Need a bit of an experienced trader to answer this

[Crasho]

I'm trying to begin analysing the affect news has on an index (in this case, wall street DOW average).

At around 11am (NYC time) DOW dropped from 11340 to 11200 within the space of just over 1 hour. It flat lined for around 2 hours then climbed back up to 11360 within 1 hour.

The question:

Could someone please explain to me the most likely reason this happened. The oil price was increased today (I believe) so I'm assumiong that people over exadgerated the news but thats completly from a noobies point of view lol. I'm just trying to understand what types of news people react to.

Thanks in advance guys, I appreciate it.

P.S Chart attached.

 

[BlackMonday]

The honest answer is that you can't explain everything the market does.

My best guess is that the Dow was following the FTSE and other European indices down. Then data came out (it was an ISM or somthing, I forget) which came out stronger than expected.

Trading of news is difficult in my opinion. It doesn't matter what the news is, what matters is how the market reacts to it.

Good example a couple of weeks ago: Markets expecting -80k in US Non farm Payrolls.
Actual number -40k. Good right? No the Dow tanks.

Trade the charts, you've got a fighting chance that way.

I reckon

 

[Jaydee]

Hi Crasho

Sometimes the reasons are purely mechanical/technical and it's not really because of any news. News normally has a short term impact then influences the long term in a, usually, unseen way.

Mechanically, the DOW dropped at the start of the day to move in line with the European Indices which had fallen heavily in the morning.

In the afternoon (US), the sellers probed the 11200 region several times before they found that the buyers were here en mass. If you watched the DOW September futures order book at this point, you would see the aggressive sellers firing market orders into an increasing number of passive order bids coupled with some brave aggressive buyers lifting the offers. Therefore, an impass was created to the downside.

When such a situation occurs, the market will either drift sideways if sellers still have a say or the buyers will become aggressive and start lifting offers. In the case of the latter, those who got short hoping for a break of 11200 will be caught short and have to cover. This means that there will be two types of buyers: those who are buying to open a position and those who are getting out because they couldn't wear the pain of being short and offside. This is what creates a very aggressive buy move and is the reason for the DOW going up in the afternoon.

Does that make sense? Sometimes you must look at the chart level or, even further, the order book level to get a better insight.

Best

JD

 

[Crasho]

Thanks for your reply BM! I think I've come a bit too far tbh, I should probably take some time out to understand how everything comes together. Can you recommend me any good sources/books which explains the market from step 1? I need to understand the consumer impact on something i.e if the Oil price rises I need to understand if the rise will make the consumer cut down on buying or continue to buy. Also need to understand why DOW would follow FTSE etc etc.

Im moving from the IT industry into trading so it's going to be a big learning curve I feel :O

Thanks again BM