"Every day, self-proclaimed stock market experts tell us why the market just went up or down, as if they really knew. So where were they yesterday?"
The average investor doesn’t understand, or at least doesn’t appreciate, this lag in reporting. What most investors do when they hear either good news or bad news is to immediately react to the news by either buying or selling the stock. And since this lag in the news means that he’s reacting on old news, he’s getting in late.
News tends to spread out gradually over time. And over time there’s a gradual building of volume and inertia in the buying or selling. As I’ve pointed out in other posts I may never know the real reason that investors begin to buy or sell a stock in unison but in all likelihood I will eventually be given a reason by the business news media. They give a reason every day for why the stock market moved and sometimes they’re even correct. But whether they know why a stock or the market goes up or down they’ll always give a reason when they quote prices during the business news. It both reassures the public and at the same time hides the ignorance of the business newscaster who in all likelihood doesn’t know any more that you or I do.
Here’s why charts are so important to me. Traders trading stock in the market is what creates volume, and volume along with price is recorded and plotted moment by moment on a stock’s chart. Any good charting website like StockCharts.com or FINVIZ will show in real time exactly what’s happening to a stock’s price and volume. If a stock is increasing or decreasing in price while increasing in volume, then I know that someone knows something and they’re acting on that information by trading in the stock. As volume builds and the price starts to trend, I’m seeing the evidence of trading on that information as it spread out to other traders who are acting similarly on that information. The more volume that comes in as the price is extended the better (or worse) the news will be when it’s reported hours later on the internet, that evening on television, or tomorrow morning in the newspaper. The poor guy that finds out in the newspaper will more than likely be the last to the party.
So what good is the news and how do I use it. If the news is good I expect buying to come in the next day. If the news is bad I expect selling to come in the next day. This makes sense to the average investor so he buys or sells on the news and expects the market to confirm his investment decision. Sometimes, however, good news or bad news breaks and the stock trades sideways. At that point the market is telling me that the news got out yesterday and is no longer driving the stock. The average investor got in too late. I immediately check my momentum indicators and oscillators to see what the stock is really doing and most of the time it’s getting ready to roll over and reverse direction. Knowing this I trade with the traders of the stock and not with the news.
In the end stocks are going to do what stocks do and not what’s expected by the news. The news is a lagging indicator. It’s like trying to drive down a road while only looking at the rearview mirror. It’s impossible to do. I watch charts and not the news. I look at charts to tell me when to buy and sell stocks. If you spend the time to understand what price and volume are telling you and you learn about momentum indicators and oscillators and what they can tell you about the movement of stock prices, then you can visually see which way traders are pushing a stock and you can financially benefit from this information. Knowledge can make you rich if you learn how to act on that knowledge. And simply by thinking you can earn a decent living.