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
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
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.
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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