What I found interesting was that some traders were able to jump aboard this development and make money on the short side, while others found themselves relatively confused and even paralyzed.
So when is news a true game changer? How can we recognize when the psychology of the market has genuinely shifted? The charts above, from the excellent Stock Charts site, depict two things that help us identify when news items are truly newsworthy.
1) Volume and Volatility - Notice around the 11 AM time how we got a large bar to the downside on meaningfully increased volume. This is important. The extra volume coming in represents new participants in the marketplace. Typically these are institutional participants who are moving considerable size in the market. The fact that they enter all at one time, driving the market meaningfully lower tells you right away that participation and sentiment has changed.
2) Breadth - As long-time readers know, my favorite moment-to-moment indication of breadth of market movement is the NYSE TICK ($TICK). This represents the number of stocks on the NYSE exchange trading on upticks minus those trading on downticks. Notice how this had opened in negative territory, as many stocks opened lower than their prior day's close. We then saw buying come into the market during early trading, sending the TICK in positive territory. At that 11:00 AM hour, notice how TICK slammed negative, hitting levels of -1200. This is an extremely negative number and can only be achieved when institutions are dumping baskets of stocks (so that everything downticks at once).
When we put those two factors together, we can see that the distributions of price change, volume, and breadth completely shifted around 11 AM. We can then walk forward to see if those distributions continue their new pattern. Sure enough, SPY continues to trade with elevated relative volume and $TICK continues a negative distribution, failing to reach its morning highs. The hypothesis you want to entertain at this time is that the news was indeed a game changer and we could see a trend day, as large participants unwind large positions that can't just be dumped on the market. Notice how selling the first bounce after the 11 AM washout was indeed a good entry, even if a trader failed to hit bids at the first indication of volume and negative breadth.
No one could be expected to predict what happened at that 11 AM hour. Successful trading does not require such prediction. Rather, it requires an open mind and an understanding of what is happening moment-to-moment in the marketplace. A valuable feature on many trading platforms is a playback function that allows you to replay market action to see how the day unfolded. Playing and replaying key market scenarios is a great way to accelerate your pattern recognition abilities, so that you will be sensitive to similar patterns in the future as they emerge. Simply writing in a journal is not sufficient. We need to train the brain for real-time pattern recognition if we are to act in the heat of the moment.
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