Let me tell you about a recent observation of mine.
This is the weekly chart for OptionsXpress since its initial public offering.
This is the recent chart of Investools(IEDU) highlighting what happened to the stock when on September 19 they announced the acquisition/merger of online broker Thinkorswim. The stock quickly sold off somewhere around 20% on big volume for fear that the company had paid way too much in the deal. However, after the two day fear fest, there was a clear change in sentiment that this was a very good move and that Thinkorswim apparently has a lot of believers. How's that for a bounce!?! The clearing of resistance at 9.50 would have been a beautiful buy. Hindsight...
On that same day of the press release, OptionsXpress also sold off on heavy volume, but somehow a couple days of selling was all the news warranted and the overall trend really didn't seem to buckle.
(While we're at it, notice the double bottom reversal on this chart. Just like a double top, once it breaks the high point between the two bottoms, the target is the height between support and resistance of the pattern added to the price at the level of broken resistance, in this case 3 pts.)
Here's where it gets interesting. As an investools student, I was more or less shepherded toward OptionsXpress and used them as my first online broker. I was generally satisfied with their service, though I felt like they weren't very interested in hearing from me and my rookie questions whenever I called up for support. What led me to leave them, though, was that the commissions were too high for me and I knew I could do better elsewhere. I tried Interactive Brokers which was great for dirt cheap commissions, but you get what you pay for there and that's just about zero service. They definitely don't want to hear from you. I switched to Thinkorswim and quickly learned what a gem this outfit is. Not only did I get a warm, fuzzy feeling from my experience with them, but it was quickly apparent to me that they have a unique and very loyal customer base, almost rabid, I'd say. As I'm sure were many of their devoted and loving customers, I was a bit uneasy about the news that Investools was buying them for fear they would mess up a good thing. Regardless, it was clear to me that Investools had made a very smart move. Not only is Thinkorswim a force in its own right, but with a new and steady stream of Investools users being herded their way, the money would be flowing twofold, and threefold considering all those new Thinkorswim users will have already paid Investools for whatever educational services they purchased.
I haven't looked into it very hard, but I'm sure OptionsXpress has a customer base broader than just the Investools Sudents. However, I would think there are and were quite a substantial number Investoolers and I'd bet there was a relatively steady flow of new accounts coming from the Investools direction. With this in mind, I found it interesting that after the press release of the merger, both IEDU and OXPS had a hiccup and then continued moving up. Something was wrong with this picture. If TOS is going to getting a ton of marketing now AND a steady flow of new customers and the buzz that they'll then create, this can't be good for OptionsXpress.
I didn't really care to look into the details of what the numbers were and pretend that I could do the analysis better than all the professional market analysts out there. But I could draw my lines, which is what I did. I drew a resistance line from earlier in the year. Sure enough the rally stopped there. Just under two weeks later, on November 8, the stock had failed at making a higher high and put in a lower high. On 11/27 there was a big bearish candle for the official lower high in the trend. Looking back on it now and seeing the relatively low volume on that day, I would bet that all of the other market technicians who had any sense of what was in the air were playing this by the charts and not the news.
I drew in the new down trending resistance and the support line to form what looked like a descending triangle. (I should note that these triangles are continuation patterns, so to be an official descending triangle, it should already be in a downtrend. Nevertheless, the stock was sitting heavy on support.) I set an alert to email me on a move below 28.40 and it went off on December 11. I didn't take the trade intraday because it could have easily come back up at day's end just like it did on December 1. In fact, it did close a bit off its low. I hesitated to call support broken because of the lower shadows of the previous candles in that area, but using the candle bodies, support was clearly broken and a valid buy signal was there. I didn't take it because I didn't trust the chart and I feared losing money on a bearish trade in a bullish environment. (Note to self: Don't fear. Don't think. Read the charts.) The next day it confirmed beyond the shadow of a doubt but by that time it was far enough gone that the risk/reward was difficult to get past.
In any case, two days after my alert had me watching the chart breaking down, I watched and just about cried when on the morning of December 13 the company reported their monthly performance metrics and the stock gapped down in a big way with somewhere around 7 times average volume. Trading volume had grown but account growth had slowed. A Raymond James analyst downgraded their rating.
I don't know whether there were insiders who unloaded stock on those two days before the press release or whether it was just the mass of market technicians waiting for the same thing I was. But it's clear that the chart sent out a newsflash before the press did.
This is now a personal example where I had a hunch about something and it showed up on the chart before the press release came out with the bomb. Had I used my hunch and traded the chart, I would have gotten into a beautiful trade.
But there is another lesson here. Hunch or no hunch, news gets priced into a stock VERY fast. If we wait for the news to come out before acting, we can either miss the trade or get killed on a position we're in. So just as it goes for potential new trades, the charts just might tell you something about a trade you're already in before the news does. If you watch for it and listen to what the charts are telling you, you can get out before a nasty gap one morning. Have you ever stayed in a position when the chart was giving you signs of ugliness to come but you thought it still had a chance at coming back and then a bomb hit it? I have. That's something I'd like to see not happen again.
The moral of the story: Great phase 2 scores, rosey economic news, wonderful market, pending scandals, legal problems for a company, whatever. Trade the chart. Look for news and try to understand. But trade the chart.
And lastly....trade the chart. There's no news more up to date.
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