When a catalyst hits the wire, traders have two ways to play it. Either position ahead of the move, or wait for the headline to cross and trade the fallout.

In the Think Tank on Friday, Stock Trader Network Chief Market Strategist Dennis Dick walked through the difference between anticipatory and reactionary trading as sellers hit Amazon (NASDAQ: AMZN) and Intel (NASDAQ: INTC) after earnings and rotated into defensive names.

A Thoughtful Approach

Dennis uses both styles, but Friday’s open called for reactionary trading. With Amazon and Intel cratered after the bell, he stepped into Coca-Cola (NYSE: KO) to catch the defensive rotation into consumer staples. 

“With reactionary trading, you are taking a trade by reacting to new information,” Dennis explained. “These trades need to go in your direction almost immediately. Immediate gratification. Because if they do not, you may have interpreted the new information incorrectly.”

His overnight trade in Lululemon (NASDAQ: LULU) took the opposite approach. With shares trading lower overnight, he bought the dip on the thesis that capital rotating out of mega-cap tech would eventually look for a home in beaten-down retail.

“The trader is anticipating future demand,” Dennis said. “Nothing works perfectly and timing is critical. You have to give these trades a chance to work out, meaning widen out the stops.”

Knowing which tool to pull out of the bag comes down to the broader market regime. According to Dennis, the current tape favors reacting to price action rather than trying to front-run it.

Anticipatory “trades work better in bull markets because they are driven by speculation,” he noted. “Speculation is muted during bear markets as traders aren’t focused on making money, they are more focused on protecting capital.”