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You've Heard the News

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And so has everyone else. Yahoo (YHOO) reports earnings July 19, and traders don't like the results. Yahoo's stock gaps lower and falls on strong volume. Although the stock price closes off its day's low that day, it retains most of its loss. Was it time to sell YHOO?

Not right then. Contrary to popular lore, that strong volume might have been your clue to stay away from a short position at the close on July 19. Please note that the charts in this article are not current, as this article was prepared late in July. I have purposely not updated them as I review the article on Friday, August 4, so that we can see together how the predictions panned out.

Annotated Daily Chart of YHOO, as of 7/26:

YHOO's ultimate direction isn't yet known. What is known is that after one more day of consolidation after its earnings announcement, YHOO moved higher. As I review the article Friday morning, YHOO is currently at $27.32.

Bad news drove YHOO lower on July 19, but the high volume and close off the low may have been a sign of accumulation by the big-money entities, rather than a sign of selling.

The case might have been clearer if the close off the low had produced a longer lower shadow and is somewhat inconclusive with the small shadow that was produced. Because of the inconclusiveness, I wouldn't be surprised to see YHOO come down and retest those July 19-20 lows.

However, on that day, any lower shadow in the context of high volume alerted me that the drop might be about finished for the short-term. I would have suspected that big-money entities could have been soaking up the stock that the retail crowd was selling. Although the case was inconclusive, I would have been worried about the possibility of a short-term bounce at least, a bounce that did occur.

Sometimes the evidence isn't so inconclusive. Be careful when good or bad news hits, because the truth is that big-money entities may have predicted that news and acted on it long before the retail public does. They may be waiting to use a news-driven move to accumulate or distribute stock. And they may be doing the opposite of what retail traders think is logical.

You definitely don't want to take a side against the big-money entities, so it's sometimes necessary to turn your thinking around a little. For example, to illustrate my concerns about the news-driven drop and the price/volume patterns on YHOO, take a look at what happened when Boeing (BA) reported earnings on October 26, 2005. The pattern was similar.

Annotated Daily Chart of BA:

When a badly received earnings report drove BA's stock lower, the inordinately high volume proved that big-money people were involved in the action. So what were they doing, if they were involved? The close off the low of the day suggested that they were snapping up the stock that retail investors were discarding. Note that BA did reach a lower low a couple of days later. Institutional involvement, most probably in accumulating, didn't guarantee against lower prices. Momentum sometimes carries prices lower after such a move, and BA had been dropping for several days. But then BA was ready to take off, as that likely accumulation pattern suggested that it would.

BA's bounce off its low after that news-driven drop was more pronounced that YHOO's was, but the other correlations are easily noted. Big-money people were clearly using that news-driven drop to accumulate BA stock, and there's at least a suspicion that they might have been doing so with YHOO's recent news-driven drop, too. As yet, it's unproven whether they were buying ahead of an anticipated short-term bounce into the gap or something more, and I would want to see how YHOO acted on retest before I made further predictions.

By the time most retail traders--you and I--learn some encouraging or damaging piece of news, big-money entities often have long known the news. GM's recent well-received earnings announcement might be one example.

Annotated Daily Chart of GM:

Big-money entities began their buying well in advance of GM's well-received July 26 earnings report. I was watching GM late last year and this spring and commented to another OptionInvestor writer that it was showing signs of accumulation, but I could not bring myself to buy, despite what I was seeing. Dire predictions were still being made daily about the likelihood of GM's swift demise. The signs were there, however, that those with deeper pockets were buying back then.

These illustrations all point to the necessity to be suspicious of news-driven spikes, whether to the upside or downside. When news hits, you should be asking how the big-money people are reacting? Small volume means that they're not paying much attention and it's the retail crowd driving price up or down. Big volume means they're involved, but are they buying or distributing? Did price close well off the high or the low of the day?

When you scan the chart below and the question it asks, remember that this chart was prepared in late July (as evidenced by the missing daily bars for subsequent days), but I've deliberately left it as it was so that we can test the veracity of the prediction.

Annotated Daily Chart of GM:

Given the close well off the high of the day after the earnings announcement and the larger-than-normal volume, I would have been suspicious that some of those big-money people who had begun accumulating stock earlier in the year when the stock was between $18.00-20.00 may have used the spike to sell or lighten their positions. That combination on a news-driven spike led me to suspect that GM might trade sideways or even dip. There has, in fact, since that the preparation of that chart, been a short-term dip at least, into the gap. As I review this article prior to submitting it on Friday morning, GM was at $31.71, having dipped and then risen a bit from the week's low. As yet, I don't see definitive signs that there was a whole lot of institutional buying on that dip, so I'll be eager to see what happens if it should retest that recent high.

You need to be suspicious, too, on a high-volume spike to a new recent high or new recent low move after news hits the wire. The big-money crowd has been involved if volume is inordinately high, and you need to decide what they were doing. Don't assume that high volume on a dip to a new low means that they're selling or that high volume on a climb to a new high means that they're buying. If that inordinately high volume is coupled with a bounce well off the new low or a pullback well off the new high, they might have been doing the opposite.

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