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Trading Recap

Weird Weekend Play: Bad News = 🚀

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Written by Timothy Sykes
Updated 7/3/2023 5 min read

If you listen to top poker players, they’ll often tell you they are playing their opponent, not their hand.

Trading can work like that too.

You see, the best traders aren’t just looking at headlines and deciphering whether it’s bullish or bearish.

They are thinking about how other traders will react to the news.

If you can anticipate quickly, you have a significant advantage over others.

To drive this point, I want to review this “weird weekend play” and discuss the psychology behind traders’ thinking.

It’s All About Expectations

the bottom line on support and resistance
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Right now, the Federal Reserve Bank is concerned about inflation and not allowing it to get out of control.

Let’s say we just got a new jobs market report, and it’s bullish. While a strong jobs market is generally good…it’s not at the moment.

A strong jobs market will likely push wages higher…and increase inflation.

Which is something the Fed doesn’t want to see right now.

This is an example of good news being bad for the stock market.

On the other hand, if the labor market report looks weak…it’s bullish for the market because it means the Fed is less likely to raise interest rates.

Makes sense?

Good.

Here’s another example and one you want to pay close attention to now that we’re entering earnings season.

A company’s earnings results aren’t based on whether they were strong or weak…but on its expectations.

For example, Company A recorded quarterly profits of $20 million. That sounds great, right, record profits…who doesn’t want to see that.

But if Wall Street was expecting the company to record profits of $30 million…there’s a good chance that Company A shares plummet following the report.

You can’t just look at the news and say it is bullish or bearish…you have to measure it against expectations.

My Weekend Play in DHC

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Diversified Healthcare Trust (DHC) is not my typical weekend play…so allow me to explain the back story.

Earlier this year, DHC was on the rise in March after the company announced some surprisingly strong Q4 earnings…

SHOP Segment Occupancy Improves 380 Basis Points Year Over Year to 76.3%

SHOP Segment Revenues Increase 14.2% Year Over Year

And the stock began to take off…

A nice recovery from a long-term downtrend.

But after that March spike…the stock started to sell off again.

Why?

Because in April, Diversified Healthcare Trust and Office Properties Income Trust announced an agreement to merge in an all-share transaction.

A merger is usually bullish…

But not in this case for DHC.

Investors believed the company was worth more,  And because of that, shares tanked.

Then in June…this headline came out:

Flat Footed LLC Calls on Diversified Healthcare Trust to Finally Address Merger-Related Questions at its Annual Meeting of Shareholders

All of a sudden…investors started to believe that the merger might not go through…as some shareholders opposed the deal.

And the stock started to rally again.

Let me sum it up.

Good news =  no merger

Bad news =  merger

Now, I’m not a merger arb trader…nor an investor.

I’m looking for short-term trading opportunities.

How I Played DHC

I really liked the price action and the $2.20 level for an entry…the chart pattern gave me vibes of AAOI.

My goal was to get 5 to 10% out of the trade…which I did.

Now, the stock did hit a high of $2.53…but I reached my profit target…so I was very pleased with the outcome.

Source: StocksToTrade

And because this story seems to be ongoing.

There’s a chance I may trade this again in the future.

If you want to learn more about my Weekend Strategy, CLICK HERE. 

 


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Timothy Sykes

Tim Sykes is a penny stock trader and teacher who became a self-made millionaire by the age of 22 by trading $12,415 of bar mitzvah money. After becoming disenchanted with the hedge fund world, he established the Tim Sykes Trading Challenge to teach aspiring traders how to follow his trading strategies. He’s been featured in a variety of media outlets including CNN, Larry King, Steve Harvey, Forbes, Men’s Journal, and more. He’s also an active philanthropist and environmental activist, a co-founder of Karmagawa, and has donated millions of dollars to charity. Read More

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* Results are not typical and will vary from person to person. Making money trading stocks takes time, dedication, and hard work. There are inherent risks involved with investing in the stock market, including the loss of your investment. Past performance in the market is not indicative of future results. Any investment is at your own risk. See Terms of Service here

The available research on day trading suggests that most active traders lose money. Fees and overtrading are major contributors to these losses.

A 2000 study called “Trading is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors” evaluated 66,465 U.S. households that held stocks from 1991 to 1996. The households that traded most averaged an 11.4% annual return during a period where the overall market gained 17.9%. These lower returns were attributed to overconfidence.

A 2014 paper (revised 2019) titled “Learning Fast or Slow?” analyzed the complete transaction history of the Taiwan Stock Exchange between 1992 and 2006. It looked at the ongoing performance of day traders in this sample, and found that 97% of day traders can expect to lose money from trading, and more than 90% of all day trading volume can be traced to investors who predictably lose money. Additionally, it tied the behavior of gamblers and drivers who get more speeding tickets to overtrading, and cited studies showing that legalized gambling has an inverse effect on trading volume.

A 2019 research study (revised 2020) called “Day Trading for a Living?” observed 19,646 Brazilian futures contract traders who started day trading from 2013 to 2015, and recorded two years of their trading activity. The study authors found that 97% of traders with more than 300 days actively trading lost money, and only 1.1% earned more than the Brazilian minimum wage ($16 USD per day). They hypothesized that the greater returns shown in previous studies did not differentiate between frequent day traders and those who traded rarely, and that more frequent trading activity decreases the chance of profitability.

These studies show the wide variance of the available data on day trading profitability. One thing that seems clear from the research is that most day traders lose money .

Millionaire Media 66 W Flagler St. Ste. 900 Miami, FL 33130 United States (205) 851-0506 This is for information purposes only as Millionaire Media LLC nor Timothy Sykes is registered as a securities broker-dealer or an investment adviser. No information herein is intended as securities brokerage, investment, tax, accounting or legal advice, as an offer or solicitation of an offer to sell or buy, or as an endorsement, recommendation or sponsorship of any company, security or fund. Millionaire Media LLC and Timothy Sykes cannot and does not assess, verify or guarantee the adequacy, accuracy or completeness of any information, the suitability or profitability of any particular investment, or the potential value of any investment or informational source. The reader bears responsibility for his/her own investment research and decisions, should seek the advice of a qualified securities professional before making any investment, and investigate and fully understand any and all risks before investing. Millionaire Media LLC and Timothy Sykes in no way warrants the solvency, financial condition, or investment advisability of any of the securities mentioned in communications or websites. In addition, Millionaire Media LLC and Timothy Sykes accepts no liability whatsoever for any direct or consequential loss arising from any use of this information. This information is not intended to be used as the sole basis of any investment decision, nor should it be construed as advice designed to meet the investment needs of any particular investor. Past performance is not necessarily indicative of future returns.

Citations for Disclaimer

Barber, Brad M. and Odean, Terrance, Trading is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors. Available at SSRN: “Day Trading for a Living?”

Barber, Brad M. and Lee, Yi-Tsung and Liu, Yu-Jane and Odean, Terrance and Zhang, Ke, Learning Fast or Slow? (May 28, 2019). Forthcoming: Review of Asset Pricing Studies, Available at SSRN: “https://ssrn.com/abstract=2535636”

Chague, Fernando and De-Losso, Rodrigo and Giovannetti, Bruno, Day Trading for a Living? (June 11, 2020). Available at SSRN: “https://ssrn.com/abstract=3423101”