The Fourth Wave

  • March 20, 2001
  • Marc Dupee

The April Federal Funds futures
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50% chance of a 75-basis-point cut in the minutes directly before the Fed’s
highly anticipated announcement on interest rates, but a 50-basis-point cut
(.50%), to the disappointment of many on Wall Street, is all it got. 

Although there is still a chance that the Fed will cut
rates an additional 25 basis points in April — proving the FFJ1 right — traders
voted that the Fed is behind the curve in stimulating the economy, selling off
stock index futures in ugly engulfing bar-at-low patterns that left contracts at
new lows.  

While there is an outside chance that the second
intersession cut of the year could arrive prior to the Fed’s next meeting in
May, what is perhaps most surprising about today’s "50 only" cut is
that it took investors by surprise. Many factors augured for a 50-, rather than
75-point cut. 

First, under Greenspan’s stewardship, the Fed has never moved 75
points. 

Second, the Fed has made it abundantly clear that it prefers a
gradualist approach to monetary policy–75 would have been drastic.

Three,
despite a virtual recession in manufacturing, the economy has been showing signs
of a comeback (see Greenspan sage Tony
Crescenzi’s column from yesterday where he gives at least 11 reasons why the
Fed could be seeing a rebound in their economic crystal ball by the end of the
year). 

Four, the Fed is known for not targeting the stock market
and it is Wall Street that has been crying the loudest for a 75-point cut.

Stock index futures was extremely volatile, rallying to
their session highs by the time of the rate-cut announcement. Lewis Borsellino has pointed out in his
afternoon
commentaries on days of Fed announcements and in his Stock
Index Futures Trading Course that the S&Ps often make three moves before
taking their decisive trend in the fourth swing. The June S&P futures
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sold off hard — 10 handles — in the minutes immediately following the Fed’s
announcement of their decision, rebounded to pre-announcement levels, then sold
off to take out yesterday’s low. The Spooz closed 28.00 lower, on their lows of
the session, and on contract lows. 

However, the
fourth and decisive wave of the “three fakes and go” pattern
have not yet materialized; only three waves have occurred. Watch to see if the
pattern Borsellino has observed numerous times after a Fed event repeats. If it
does, the fourth wave could also be in reaction against today’s new low. 

 

In the energies, natural gas
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traded higher in day three of what could be a 1-2-3-4 Pullback From Lows setup and
closed near the top of its range, up .224 at 5.287, filling the March 9 gap.
Look for this contract to encounter resistance at the gap and for possible further tests
to the downside out of NG’s bigger picture
bearish pattern. 

April crude oil
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and

unleaded gasoline
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again after an attempted rally. Both contracts have been unable to rally despite
OPEC’s decision to cut production and have bar charts that show multiple
attempted, but failed, rallies. These failures to rally, especially in unleaded
gasoline at the neckline of a head-and-shoulders pattern portend additional
downside for oil and unleaded gasoline. 

 

For those who like to trade reversals at lows, May sugar
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closed on the trigger of a Turtle Soup Plus One Buy setup at both a new 20-day
and three-month low. Any reversal would likely be a swing trade as the daily
pattern of declining tops and a weekly head-and-shoulders pattern keep the
pressure on to the downside — intermediate term — in sugar. 

Cocoa
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neckline of a head-and-shoulders pattern. The May contract rallied to the round
1000 level where it barely filled the morning gap-down, a sign of weakness,
before closing on its low of the day, down 19 at 986 and just off the lows of
the session. The pressure also weighs to the downside in cocoa.