Assessment of information

Karl O.Strøm
17/10/2023 | 4 min read
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Trading is about following the market closely and looking for special situations where you want to take positions, either long or short. There are both technical, quantitative, and fundamental (news-driven) methods available to find these special places.

Different traders will prefer different tools, and one cannot say on a general basis that one approach is obviously better than another. Often good traders will use a combination of methods, e.g. good news on a share that is in an uptrend can lead to a new move in the direction of the trend. This is therefore a fundamental innovation that leads to a new wave movement in a technical trend. At the same time, such will often result in unusually large price movements and larger traded volume than usual, which means that it is caught by quantitative analysis filters as well.

While more long-term investors read in the newspaper that the stock market has gone up or down one day, for short-term traders it is often more important how the prices have gone up or down. One must not forget that a stock market is a place for the trading of securities, and that sellers and buyers usually receive the information at the same time. Let's take an example from today, Friday 13. October.

The case of ORSTED

Outside of trading hours, it was reported that the Danish wind energy company ORSTED is not succeeding in its negotiations with the American authorities regarding an increase in subsidies for the construction of a wind farm. This may mean that the park will not be built and may result in a new write-down in the order of 11 billion Danish kroner. Obviously a negative fundamental piece of news, which can be expected to lead to a price drop. Is the share therefore a good short candidate for a day trade? Well, news like this is often released outside the stock exchange's opening hours precisely so that both sellers and buyers have the opportunity to react to it. The price in the market is an expression of the balance between sellers and buyers. It may well be that a trader wants to sell at yesterday's closing price of DKK 359, but you have no one to sell to at that price. The buyers have moved, and they move as far as they need to for them to consider the stock a good buy after the news has come out.

We therefore see from chart 1 below that ORSTED opened at 339.8, which is DKK 19.2 or 5.3% lower than the closing price the day before. Fundamentally, this was a reaction to the news which led to a repricing of the share. Technically, this was a new downward movement in an existing downtrend, and also a bearish "gap" (price jump) in the chart. But this was also a price drop down to a place where the share has turned upwards twice before, and thus a possible technical support zone. The leap also triggered quantitative models. Normal daily movement (ATR) in the share in the last 30 days is 18, and the jump of 19.2 is thus slightly more than 1 ATR. Many traders use models to look for such. At the time of writing, the trading volume was also 4.3 times higher than usual, so this is obviously a stock with current "action". But which way should a trade be? Let's see if a daily and hourly chart can provide relevant information.

16102023 Picture1.png
ORSTED with daily candlesticks for the last six months. The yellow curve is the 100-day moving average, and the gray the 8-day. At the bottom of the chart, the Relative Strength Index (RSI) and bars for daily traded volume are shown. Prices in DKK. It is emphasized that historical price movements are not a reliable indicator of future development. Source Infront.
16102023 Picture2.png
ORSTED with 1-hour candlesticks from September 14. to October 13. 2023. Blue curve is an 8-hour moving average, while gray is 21-hour. The outer curves are a so-called Keltner Channel around the latter section. At the bottom of the chart, the Relative Strength Index (RSI) and bars for traded volume per hour. Prices in DKK. It is emphasized that historical price movements are not a reliable indicator of future development. Source Infront.

Above we see that chart 1 shows daily candlesticks and in chart 2 each bar corresponds to one hour's price movement. As mentioned before, the price jump at opening was already larger than a normal full daily movement, and it sent the price down to a level where the share has reversed a couple of times before. We see this more clearly in the shorter chart, and we also see that the price jump sent the stock outside a so-called Keltner Channel, which precisely captures price movements greater than a certain number of ATRs. Thus, this share will have a sell signal on a fundamental news, and on the technical trend movement, but at the same time be a possible current buy candidate for a reversal-trade on the sudden price jump outside the Keltner channel.

Such trade-offs occur daily for a trader. Ideally, a stock should give the same signal on all models and timeframes, but this does not happen very often. Some traders focus almost exclusively on such news-driven price jumps, and you can find added value in some of the models they use. One element is to look at even shorter charts after reversals outside the Keltner channel. Another is to use the price movements in the first few minutes as an indicator, and go long or short if these top and bottom levels are broken. In ORSTED's case, the share had a large swing in the first few minutes, and a trader thus had to deal with a rather large range. If the share broke above the opening price, it could be an appropriate purchase for a possible closing of the price gap up to the previous day's close. A very good candidate for an intraday short after such a jump, I wouldn't say it was to begin with. In fact, according to some models, one could say it would have been a better short if it had opened below the previous bottoms' technical support and failed to quickly retrieve that level again.

It didn't work out that way. The price immediately stabilized around the opening price and the stock went sideways for more than an hour at that level. Since then it started to fall off somewhat, and shorts would eventually have been paid to hold a position. I ended up doing nothing in ORSTED this morning as the focus shifted to other stocks when it started going sideways for so long. But the case serves as a good example of the assessments a trader must make. This thinking applies whether you trade shares, indices, commodities, or trading products with these as underlying.

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ORSTED with weekly candlesticks for the last 5 years. The yellow curve is a 20-week moving average, and the blue 40-week. This corresponds to 100 and 200 day moving averages. At the bottom of the chart, the Relative Strength Index (RSI) and bars for weekly traded volume are displayed. Prices in DKK. It is emphasized that historical price movements are not a reliable indicator of future development. Source Infront.

Disclaimer: After more than 20 years in the brokerage industry I started my own business in 2021. I published the book "Paleo Trading: How to trade like a Hunter-Gatherer” and launched Paleo Capital that manages a hedge fund according to the principles described in the book. I emphasize that nothing written on this blog is to be regarded as personal advice or a concrete call to take positions. Everyone must be responsible for their own decisions and familiarize themselves with the products they use.


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