Science of Stock Price Action:
Lots of times, market participants look at news flow in an absolute fashion. If it sounds good it must be good without understanding how the market is positioned for the news flow. It has been seen that the news by itself does not mean much. What matters: How stock reacts to the news. It tells a lot about market expectation and what's in the price.
Last week - most of the department stores came out with horrible earnings number...disappointing same-store sales but the stock reaction was extremely positive. See it for yourself
Macy's latest quarterly revenue declined 3.9% compared to the prior year. The same store sales down 2%. What stock does: Look at the huge gap-up rally.
Ralph Lauren's quarterly revenue declined 4% and the same store sales down 6%. What stock does: Look at the huge rally.
NOW THIS WEEK: TJX, owner of stores Marshalls, HomeGoods, and T.J. Maxx came out brilliant set of numbers like same-store sales up 4% and earnings up 5%. What should have been the stock reaction? - Well see it for yourself
There was a Gap down Selling (Some people can say: Bacchey ki Jaan lega kya)
I know some people can call this a rigged market....Bad earnings Numbers and stock rallies and Good earnings numbers and stock is down....
Let me explain the above situation with a story
Situation A: A Child scores 94% marks and secures 3rd rank in his school.
Now imagine, you have to visit their home and you know the above information - what would you visualize - A happy cheerful home, but then you visit their house and see sad faces. What would be your reaction? - What a weird family...rigged family 🙂
Why?: The child was a brilliant student all his life. He never scored less than 96% and always used to secure the first rank. This is the first time he got less than 95% marks and secured 3rd rank. The disappointment in the family will always be obvious.
The same thig happens with a stock. Sometimes a company comes out with a result: Net Profit up 50% and stock tanks 10% and people say: Oh what a rigged market without understanding what market expected out of the company
Situation B: A Child scores 45% marks and just gets passing marks in all subjects.
Now imagine, you have to visit their home and you know the above information - what would you visualize - A very sad home, but then you visit their house and see everybody smiling and happy. What would be your reaction? - What a weird family...rigged family 🙂
Why?: The child was very bad in studies. The parents expected that he will fail in the exam but somehow he survives and gets passing marks in all subjects. Obviously, parents were delighted to see that and hence happy
The same thig happens with a stock. Sometimes a company comes out with a result: Net Loss of $200 mn and the stock rallied 20% and people say: Oh what a rigged market without understanding what market expected out of the company.
The Financial Market is traded by human beings and hence every behavior of market can be traced back in society
Next time, never form an opinion just based on how you perceive the news on an absolute basis. Focus on the market expectations which generally gets captured in the reaction.
Science of Stock Price Action
There is no complex science behind Visualizing patterns. All you need to do - keep your eyes open. In simple words, keeping the mind open to several possibilities. I have captured these simple lessons in "Science of stock price action" video book.
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Disclaimer – The state of the market notes is Deepak’s perspective on the market. The column is purely for educational purpose. Nothing contained herein is a solicitation to trade or a recommendation of a specific trade. By reading this publication you agree to make no trade relying in whole or in part on the comments of the writers