How to Trade Around Unexpected Market News

2021-06-02 | Allison Ostrander

When the FED or the government make an announcement, the markets are likely to react. Whenever there is unexpected news, many new intraday traders can find themselves in the red after volatility takes over the markets surrounding the news.

On April 22nd, 2021, we found ourselves in the midst of unexpected news with President Joe Biden’s tax proposal, planning to raise taxes on the wealthy. It is times like this when traders need to be prepared for the moves that could affect their positions.

  1. What Happened: What a drop. Almost immediately after Biden released his proposal to tax the wealthy at a higher rate, we had a strong selloff. As many big hedge funds and industrial traders find themselves in this wealthier category, we expected the market not to react too kindly to the news. For those watching the intraday charts, we had a strong selloff, but the selloff fell right into support levels.
  2. Be Cautious: The most important thing to note around volatile news like this is to always stay cautious when you are trading. Be extra wary not to get caught in the selloff. Sometimes these announcements can cause knee jerk reactions in the market down to support levels, where the price holds, and then bounces. While with this news has less of a possibility to bounce, it is possible the market could chop around support. If the chop has a wide enough range, this can make room for some great intraday trades.
  3. Don’t get Emotional: If you hold longer term trades and it isn’t an intraday trade, don’t trade solely off the news and get caught up in what the shorter term move will be. It could end up making a great intraday trade, but don’t get emotional if you have time on the trade, or if it isn’t expiring. Oftentimes, the move reverses within the next market day or two. It may be easy to get caught up in the news and let that emotion drive you into or out of a trade, but this can be a very dangerous game in your trading. Psychology is one of the most important factors of this trading, and it is important to remember this when trading around unprecedented news. With these types of moves, it is easy to go into the dark side of trading and let your emotions guide you. Make sure to follow the technicals and make an objective decision based on what you are seeing on the charts.
  4. As with all your trades, only risk 100% of what you are willing to lose: It is unexpected news like this that reminds me why I am so mindful of capital risk on these trades. Especially around FED and unplanned news, the intraday trades you make should be treated like earnings announcements – meaning it’s 100% a lotto trade. By risking only what you are comfortable losing, you eliminate the emotional side and are able to play the moves around the news more strategically. I am glad we were able to close out of several of our trades for profits or breakeven prior to the news release, so we were able to recoup some of our capital.
  5. Be Mindful of your Technicals: Unless the technicals are also in line with the sentiment, I would prefer to trade just solely off the technicals. Oftentimes I have found the technicals are showing you what is about to happen, and the news is the catalyst for the move. If you are intraday trading off of the news, still be mindful of your technicals. Make sure that overall, if they are not holding up, then the news is a bit stronger and you will have to play it lower. If you find that we are pausing somewhere, like the 60-minute chart on the simple moving average, then sometimes these emotional moves still end up pausing at your technicals. That is exactly what happened and we paused there.
  6. SPX Example: Let’s see if this was a knee jerk reaction or if it caused a bit more of a sell off. One thing you should note if you are intraday trading and maybe got caught in this is we were making a bullish divergent bar, and if we closed below the 30 period simple moving average making this, be cautious that we might get a pullback. Especially now that we are pairing it with a pullback on the compound breakout tool. If it breaks the 30 period SMA before the end of the day, I would play it between 4,150 and 4,143. I try to use spreads to keep risk in mind when there’s news like this.Keep in mind it could always pop back up before the close of the hour. SPX was trying to hold 4150. If the SPX moved below 4158 or 4159, I think there could easily be a retest down to 4150 or maybe 4140 if we break this level down to the ATR trailing stop.

    On the smaller time frames, watch the resistance levels to see how they hold. It looked like we were holding 4150 and bounced back up to the 30 period SMA and were maintaining that level, making it seem like a knee jerk reaction in the news. It looked like the news would pause there and digest. If it holds 4160, I don’t think that heavy news would bring it all the way up, but we could definitely see some chop.

    Notice that we went right to the ATR trailing stop and held support beautifully, and held back up. SPX was trying to keep up 4150 and was still shy of 4160, but overall if you are seeing a whiplash move like this, this is when your technicals help you out at where it may pause or the levels it might trade into.

    We paused on the 60-min chart at the 100 period SMA, and sometimes those emotional moves pause at our technicals as well. We made a bullish divergent bar with back to back divergent bars, showing a sign of consolidation. It took the fourth bar to take the higher high, so you would have had to hold this trade until the next day if you wanted to take it back up.

    The news brought us right back down to a support level around the 10 period simple on the daily chart. We bounced back up the next day and traded within that choppy sideways action between 4180 and 4125. This chop allows things to reset. There were signs of consolidation with choppy momentum, the choppy compound breakout tool, and bollinger bands coming together. Overall the price was holding the 10 period support, which is a good sign that ultimately as long as we can hold that level we’ll test that 4200 and if we break above it, we’ll continue that bullish trend.

    *** Daily Chart ***

    As you can see, all those levels were hit that day. We went right into the support levels I was mentioning when the news broke out. When you get strong sell offs like this on the intraday charts, be mindful of the psychological levels. 50s or double 0’s are psychological areas where we could have more pauses, when buyers come in and find it as a good buying opportunity. Had you been emotional, you would have sold off emotionally and would’ve missed the bounce back up and been stuck with a loss rather than holding onto the trade.

Once again, match your position with the technicals and make sure you keep risk small, and only risk what you are 100% willing to lose. When news drops like this, volatility will spike and you will have to pay more for those options. As soon as the market digests the news, that volatility will drop back off, especially if it is near-term expiration. Always be cautious with how that works.

All in all, don’t get knee jerked by the markets. Be extra cautious around unprecedented news if you are intraday trading. If you have long term positions and are able to, try to hold onto another day, so you avoid getting knee jerked by the move, and trading emotionally rather than what the technicals are telling you.

As always my fellow traders, may the trade be with you!

Allison Ostrander