Show me the chart and I’ll tell you the news. We often joke about this in trading, trying to figure out how the market might price in news and economic data. We also often see accumulation and distribution into news that shows how the market was being positioned prior to it being released.
But what we most often see is disbelief in price moves because they “don’t make sense with the narrative”. News moves the market, that is sure, but as traders we do ourselves a disservice to attach a bias to the news, because more often than not, the moves that come after seemingly make no sense. We must remember that the market is an entity built on option flows, volatility, fear, and most importantly, sentiment.
But all of this, sentiment, news, positioning, we can actually use to our advantage, if we’re willing to accept that whatever the “narrative” might be, can equally go the other way. The most obvious way of doing this is watching for sentiment to swing entirely one way. Calling for crash continuation, bleak outcomes, recessions, then we can look for bad news to hit, often marking a reversal rather than continuation. The boat gets so loaded to one side it can do nothing but tip.
Another way we can use this to our advantage, is to say what in the narrative would need to change in order for things to shift. We can see this with price - for example, as long as we’re under a moving average, nothing changes, once above that shifts. And we can do this with news and narratives as well. In this last rally, one of the things traders were watching was the advancing move almost entirely being led by tech. In many traders’ minds, this is a bearish sentiment since the rest of the market is not participating in the move. Rather, our perspective on reading it should change. If breadth is negative, it’s not bearish per say, but rather if we were to continue to go higher, we’d expect to see other sectors that were previously lagging also push higher.
Another seemingly negative narrative is a company laying off employees. On the surface, this would be seen as a company who isn’t making enough revenue and needs to tighten their belts. But in reality, we have seen several stocks bottom and rally 100’s of percents on the news that they were doing massive layoffs. Heck there is even a joke in the market that announcing bankruptcy will temporarily boost your stock 100%.
The goal then, is to use news, sentiment, and narratives to your favor. By identifying how good news and bad news move the price, especially when there’s a seemingly inverse correlation. By identifying the dog not barking, i.e. rather than identifying what is there, looking for what’s not there, what would need to change to look for a shift. By watching emotions and sentiment, people giving up, parabolic FOMO pops in price that quickly get sold, or V-shape recoveries that quickly trap bears and rocket higher. These are all tools that we can use to help our trades, no matter what the “narrative” says.