Macy's (Stock Symbol: M) 02/02/2009

This is an example of News Trading with Macy's, (stock symbol: M). It was originally posted in February, 2009 but is timeless because of the lesson that it is.

You'll find details of what actually occurred below, as well as an analysis of possible trades that could have been made.

On February 2, 2009 Macy's announced 7000 job cuts and that they are going to slash their dividend from 13.25 cents down to 5 cents a share. They said these steps are being taken to help lower costs during the current economic slowdown. See: Macy's to Cut 7,000 Jobs, Slash Dividend

The same day, Moody's said they were placing Macy's debt ratings on review for a possible downgrade. See: Moody's Places Macy's on Review for Possible Cut

Here is the chart for Macy's (Stock Symbol: M) for that day:

Macy's Cuts Dividend Chart

Let's take a further look into what happened that day:

  • We can see that at 1:00 p.m. the stock dropped off a cliff on heavy volume. When we see an intraday move this large, we know that it was due to some type of news that was released.
  • At 1:00 p.m. CNBC has a news release about the job cuts and dividend cut at Macy's. I happened to be listening at the time and heard the news.
  • If you look closer, you can see that upon the initial news release on CNBC, the stock dropped from about $9.25 down to the $8.90-$8.95 area instantly which just happened to be the previous day's closing price level (hint, hint. Temporary support level..).
  • After the initial drop, the stock reversed higher to $9.20 (just under where it started before the news release. Now a resistance level), before finally reversing again and going lower all the way down to the $7.50 level. About a 19% drop on a single news release.
  • Then look at what happened. After the large percentage drop, the stock drifted back higher all the way up to the $8.70 price level (the same level as the opening price for the day as well as the low from the day before, another temporary resistance level).
Macy's Stock Chart

Does this drop, reversal, drop and reversal again always happen in this order? Certainly not. Sometimes there will be no immediate reversal and other times the initial reversal holds and the stock moves higher. There are several different possibilities that can occur. Trading is not an exact science and nothing happens exactly the same over and over again.

So let's try and see what kind of trades would have worked in this example:

  • How about if we caught the initial CNBC news release and were able to catch the initial drop to the $8.90-$8.95 level and we placed an order to sell short here. We could have used a price level just above where the stock started to drop, $9.30 for this example, as our stop loss, just in case the stock reversed higher. In this case we could have had a large percentage gain within a few minutes.
  • If we caught the initial drop to $8.90-$8.95, and we noticed that was the previous day's closing price, we could have went long here for a possible quick scalping trade back to the are the drop started from. In this case we could have had a quick 2-3% gain.
  • If we caught the initial news release and we were patient, we could have watched the intial price drop, reversal and second reversal, and once the price broke down through $8.90 at 1:06 p.m. we could have initiated a short position with a stop loss at the $8.90 or $9.00 level.
  • After finally seeing buyers stepping in and the price consolidating at around 1:15 p.m between $7.90-$8.00 (which also formed a triangle), we could have went long with a stop loss just under the consolidation level, at $7.80 for example. This would have allowed for a sizeable gain also throughout the rest of the afternoon.

You will notice that the price went back up to the $8.70 level in the afternoon, which was also the opening price area for the day (an intraday resistance level).

What would not have worked here:

  • Going long on the initial drop at around $8.90-$8.95 and expecting a large reversal, without having a stop loss in place. You would have seen the price move higher and then drop down under $8.00 and had a large unrealized loss on your hands.
  • Going short on the large move down and not having a stop loss in place, only to watch the price reverse from the $7.50 level and move higher.
  • Going short near 1:15 p.m. expecting another drop lower and not having a stop loss in place.

Do you see a common characteristic of these three losing trades....NO STOP LOSS IN PLACE!

Remember, these are just some of the things we can take away from this example, but by looking at what would have worked and being able to recognize similar patterns in future trades, we can give ourselves a bit of an advantage because we now have experience to back up our reasons for getting into and out of trades.

I want to finish with a couple of things. One is that over the next few days following this example, Macy's traded higher, following the general market higher I believe. Analyzing a trade for intraday and other types of trades would require different thinking, charts, and is not what we are analyzing here.

The second thing I want to let you know is that the news released by CNBC at 1:00 p.m. was actually released by other news services before 8:00 a.m. this same day. Yet the stock opened near $8.70, just 25 cents below the previous day's closing price and moved higher until the CNBC news release.

Because of this, you should realize that stocks will not always react the same way based on good or bad news, every situation is different which is why stop losses should always be used in case you are wrong.

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