Let the News, and Mood, Guide Your Trade

Being in the midst of earnings season, most of our recent momentum plays have been based around earnings news. Playing news momentum is without a doubt the best way to make the most money in the shortest amount of time, but it can also be one of the most dangerous and tricky plays if you are emotional and unprepared. So how does one prepare for news?

Simple, But Tricky

One important thing you need to do before you start playing earnings news is make sure you understand the current mood of the market. This might sound simple enough, but if you have ever been married, you probably know how important this can be, and I would venture to say you have probably practiced these same skills every day.

Everyone knows that if you have some bad news to break, you are better off waiting for the right mood. If you were just fired from your job, for example, that would be the wrong time.

The market is really no different. Every earnings report has to be examined within the context of the market's mood because that will determine how sensitive the market is to news at the time. So how do you know what kind of mood the market is in?

Reading the Market's Mood

First of all, look at a daily chart of the composite indices to get an idea of what direction the market has been going. Currently, we have an uptrend in the Nasdaq Composite from a low of 2155.42 on March 17 to the April 24 high of 2447.28.

The sensitivity of the market is ruled by two emotions -- fear and greed. A strongly uptrending market is spurred by greed, or the belief that we can do no wrong and the market is heading higher.

---

At the time of publication, Wolff had no positions in the stocks mentioned, although positions may change at any time.

Ken Wolff is founder of MTrader.com, the first educational daytrading site on the Net, and co-founder of InvestingOnMomentum.com, a Web site devoted to short-term potential for retirement accounts. TheStreet.com has no affiliation with InvestingOnMomentum.com, and no endorsement of InvestingOnMomentum.com or momentum trading is intended. While Wolff cannot provide investment advice or recommendations here, he appreciates your feedback; click here to send him an email.