Thursday, September 30, 2010

Trade the news?

This is often easier said than done. Often, the news is old by the time you reach it, even if you subscribe to the many real time lightning fast breaking news services devoted to trading for a premium.

However, I have noticed one news situation that tends to pan out even if you are slightly late (on the short side of course!) which is the phenomena of a lawsuit (even better a governmental body suing) a company with stock that has borrows. People panic, and remember a lot of this game is understanding and taking advantage of human nature, since your job (never forget this) is nearly always to trade the crowd, not the underlying equity.

Take FALC today in early trading. Despite being down tons yesterday and in after hours last night, it is gradually selling off even more. Say "we are getting sued" and it is like a free lunch for shorts. Sometimes the lunch is free 2 days in a row! It is one of the easiest shorts over fundamentals possible, IMHO.

This could still bounce today, but this price action which has happened in other stocks I have followed this year with lawsuit news, is very typical. Once this stock goes red (trades below the previous session close) on the session, it is a shorting signal.

You just hang out a few hours then buy to cover and celebrate their bad fortune with dinner at Red Lobster!

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