FUNNYDAMENTALS in Better Trades

By Loredana Sargu

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The end of last month, a broker from New York calls me. He has called several times over the last year to tell me I need to open an account with him because he has such a great buying opportunity. He was armed with a strong list of fundamentals that just had to convince me to give him money to buy this stock. Well I enjoy talking to him because he proves my points about staying neutral and playing the stock not the fundamentals or the news.

So I looked at the stock chart and shook my head. I tried to explain that the stock was breaking a long term support line and could pull back a long way to find new support. Oh… that raised the rhetoric level and the intensity of the pitch. The long and the short of it was that once again I did not send him money. He was not smiling and now, two and a half weeks later, I smile and say "Ok, now I would go bullish on Sirius Satellite Radio SIRI. The fundamentals were great. New car manufacturers were signing deals to add SIRI to their production line, but…

SIRIUS (SIRI) had climbed a nice support line for 14 months. It had recently broken through the support line and traded in a 30 cent range for 6 weeks. The news was accurate but not new, and it had not moved the stock up yet. The question was w will the public reward the news and fundamentals? The answer is maybe they will and maybe they won't. Maybe they will reward it a lot or a little. The traders and the public vote with their bid and their ask and there is no ombudsman to complain to when the stock fails to respond the way you were certain it would go.

I believed that the public would come back to buy SIRI when it reached a level that seemed cheap and a sure bet against future value. Now can news create value? Yes, but it's not a given. People create / assign value to the news. The news can be great but unless the stock looks cheap the market will ignore it or keep selling.

OK, so you set an alert to let you know when / if, it reached the next good support area (slightly above the $2 support line). This is to make sure you don't have to stare at it for days on end and also to make sure you don't miss it if it happens quickly, which is precisely what happened. The dip to support was quick and temporary. The alert was hit and bullish / bearish contingency orders are activated and when the stock recoils back up the bullish entry order is executed.

Now, the stock may come back to test support again. That's fine, it may run up and not look back either, the entry point was right for the pattern. For now the stop is $1.97 and in fact it may be a Switch Stop (where we switch from bullish to bearish) but the support was recognized and acted upon so we go with it. Maybe the news / fundamentals will be rewarded here but maybe not, maybe later, maybe never. As long as we stay neutral and allow for the stock to do the opposite of what it looks like it will do, we can trade it right. Habits and patterns are the trader's best friend. Why? Because they can be seen and followed. The 14 month trend was rather disciplined and so a drop to a known support made sense.

Now, will it return to confirm and close on the support line? It happens often but it is not guaranteed. Will it just keep climbing? Maybe. Right now all you have to do is defend the $1.97 bearish entry which is now your stop. You cannot affect the outcome so just set the criteria of your trade and risk and wait.

My take on news, which includes fundamentals is this… it's like a football. A football is a ball and if you bounce it, it might bounce right back up but it might not. It's funny that way, you just don't know how it will bounce. A $10 piece of news may get $2 of movement or $10 or $12 or nothing. And after the fact CNBC will try to make it all sound logical but the fact is, the traders had an agenda and they interpreted the news to fit the current conditions.

In the end the chart wins because it is pure. It is the tracks in the sand. People are creatures of habit and the market will reflect how much discipline the traders of a certain stock or market have. If support is $3 away then a $1 bad news item can magically produce a $3 drop. If it is at support already, a $1 bad news item could see a $.75 bounce up. Kinda funny huh? Go figure.

The key traders buy when they sense the public is ready to buy. They test key price levels because they do not want to go it alone. They want to lead the action either way. So news is subjective and unfulfilled expectations are at the root of many a sad face on investors and amateur traders. I say "Find the Pattern and play it until it breaks" and "Play the stock not the news / Funnydamentals". Look, Funnydamentals is not a slam of fundamentals; it is simply used to show that there is a higher authority.

See you in class!

Ryan Litchfield with Better Trades

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