News Driven Market Demands Adjustments

Problem:

There are two important factors about the current market environment that play an important role into how we approach our trading strategies going forward:

A) The first factor that requires careful consideration is the fact that buyers have been fairly aggressive about buying dips. We have now seen the market hammered with bad news for weeks. This tells us that bad news is likely priced in and that a slightly bullish bias exists at this current time. That said, this is probably not a market that is ready to rally significantly; rather it's a market that is fighting off efforts to take it lower. This is an important distinction.

B) Second, on a daily basis this market is news driven and range bound.

The second factor is probably the most important factor to consider because it is this that has been affecting our trading results and it is to this that we must adjust our strategies to meet the current challenges that we are faced with in this unusual market.

The lack of a trend and the extreme volatility driven by daily news events has caused trade set ups to appear good and solid on one day only to evaporate the following day. Agilent Technologies (Ticker Symbol: A) is a great example. Two days of heavy volume and a tight range indicated that it was ready to break higher. When the market gapped down Friday the set up that drew us in eroded and A gapped down with the market.

Solution:

The solution to this is to adjust our strategies to the market conditions that exist. That means we must anticipate gaps and weak opens on some days. Likewise, because we have good evidence that dip buyers are aggressive even if follow through buying is not, we need to look for ultimate support on the strongest stocks and wait for the price to come back to us.

In other words, forget about following strength in this market. We need to buy weakness in strong stocks. This means we need to be patient. Much more patient than we have been; waiting for the weak open like the one last Friday before buying in.