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I remember growing up as a kid playing a card game called Euchre. I loved that game, and the goal of the game was to get the “trump” card. If you got the trump card it was the one that would override every other card in the deck. So getting the trump card meant you had the power to control how the game was played. When you hold the most powerful office in the land, what trumps you? What trumps the news caused by the President of the United States? The economic laws of supply and demand.
As savvy investors we are always looking for opportunity, and specifically we are looking for what will drive the markets into those areas of opportunity. News is one of the biggest catalysts that can drive the markets into short term areas for traders and investors, most especially news that has a lot of emotion tied to it. Whether you are a proponent or opponent of our current President and his policy decisions one thing is certain and that is the amount of emotion tied to his every word. Big banks and institutions know that average investors make key mistakes, and one of the biggest is succumbing to the emotions of fear and greed. Look at the below chart as an example:
This is a chart of the S&P 500, dated Jan 11th. That was an important date, as it was the President Elect’s first press conference and one that the media had been eagerly anticipating. As expected, the markets moved a lot on his words, as evidenced by the large candles down and up during the press conference. Interestingly enough though, that movement was not enough to truly affect institutional supply and demand. I have written in the past that true levels of supply and demand are created by unfilled institutional order flow, remembering that the market ultimately in in search of balance between supply and demand. Now look at the 2 charts below, one chart being the Online Trading Academy Mastermind Trade grid:
Looking at the above chart, we can see that the Levels of Supply and Demand are clearly identified before the press conference. These levels of Supply and Demand are simply the unfilled orders that major banks, institutions, and hedge funds have placed in the past that remain unfilled. These unfilled orders are the origin of imbalance between Supply and Demand, and where the most orders are present. These areas of imbalance will act as price magnets, and give the educated investors a chance to get in with the highest probability. The President Elect’s press conference certainly moved the market, but simply moved it between supply and demand, not through supply and demand. The difference of between Supply and Demand vs. through Supply and Demand is monumental. News of any sort typically moves price, but the price movement created by news is the catalyst to drive price to Supply and Demand. The news trade driving price will help the institutions because they will now be able to get their orders filled. Now look at a picture of the chart after the news conference:
Notice that the market (in this case the entire S&P 500) moved in the circled area during President Trump’s press conference, but never came to Supply or Demand. At the end of the trading day, price rallied into the supply level and then traded down from that zone, giving someone an opportunity to profit from prior price movement. A few hours later, price reached the Demand Level and then traded back up to the supply zone. Both of those moves were evident to an educated trader or investor before the news drove the price.
When the world and financial markets are in a state of uncertainty and seem to follow every word in the news, it’s comforting to know that there are economic laws that trump everything.
Chuck Fulkerson is the Director of Student Development at Online Trading Academy, a leader in investing and trading education for any market or asset class. Fulkerson helps education individuals across the globe in what it means to be a successful investor and trader. He currently trades options as a swing and position trader; futures and currencies as a day trader; and equities as an investor to round out a truly diversified trading portfolio.