News Events Can Trounce Technicals
Day traders rely on charts and technical information for trading decisions, but there are times when news events can trounce the technicals. Traders should be mindful of potential news announcements and their impact on price, whether it affects price positively or negatively. More specifically, when news coincides with a chart pattern set up, traders should be nimble and adjust their trading strategy.
Example of News and Technicals Coinciding
Looking at an intraday 5 minute chart of PLUG on 03/25/14, there is a perfect example of a chart pattern setup coinciding with a news event. Through late morning and early afternoon, an inverse head and shoulders pattern formed with a target price of $6.46. This represented a 4.3% gain for traders who bought on the breakout above the neckline at $6.19.
Consider Adjusting Trading Strategy
Just prior to the breakout of the pattern, Plug Power released a news event which caused prices to surge relentlessly higher. The target price of the technical pattern was reached within minutes and prices continued to soar higher. The safe bet for the day trader was to take a profit at the target price, but traders who were nimble and adjusted their trading strategy could have seen double digit gains.
Look for a Topping Candlestick
A nimble trader could have waited for other signs the stock would top at the target price. For example, a trader could have patiently waited for a topping candlestick such as a doji or bearish engulfing candlestick. In this case, bearish candlesticks didn’t start forming until the $7.50 level, much higher than the $6.46 target price of the technical pattern.
Watch for a Break Below 8 Period MA
Many traders also time their exit decisions by watching the 8 period moving average. They won’t sell until prices close below the 8 period moving average. In this case, this method would have been extremely successful as price ended the trading session at $8.47 without closing below the 8 period moving average.
Technicals Combined With News Events Can be Very Rewarding
Although day traders rely almost entirely on technicals, traders should be nimble when positive news events present themselves. By being aware and adjusting the trading strategy, a nimble trader could have seen a 21% or even as high as a 36% gain by holding to the close of the trading session for the previous example. News events should never be traded alone, however when they coincide with technical patterns they can be very rewarding for traders.