Should you follow the news?

One of the many trading/investing emails that I receive is from trader John C Burford, MoneyWeekTrader (you can sign up for free at Moneyweek.com).

In a recent email on the latest market volatility he said;

Now, if you read – and believe – the mainstream’s rationale behind this move, let me offer you an alternative explanation. It has little to do with the ‘news’.

The conventional story was Mario Draghi’s announcement "that the ECB stood ready to do ‘whatever it takes’ to retain the euro". There were also some positive earnings reports out of the US (a lagging data point). 

But remember on Wednesday, I noted that the market had completed a textbook five waves down to the 12,500 level on Tuesday – many hours before the above news emerged.

I stated then that I expected a rally from this level, and this is what occurred. 

He then goes on to say;

In other words… the ‘news’ followed the market!

But most believe the very opposite and this is one of the many market myths that I aim to bust in these emails. Keep reading them...

An essential point to understand about markets.

If you are, or would like to be a serious trader, then you need to understand that markets are patterned and the patterns are virtually independent of the news flow.

Burford uses tramlines, Elliott Waves and Fibonacci numbers and has produced a number of videos explaining his methods.

http://www.moneyweek.com/online-trading/spread-betting/spread-betting-video-tutorials

But is it possible to trade without taking notice of what is happening in the news?  Is it really the case that all the information is already there within the charts?

I would suggest that some news events clearly have an impact on the markets and some traders simply trade off of the news.  They wait for certain announcements or particular economic numbers, especially from the US, or Fed meetings, interest rate decisions, etc.  Very short term trading when a sudden news announcement can see the markets move one way or another very quickly can often be seen as noise, not necessarily a beginning of a bigger move.  Day traders may well be able to trade these, but swing and position traders may well ignore them.

Individual companies may also be hit by news events, i.e. a profit warning, which no chart can forewarn you of.

The timeframe that you are trading may also play an important role in determining to what degree you should take note of the news or just let the charts be your guide.  For the last month or so I've posted regular charts here showing the 20/50 dma, a very basic indicator of market direction.  What is interesting is that despite all the bad news about, these charts have basically gone against the newsflow.  The charts are showing that price is going up, while the news hasn't really given us any reason to be that positive.

One chart that looks very good has been the Eurostoxx 50.

The trend was up before Draghi made his save the Euro at all costs intervention last week.  Would the 50 dma have held if he hadn't?

Elliott waves give the believers of such strategies a more "scientific" type approach towards their technical analysis, although there is an art to actually being able to spot each wave, as even those that use it don't always agree on where the individual waves begin and end.

Still, I would say that there is a case for ignoring the news when trading (or investing) because if you watch it too closely and fear what may happen because of it, you may well miss opportunities. For example, the internet is full of fear and doom and gloom right now and has been for some time, Nadeem Walayat, editor at The Market Oracle calls it the blogosfear.  Many who bought into the doom and gloom after 2008 missed out on a great bounce in the markets because they feared things would get worse as the Greater Depression hit us.  

Another point to remember is that many of those peddling fear and greed may well have their own reasons for doing so. Extreme pessimism and optimism - remember Dow 36,000? Or Dow 100? - sells.  

Increasingly in the last 2-3 years, Eurozone problems have also fed the anti-Eurozone lobby a treat.  What more proof was needed that it didn't work?  Accept that the chances are Europe would be in just as bad a state Eurozone or not. After all, the UK is not a fully paid up member and we nicely built up the debt, which we are now trying to reduce by a mixture of cuts and money printing, as if that is the answer.  I mean, if everyone was "printing" money to their hearts content what could possibly go wrong!

So, I tend to no longer bother with websites, forums and blogs that preach a certain economic and/or political message.Ignore the doom and gloom merchants and the supreme optimists, historically they are wrong 99.9% of the time.  They only waste your time and pray on your fears and greed.  

Trade or invest in what you see on the charts, using for want of a better term timeframe analysis, backed by fundamentals.  Charts are simply showing us the herd behaviour of those in the market, in one sense the news is already there and barring the type of news that leads to a crash that no one can really predict with any accuracy, we should simply trade what we see, up or down and use whatever technical analysis we can that enables us to do that.