All the News That’s Fit to Trade

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MARKET WRAP UP 07/15/10

After a morning gap lower, followed by choppy trading for most of the day, the market rallied into the closing bell in the final half hour based on a flurry of news events. Congress had passed the financial regulation bill, $GS had reached a settlement with the SEC, and $BP said that they stopped the flow of oil into the Gulf of Mexico. With the S&P 500 finishing up 0.12% to close at 1096, there was clearly more at play under the surface of today’s price action than that which met the eye.

As the updated and annotated daily chart of the S&P 500 indicates below, we are still chopping around the 50 day moving average, as well as the 1090-1100 zone. In my view, to presume that this is either a wildly bullish or bearish consolidation is premature.

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In addition to the S&P, the Nasdaq, Russell 2000 (small caps), and transportation stocks all indicate that we are still chopping around at resistance (see charts below).

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Trading based on news events can often be a tricky proposition. In fact, I generally abstain from trading based on earnings, big news events, etc.. The reason why I believe in doing so is because of the number of variables at play. As a trader who primarily uses charts, I want to mitigate as many external factors as I can before making a trade. Further, I am individual trader, and it is likely that some of the bigger institutional money has some idea about the news and is trying to price it in before I even see the flash come across my screen. Finally, I am a swing trader and not a day trader. Many of the news driven events in the market are usually good for just a quick scalp, before the action is faded as the smart money quickly takes profits.

In this case, the news events announced today would seem to erase much of the uncertainty that has plagued the markets for several months now. As the  daily chart of the $XLF shows below, it was no coincidence that the broad market began the early phases of its correction with the April 16th announcement by the SEC of the fraud investigation into $GS.

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Of course, my interpretation of that chart is that the market was ready for a correction, and the SEC investigation offered a convenient excuse to selloff. Either way, however, the issues with $GS, $BP, and the financial regulation bill have loomed over this market for the past several months. Whether the market rallies higher based on the closure of these events remains to be seen.

Turning to my portfolio, I decided to deploy part of my 80% cash position back on the long side today. Two setups intrigued me to the point where I bought full positions in $SAPE and $SWSI into the closing bell. With my current cash position sitting at 64%, I felt that it was correct to buy two good looking charts on the back of the possibility that the broad market uncertainty has been lifted. Their respective charts can be seen below.

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In sum, trading based on news is never a sure thing, and is often a trap for the retail investor. Today, we had several major events seemingly resolve. As always, the market is the final arbiter, and the reaction from the market in the coming days will illustrate just how significant today really was (or was not).

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TOTAL PORTFOLIO:

EQUITIES: 36%

• LONG: 36% ($NR $NTAP $LULU $THOR $SAPE $SWSI)

CASH: 64%

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