, and deduce therefrom a conclusion from which the course of prices may be predicted with any fair percentage of success; what is more, it is a fallacy to believe this can be done on that basis. All the elements which have gone to produce the lines on the fundamental charts have already been discounted in the market. "- R.W.

[firewalker 10]

The problem with news-related trading is that most traders focus on picking trades around these releases because they believe the sudden increase in volatility gives them a better chance of making a quick buck. Unfortunately, they often fail to realize the risk that goes along with it. Too many traders see a sudden burst in price and think "this is it", and they jump in.

 

The patient trader waits and watches how price reacts, and looks to fade the news. This is not to say that fading the news is a profitable strategy in each occasion. One must look to what price is doing with regard to important technical levels, like support and resistance.

 

Most of the news has already been factored into the current price of the market. This means that once the news confirms what the market was expecting, the whole anticipation is gone and people take their profits and walk away, thus sending the market lower.

 

There's one very important observation to be made here. f the market should go lower (very bad news), but it doesn't, it signals important strength. The news in itself doesn't matter, but it's the aggregate position of traders before the news. Experienced traders wait to see what the news tells them before acting.

 

Often a market will run up minutes or hours before a report, if they are expecting good news. That's why by the time the report is released, price can often fall out of nowhere. This is especially the case when the news confirms what is expected or the numbers are the same as forecasted.

 

(main sources: Marcel Link, Justin Mamis, John Magee, and my own personal experiences)

[firewalker 10]

"Many times unexpected news may come out that is the opposite of what the market has been doing. Initially the response is rapid, hard move the other way, but once traders take a deep breath and reevaluate, the market normally will continue in its set trend. I can't count how many times a downtrending stock reports better than expected earnings, has a quick bounce, and then spirals back downward.

 

The news isn't important here; it is more important to see how the market reacts to it after the initial move. Fundamentals should be believed only as long as the technical signals agree. Too many times a trader will stick with a news story and not let go no matter what the market ends up doing. Opinions mean nothing to the market; the market goes where it wants to, not where you think it should go. If the market shakes off news and continues its trend, a trader should ignore the news and follow the market." - Marcel Link

[firewalker 10]

"A large problem with news releases is the figure is never the whole picture. For an intraday currency trader, I for one do not pay attention to numbers when released because the figure itself is only part of the picture. Many newbies believe if it is X = long and Y = short but it is never that black and white.

 

How can a home retail trader know the real story and act accordingly. Would a retail trader ever get the release in time in comparison.

 

Obviously the news affects the price and 99% of the time the end reaction can be foretold to a high degree through technical analysis so from both points of view, for the retail trader, it is better to work purely from the chart IMO."

 

I buy Company X as at Y date on the close. The next day the stock goes X dividend and price drops by the requisite amount. The information was not in the chart that it would do that ,it was in knowing that the company was going ex div the next day and you could expect the price to drop.Ergo ,all you needed was not in the chart.

 

..............

[mister ed 10]

Welcome Firewalker - interesting stuff!

[brownsfan019 17]

fire - good stuff, but that's a lot to read in one sitting.

 

Give us some breathing time, ok?

[brownsfan019 17]

But to answer your question - I voted no from a pure daytrading standpoint. As far as the day-to-day moves are concerned, I only want to see the chart. It's cliche, but I agree w/ the statement that the chart tells you everything you need to know.

 

Now, on a longer term perspective, which I will define as investing, I do consider fundies. I do not believe there is a 'long term trader'. I think by definition a trader is one that actively trades. Once you call yourself a long term trader, I believe that is synonymous with a trade gone wrong and now you have turned into an investor.

[firewalker 10]

fire - good stuff, but that's a lot to read in one sitting.

 

Give us some breathing time, ok?

 

I realize that, but I just wanted to put together the series of posts I made elsewhere, so that the basics are there. I'll leave it like this for a while, it's definitely a lot of text.

[Sledge 13]

Great thread Firewalker. I agree with you 100%

I actually only use the news to see if it will push an instrument to a Support or Resistance level. That tends to be the case most of the time on a major news release.

 

Scenario usually plays out like this: Push to a resistance level, trap the would be bears, then "horn" them as it climbs back northward!

 

Kudos on starting the thread!

Sledge

[fifty2aces 10]

FW - glad to see you here, it's unfortunate that T2W is getting "noisier", but I always enjoyed your posts there, and look forward to seeing more over here.

 

I do follow fundamentals, although only for 2 reasons:

 

1) I find them interesting, so it makes for some good reading after the close

 

2) To ensure there are no major economic releases that I need to watch for - example would be NFP or interest rate announcements - while I don't use them to make trading decisions, it's good to know not to put on a trade with a tight stop just before a load of volatility.

[firewalker 10]

"The people who tell you that commodity prices today are driven by “economic fundamentals” are the same ones who said that house prices in Britain were rising because of land shortages. The amazing thing is that just months after losing hundreds of billions in the housing and mortgage bubbles, investors and governments around the world have reverted to the discredited fallacy that financial markets always reflect economic reality, instead of the boom-bust cycles and misconceptions that George Soros's book vividly describes."

 

http://www.timesonline.co.uk/tol/comment/columnists/anatole_kaletsky/article3980797.ece

[nasdaq.nyse.day.trader 10]

It's one of those deja vu threads all over again..........

Good stuff firewalker

Not much evidence of bandits here; I might start posting myself.

Richard

[firewalker 10]

On Friday, 'important' figures about existing home sales were released at 1600PM (time on the chart). The exact minute is circled on the 1-min chart..

 

If you look back at the chart of the day, I think it's clear to say the news had almost no impact, other than a very temporary effect. On a 5-minute chart this spike completely disappears and even the volume doesn't mean anything.

 

Price was on the way down to support at 470 and the news could not change that in any way.

 

[Trader333 10]

It was highly unlikely to have any impact because the actual result was pretty must as forecast.

 

 

Paul

[firewalker 10]

It was highly unlikely to have any impact because the actual result was pretty must as forecast.

 

Paul

 

Actually, the fact that the result is as forecast, does not automatically mean the market will not react.

 

This is an example of April 30, where the FOMC decided to lower intrest rates to 2.00%, exactly as predicted. One could hardly say there was no impact in this case... As always with news, 'good', 'bad' or 'neutral' news, might be fun for analysts, but is mostly irrelevant for traders.

 

 

On Friday, the market was attracted to support at 470, almost like a magnet. Therefore, odds were higher that it would continue lower after it broke down 570.