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There's an old market adage that says, "Buy the rumor, sell the news."
Simply, it means that short-term traders should buy the stock of a company on rumors of catalyst events that would be beneficial for the company, such as acquisitions or new product launches.
As excitement for the event rises, so too does the stock price as investors pile in. Traders then hold their shares until shortly after the event (the "news") occurs.
It's a fairly basic strategy, but one that can yield big returns. Let's use Apple Inc. (NASDAQ: AAPL) – a company that has had its fair share of exciting new product launches over the years – as an example…
It's fair to say that the Apple iPhone was the first of its kind. Sure, earlier iterations of "smartphones" had been sold in years past, but none with the full suite of capabilities of the iPhone.
From Jan. 9, 2007, the date Steve Jobs first introduced the world to the iPhone, until its release date on June 29, 2007, AAPL stock rose from $10.75 to $15.41 – a 43.34% increase.
Now, you may be asking yourself, "The iPhone was an incredible success; why would I sell shortly after the release date?"
Well, as with many "news" events, the reality often doesn't live up to the hype. In fact, AAPL shares only gained $0.07 on the day of the release, as sales numbers initially disappointed.
There are a litany of other examples of shares disappointing after the company's big "news" day because reality didn't meet up with expectations – something I like to call a "reality gap."
And tomorrow could mark one of the biggest "sell the news" days in years.
Here's how you can profit from it…
The Hype Machine Behind the China Trade Deal
Today is make-or-break time for the markets' short-term direction, and you need to be ready.
China and the United States will finally sign the "phase one" trade deal. Ever since the deal was announced on Dec. 13, markets have been on a tear.
And no wonder, as we've been promised a lot by negotiators from both sides: China buying $200 billion of U.S. goods including agricultural products from farmers, clamping down on theft of intellectual property, and reducing tariffs.
But even as the markets pushed higher on optimism about this deal, very few details have been released.
The reality gap between the market's overwhelming optimism about the deal and the warts that we're sure to find when the details are revealed give us a classic moneymaking opportunity.
As long as the deal was in the future, that was fine. Traders could optimistically read into it whatever they wanted.
But once the details are made public, that will all change. Even though the deal was "signed," we still don't know all of the specifics. As fantasy turns into reality and the actual terms are released, warts and all, there will almost inevitably be some disappointment.
In other words, traders have already bought the rumor of the trade deal. When they find out the details of the deal, they may well decide to sell the news.
Here are the best trades to look at right now to prepare…
Trader Expectations Are About to Meet Reality
About the Author
D.R. Barton, Jr., Technical Trading Specialist for Money Map Press, is a world-renowned authority on technical trading with 25 years of experience. He spent the first part of his career as a chemical engineer with DuPont. During this time, he researched and developed the trading secrets that led to his first successful research service. Thanks to the wealth he was able to create for himself and his followers, D.R. retired early to pursue his passion for investing and showing fellow investors how to build toward financial freedom.