Page 368 - THE MARKET WHISPERER

364 PART 10 - Winning Trades

The cumulative result of dozens of such gaps will, most likely, be zero.
By contrast to quarterly earnings reports, the outcomes of analyst

recommendations can be fairly well predicted: for example, a “strong
buy” recommendation by a Goldman Sachs analyst will generally cause a
price spike. The “sell” recommendation, or a significant legal claim, will
generally cause drops in the stock’s price. The problem with financial
announcements is that you can never know when to expect them. Here,
too, statistics comes to your aid. Unlike the completely unpredictable
market reactions to the publication of quarterly reports, when you buy
a strong stock which is rising, it is highly presumable that one reason for
its uptrend is a positive announcement which until publication had been
known only to a few with insider knowledge who began buying before
the public. True, they are not operating legally, but do not be naïve. If you
have bought the stock because it is demonstrating strength rather than
because you know a positive announcement is about to go public, then
following the announcement the stock will generally continue moving in
the direction in which you are trading.

So far, we have analyzed a situation in which you “sleep” on a stock for a
swing of several days. Next, we will relate to intraday trading.

Intraday Trading at Announcements

Our goal is to profit from a stock’s volatility, whether derived from a quarterly
report or an announcement, rather than guess the stock’s direction. Before
the start of trading, we will check several financial sites for stocks expected
to make reports public at the end of the day’s trading, and look for stocks
expecting changes due to changed analysts’ recommendations. They will
be fed into a follow-up list, and if you have sufficient computer screens, I
strongly recommend displaying each one with its own chart and following
them all over the course of the trading day.

When should we buy, or execute a short? First of all, remember that we
are not going to enter any stock before we have seen its actual direction in
real time. We will examine its direction and hit the button only when the
acceptable technical formation develops. Notice that market direction will
have much less impact on stocks in the news than on other stocks. In other
words, even if the market is trending up and the stock you have chosen is
“suffering” from the analysts’ changed recommendation, you can still short
it. The success rate of the short will increase if the market is behind it,
but in this particular situation of reports and announcements, the market
direction is not vital.