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Jay Norris | March 9 2013 11:42 EST
While it may at first seem counter-intuitive that we would see a great employment number followed by a stock sell-off, good news followed by a price correction is often a common dynamic in market movement.
The Following is an excerpt from: "The Secret to Trading Forex, Futures, and ETF's: Risk Tolerance Threshold Theory", which describes the reasoning behind today's price action in stock indices.
"There are also 6 psychological stages to the RTT cycle which we need to identify and explain before we provide examples. Depending on your experience they may be familiar to you.
...Stage 3 Concern / Short-term Market Top (or Bottom)
Markets put in short-term tops or bottoms for many reasons, but the impetus behind them is generally larger traders offsetting previous positions. The reason can be as simple as it's late on a Thursday or Friday and traders don't want to carry the risk over the weekend - this is why we call Friday's "counter-trend Friday" because of trader's penchant for exiting trades late in the week which creates price movement counter to the predominant trend. Another common theme for a short-term top is a much better than expected economic release in a rising market. This seems counter-intuitive at first, but not for an experienced trader. Imagine prices are rising and traders are long and seeing their accounts growing. Then we see a retail sales umber, or a durable goods number hit the market that is better than expected. Prices initially jump, and experienced traders realize that the news can't get much better than that, so they book the windfall profit, because, it may be a time before good news hits the tape again. Markets will also often top or bottom ahead of much anticipated news releases. Traders may be sitting on profits and decide to not risk carrying positions through the next day's employment number or central banker meeting. Their exiting of positions can cause a short-term reversal. They don't know whether the release will be bullish or bearish, they just know they are not willing to risk the outcome. Traders in training need to be familiar with this "trader logic". Many smaller traders just see their accounts going from growing to shrinking, and they're mood shifts from excitement to concern".
Figure 1.
This morning's market behavior in stock indices - Figure 1: stocks initially jump higher on a much larger than expected employment number, but then fall off and reverse lower -- is described in the sentence above which reads: "Then we see a retail sales or durable goods number hit the market that is better than expected. Prices initially jump, and experienced traders realize that the news can't get much better than that, so they book the windfall profit, because, it may be a time before good news hits the tape again". Just substitute employment number for retail sales or durable goods and we get the same dynamic.
Jay Norris is the author of The Secret to Trading: Risk Tolerance Threshold Theory and host of Trading University's Live Market Analysis
Trading involves risk of loss and is not suitable for all investors.
