This morning, the Canadian Government rejected BHP’s takeover bid for Potash Inc. The stock is trading 3.5% lower as a result.
The action is a good example for why it is important for a technical swing trader to monitor company fundamentals. The goal is simply to assess headline risks. Certain events can kill the best “chart pattern” and it is therefore a good idea to only swing-trade stocks with minimum headline risk. The takeover situation was one example. Other situations are upcoming earnings reports, pending lawsuits or industry characteristics. I’m therefore reluctant to trade certain biotech stocks because drugs can fail during the approval process and have significant impact on stock prices. Mining stocks are subject to above-average headline risks because accidents or strikes can stop production from one day to another. Massey Energy is a recent example.
You can (and should) not eliminate all headline risks, but it is important to manage them. So how do I find out if a company is subject to higher risks? There is no way around it: it is crucial to read as many headlines and reports as possible in order to get a feeling for the situation. Even though these informations do not influence if I buy a stock on a certain day, they determine if I trade the stock at all.
A final example is Countrywide Financial. The company is now owned by Bank of America and I frequently shorted the stock during the financial crisis. However, some of my trades were extremely short term because headline risks were significant: I was aware that Countrywide could be taken over any day during the crisis, so I was taking (partial) profits quickly. Same story with other major banking stocks during that time.
