If you have ever wondered about the impact of news on the price of a stock, then this article should be of interest to you. Even if you are not an active trader, news events drive price in ways that many investors and traders do not expect. Much of the surprise comes from the fact that they are getting their news from television, online versions of print media, or from online blogs. But where do these news outlets get their news, and why has price usually made a big move by the time that they are telling us to expect it.
If you are an active trader or investor, and want to get ahead of the curve when it comes to capitalizing on news events, then wire services like Trade The News (tradethenews.com) can be your best friend. They get alerts out to clients on a time scale that can never be replicated by traditional media, and also provide insight into the directional bias of the general markets via squawk feeds from Wall Street trading pits.
This morning for instance, the following alert came across the audio news wire and set the stage for a trading opportunity:
8:48 JUNO Hearing strength attributed to circulation of positive financial blog mention
– Source TradeTheNews.com
The early word on the street was that takeover chatter was once again circulating on JUNO and, long before this would receive mention in conventional media outlets, the wire service alerted us to the potential for a trading opportunity.
The chart in figure 1 shows what was happening with price of JUNO when the news hit. Note that as the initial alert was issued, price had already made a significant move higher (1), with share prices climbing from $41 to $42. By waiting for price to retrace lower, traders have the ability to enter after a price improvement is in place. The problem for most of us is figuring out where that retracement should take price, where to place a profit target, and where to place a stop. In the case of JUNO, the move back down was to the $41.47 floor trader pivot. This provided a great opportunity to buy for an expected move higher, with a maximum stop loss just a few cents below the $41.47 line.
Figure 1 – Juno Therapeutics Inc
So far, we have a plan for entry, and a plan for what to do if things go wrong. The next critical component determines what to do if things go right. In figure 2, we see a common technical tool, Fibonacci price projections, deployed to give us an idea of where an initial profit target might be placed. In this case, $42.38 is the first target. With a $41.50 entry, this represents a $0.88 per share profit, and that something that will make just about any active trader very happy.
Readers who would like to see how these types of targets are developed and used can watch one of my many videos on the topic. Please remember that these price projections represent a great way to plan both intraday and swing trades.
Figure 2 – JUNO Profit Target
Finally, in Figure 3, we see how the trade played out. By taking profits at the target, we missed out on some additional profitability, but we also traded by some very good, rule-based techniques. JUNO generated everything that we planned for, and provides a great example for all of you less active investors out there of how active traders make their living in the markets.
Figure 3 – JUNO Trade Reults
This Chart of the Day installment is a little different than what we usually provide here. It is not focused on big-picture swing trading moves, but rather gives you an idea of how we make our living as traders. If all of this is of interest to you, I encourage you to join us in TraderInsight.com’s online stock chat, The War Room, for great trading ideas every trading day from 9:00 am – 10:30 am ET.
Good Trading,
Adrian Manz