What is a Great News Signal?
The Great-News Signal sees a price collapse despite a positive news release and bullish sentiment condition. Wall Street historically referred to this price reaction as buy the rumor sell the news.
Failing to rally on good news is one of the clearest signs that a rally is overdone. Buyers are absent since the majority are already committed to the longside. The signal carries added clout should our set-up, the 3SR, a tectonic bull trap, develop across major resistance.
Bullish Sentiment Catalyst
Great News Signal was the term coined by the late Mike Burke of Chartcraft. The shock news really needs to be special - great news is of course a level above good news! A massive earning's beat, or perhaps news of a company buyout, are examples of great news. A spike in bullish sentiment is natural following such news. At the macro level, perhaps an unexpected Jobs number exceeds expectations by a huge margin. The news could be Geopolitical. In essence, anything that is perceived by investors as beneficial to their portfolios.
The capturing of Osama Bin Laden, a bullish event for the U.S. market in May 2011. However, the market failed to rally at all, immediately selling off, losing 22% over the following five months! This example epitomizes a buy the rumor sells the news reaction.
A surprise interest rate cut by the U.S. Federal reserve in September 2007 is a further macro level example. Bullish sentiment exploded, the market rallied. However, a few weeks later, the stock market rolled over into a bear market, bottoming out in March 2009. Therefore, despite a market positive news story, ironically it provided the spark that gutted the barn.
History has shown repeatedly that bullish sentiment balloons to an extreme, becoming a bearish catalyst, reversing market direction spectacularly.
Buy the rumor sell the news - How to trade it
Imperative to use sentiment analysis with this signal. Headlines need to be laden with superlatives and the champagne bottles need to be popping! Bullish sentiment will be rampant and expanding. Details on how to identify a positive sentiment situation can be found on our contrarian gauge page.
In a bull market, the great news signal should be used to turn defensive, take profits on long positions, raise cash. Anticipate a brief dead-cat pop in a bear market, consider shorts, providing the Point & Figure charts comply.
Whether shorting or taking profit, the trade should be executed on the first Point & Figure sell signal following the news release. That could be anything from a simple Double Bottom to a complex Bearish Catapult, assuming use of the chartcraft box scale.
Sell Signal Duration?
The longevity of the great news signal really depends on the magnitude of the story providing the trigger. In a strong bull market, a slight jobs number beat for instance, expect a short-lived signal, perhaps only a few hours to days.
However, during a bear market, this signal has greater durability plus reliability. The brief bullish sentiment spike, in turn dead-cat market pop, should be followed by a reassertion of the bear market, lasting weeks to months.
Where to place a stop-loss?
If shorting the market in question, one box above the column in which the price was trading at when the great news broke. Then trail the stop lower to just above subsequent dead-cat columns of Xs.
How to determine a price objective?
This signal typically results in a correction down to the next significant level of horizontal support. Additionally, observe sentiment shifts, as a bottom will see heavy bearish sentiment, as opposed to the bullish sentiment extreme seen at the peak.
Bullish Sentiment Explained
On the surface, the rate cut by the Fed in October 2007 was market positive. However, the reaction by the S&P 500 was far from bullish. The index soon sold off. Two years later the market bottomed with the S&P 500 taking a hiding, down 50%. The Investors Intelligence Advisors Sentiment Survey showed historic bullish sentiment in the fall of 2007, followed by a bearish extreme two years later.
Buy the rumor sell the news pretty much sums up the 2011 market reaction to the capture of America's most wanted. Bullish sentiment on the day of the news. The S&P 500 was down 22% from its peak five months later, sentiment had shifted in a big way.
September 2011, five months on from the capture of Bin Laden, the market bottomed. The bearish sentiment reading from the Investors Intelligence advisors sentiment survey stood at around 45%. That bearish value formed the majority camp, given that the remaining 55% is made up of both bullish sentiment advisors and correction advisors.