A counter-to-anticipated response to market news may be more meaningful than the news item itself. Marty Schwartz credited his friend Bob Zoellner with teaching him how to analyze market action. Schwartz summarized the basic principle: “When the market gets good news and goes down, it means the market is very weak; when it gets bad news and goes up, it means the market is healthy.” Many of the traders I interviewed recalled trading experiences that echoed this theme.
When the market gets good news and goes down, it means the market is very weak; when it gets bad news and goes up, it means the market is healthy.
Randy McKay described a trading approach that incorporated market response to fundamental news. Describing how he used fundamentals, McKay said, “I don’t think, ‘Supply is too large and the market is going down.’ Rather, I watch how the market responds to fundamental information.” McKay provided the classic example of the behavior of the gold market in response to the first Iraq war, the Gulf War, which began in January 1991. On the eve of the first U.S. air strike, gold was trading just below the psychologically important $400 level. During the night when U.S planes started the attack, gold rallied past the $400 level, moving to $410 in the Asian markets, but then retreated back to $390—lower ...