I have noticed that when there is a lot of short interest in a tradable asset, the price sort of becomes like an elastic band and the lower it goes and the more short interest there is then the more likely there is likely to be an aggressive reversal as it pings back up the other way and traders begin to cover their shorts. Question: what is the effect of news on a stock when it is already seriously overbought/oversold? E.g Say the price of oil has fallen to new lows and the short interest is extremely high already. Would bad news being released at this point result in the price falling even lower? or would the price start to become immune to bad news on the basis that everybody is already short anyway? Would like to hear insight from traders who have experienced this on this forum. Regards
The job of the journalist to find a reason why the market goes a specific direction. That creates an impression that news move the market. In reality price is moved by supply and demand. What creates a specific sentiment which leads to changes in supply and demand it is another story. There are always good and bad news. On my opinion one of an approaches is to look on market reaction. Not what news market follows but what news market ignores. just an example: A year ago each unemployment report was considered as a good news and we had market pushing up each time on it. Now market does not care about it. In 2009 the unemployment reports were still getting worthier and worthier and market ignored them by recovering from a crash...
With individual issues, I think the "band" can become stretched and lose elasticity on the extreme ends. Bad news must become worse news or fatal news to continue the downward pressure. Oil has a floor - somewhere - but for equities it's zero. I like to think of all the longs and shorts in real terms. Like a giant crowd all gathered in one place. If you could talk to each and every one of them, what would they hope to get out of their position and how do they see it playing out? When there is REAL news that changes the perspective or hopes for many of those people, then directional changes are far more likely to occur.
Set aside the terms overbought / oversold - those are simply healthy moves (trends) - and could continue for longer than one can ever imagine ========================== As for news - get to the point of being able to accurately predict the news - based on what the mkt did You'd be amazed how uncannily accurate you can be =============== True (and funny) story - I once heard on different radios stations - why the mkt went up (one day)..., and down (the next day) - due to the very same.., exact "news" Vast majority have absolutely no clue - btw..., if they did - they'd faint RN
You would have to observe/participate in a market correctly discounting future expectations today. Then the expected big event comes and price may surprisingly stall or reverse. This normally, for me anyway, is beyond retail knowledge and resources so price is followed and traded. It does not hurt though to understand markets work like this to front run and anticipate pricing future events.
The short answer: The effect could be either way. Generally, when the market goes up with a series of bad news for say, over a couple of weeks, that's generally a sign that the bottom has been hit. Conversely, if the asset keeps going down every time bad news comes out, it's a sign that it's still in the bear market. But that doesn't necessarily mean it hasn't hit a bottom yet. That could have been the last drop on a daily level, and anything good or bad that comes out will continue to push up the markets. In answering your question about the oil price. You can never really assume the short interest is at the peak. There could be more shorts that enter, and more sellers of current longs. That could drive the price down further on bad news... especially depending on how bad the news gets. If there was some news (and this is obviously not going to happen, I'm just saying for illustration purposes), like all the frackers came back online and started drilling, and the Saudis were going to pump more oil, and sanctions were even more lifted in Iran and there was all of the sudden more peace in the Middle East simultaneously, believe me, the price of oil has a very high probability of going down even further, even if short interest is as far up as you thought it would be. Markets by nature are forward looking. They aren't always correct in the short term, but they have a tendency to overshoot the equilibrium. If you believe that markets aren't at an equilibrium and are above/below it, that's how you can make money. But that doesn't necessarily you will make money. The price could fall faster than the equilibrium price and eventually force you to sell (especially if you're buying oil futures). Hope this helps. Nick
As a trader, you're looking for abnormal reactions to news. Good news, market goes up, no trade. Bad news, market goes up, believe the market. Good news, market goes down, believe the market. Bad news, market goes down, no trade.
but is this always the case? Selling causes the market to fall. If there is a lot of short interest and bad news is released, there is nobody left to sell because short interest is already so high and everybody has already taken their position.