S&P 500's Price Gave Clues on How to Trade the Fed AnnouncementSep 14, 2012
Chad Karnes, CMT
Has the news ever helped you make profitable investment decisions? Use data and logic driven analysis and not rhetorical circumstantial analysis to beat the market.
Current market conditions have a tremendous amount of noise built into them. This week alone we've been flooded with the FOMC's big QE3 meeting, Germany's decision to uphold a permanent eurozone bailout fund, and Apple's iPhone release. The market is drenched with news!
To really understand where this market is headed, investors should focus on price, not noise.
Logic vs. Noise
Rhetoric (or noise) is defined on dictionary.com as “the undue use of exaggeration or display” and “the art or science of all specialized literary uses of language in prose or verse”.
Rhetoric, logic, and grammar were the foundational three subjects taught in university studies. Grammar is considered to be the mechanics of a language; Logic is the mechanics of thought and analysis; Rhetoric is the use of language to instruct or persuade.
Logic is further defined as “the art of thinking”, and rhetoric is defined as “the adaptation of language to circumstance”.
Rhetorical and Circumstantial Evidence
News headlines, more often than not, contain rhetorical statements equating circumstantial and often badly timed evidence to the reasons markets rise or fall. Articles often involve guessing and gambling, with no real trading advice, as a quote from the first article below admits, "It's anybody's guess how big the package will be" (referring to this week's Fed meeting).
Their purpose is likely more to persuade as rhetoric than to be analytical through logic. Recent headlines include:
· “QE3 Will be Ease A La Carte with Something for Everyone” – , September 13, 2012
“Expectations Ramp up for QE3” – WSJ Marketwatch, September 12, 2012
Headlines like these are more confusing than helpful. The second article implies that bonds will rally on an announcement of QE3, meanwhile the iShares Barclays 20+ year treasury ETF (NYSEARCA:TLT) is down almost 1% on the day of the announcement.
The rhetoric suggested opposite outcomes than what the market actually did or the data suggested it would do. Using data based decision making instead of listening to the news would have likely provided better results.
Data Based Logical Decision Making
The ETF Profit Strategy Newsletter shows how to make logical decisions based on price data instead of based on rhetorical opinions. News articles are often misleading and not necessarily logical or data based. By focusing on data driven analysis, an investor can better navigate the markets.
In the September ETF Profit Strategy Update published 9/12, we identified, "if price breaks beyond 1440 (tomorrow's R1 pivot) then a target of 1450 is measured". Price did indeed rally 9/13, breaking out of its triangle, and reaching the 1450 target.
These levels were identified by using logical and data based technical and sentiment data. The Update also identified important levels for the Transportation Index (NYSEARCA: IYT), the VIX (NYSEArca: UVXY), Silver (NYSEArca: SLV), Gold (NYSEArca: GLD), and others.
The chart below and commentary from our 9/12 Update shows how technical analysis and data, not rhetorical opinion, were used to identify the 1440 resistance level as well as 1450 as the Bernanke QE3 announcement rally target.
The ETF Profit Strategy Newsletter avoids using news and rhetorical opinions and uses logic and data to make actionable investment decisions using technical, fundamental, and sentiment data multiple times each week.