The Return of the 'News Play' - TheStreet

If you read my March 27 column,

Ripped From The Headlines, How To Trade On News, you know that news is the driving force behind many of the stocks I play.

But I have not been playing many news stories recently. Really good stories that normally caused huge momentum have barely been moving stocks at all.

After the

Nasdaq

bounced off of a low of 3042 on May 24, I thought the momentum might return to news plays. So I tuned one eye back toward the news scanner at all times, waiting for a really good story.

I found one last week. On June 5, I purchased

Genentech

(DNA)

, the world's oldest biotechnology company, on a series of stories concerning

Food and Drug Administration

approval for an anticlotting blood treatment. The story caught my eye because the anticlotting drug was very effective, easy to administer and fast-acting. More than 1 million people a year have heart attacks, resulting in 500,000 deaths annually. Anticlotting drugs given during or shortly after heart attacks can greatly reduce the possibility of strokes and other complications.

It may sound strange, but another small factor that made the story "sexy" was the ticker symbol, DNA. Not a bad eye-catching ticker for a biotech company. Hey, every little bit helps. Put all this together, it makes for one heck of a story and a good enough impact on the company's bottom line in the short term for me to enter the trade. If you remember my March 27 column, I wrote that the immediate impact on the bottom line -- not what the company will see years down the road -- is absolutely critical in assessing how a news story will move a stock.

I purchased Genentech at the open at 119 and rode it until about 20 minutes after the opening bell the next day, to 129 9/16. Lately, I've been holding onto trades for a bit longer, keeping the strong ones if they close above the midline of the trading pattern for that day and selling as soon as they close below the midline of the pattern on subsequent days. (For more on my "above-the-midline" rule, see my

May 1 column.)

I sold shortly after the bell because the market had been getting strong buying in the first 30 to 45 minutes for at least three weeks. The morning of June 6, however, the buying only lasted 15 minutes before its first drop, which raised several warning flags and indicated to me that the market was changing again. Whenever I see the market changing, I generally exit until I can determine how to play it.

Looking at the chart, which shows Genentech climbing above 140 early on June 6, you could say, "Wow, bad move, Maverick. If you had stayed in you could have made 20 points instead of 10." Hindsight will get you every time.

Coulda, shoulda, woulda

... Not me, I stick with what I know works and refuse to be a slave to hindsight. So I only made 10 points on this trade instead of 20, but look what those warning flags did for me on three other trades I was in.

I purchased three other stocks just prior to the close June 5:

JDS Uniphase

(JDSU)

,

Oracle

(ORCL) - Get Report

and

Ariba

(ARBA)

. These three stocks were all strong market leaders, showed good buying at the end of the day and ended up in the upper one-third of the buying pattern -- all meeting my criteria for overnight gap plays. I had intended to keep these stocks until they closed below the midline of the pattern, but changed my mind after I noticed the early-day buying only lasted 15 minutes instead of the normal 30 to 45 minutes over the previous few weeks.

The JDS Uniphase chart shows a gap up the next day on June 6, a great rally, then a fairly steep drop toward the end of the day. Ariba gapped up, but it and Oracle dropped from the open on June 6 and didn't look back. Had I not exited all my trades after the initial warning flags were raised, I would have given back most of the gains I made on DNA and might have ended the day with an overall loss.

As it turns out, that early warning flag was a hidden indicator that something bad was just around the corner. We just didn't know it yet. The Nasdaq chart above shows that later in the day the Nasdaq dropped more than 100 points from the high.

Shoulda, woulda, coulda.

Not me! Stick with what you know, stick with what works and don't let hindsight make a whipping board out of you. I ended up that day with a 10-point gain on Genentech, a 1-point gain on Ariba and two small losses on JDS Uniphase and Oracle -- a winning day in any trader's mind, all due to one small hidden warning flag. Hindsight should be used to teach you valuable trading lessons, not make you sorry for what you

shoulda

done.

Ken Wolff is founder and chief executive officer of Paradise, Calif.-based MTrader.com, a daytrading and swingtrading Web site. This column provides general information about momentum trading. TheStreet.com has no affiliation with MTrader.com, and no endorsement of MTrader.com or momentum trading is intended. While Wolff cannot provide investment advice or recommendations here, he invites your feedback at

ken@mtrader.com.