Fed Day Rules
Good
morning. My column today will
be brief due to it being “Fed Day.” As a result, your approach needs to
be different. Technical levels are not
nearly as important, as “fundamental†buyers and sellers dominate price
action. Will it be a quarter-point, a
half-point? We will know at 2:15 EST
today.
In the past, Fed days were a
bit simpler than they are now. If the
announcement was favorable/disappointing, you bought or sold aggressively and
reaped the rewards. Nowadays, unless the
result of the meeting is completely unexpected, you need to wait and trade the
moves after the initial flurry of activity. I
have been burned in the last few announcements trying to jump on that first
move.
Today, I have a set of clearly
defined rules, which should enable me to play this Fed announcement properly:
-
If the Fed cuts the rate by
the widely expected quarter-point, I will do nothing initially, and then
wait to sell rallies if the trend turns down, or buy pullbacks if the trend
is up. I refer to trend here as
indicated on a one-minute chart of the futures and stock I am trading. - A half-point cut, while potentially bullish,
still is a scenario that has been factored into the market by some traders
and portfolio managers. As a result,
I will follow my plan laid out in Rule 1 above. - If the Fed leaves rates unchanged, a scenario
not discussed by anyone, I would be an aggressive seller immediately. - If the Fed cuts the rates by either a quarter-
or half-point, but follows that decision with a statement to the effect of
“there will be no further rate cuts,” I would be an aggressive buyer. - Never go into the announcement with positions.
It is a very unfavorable risk/reward scenario.
The point here is that I will
only play the initial move if it is unexpected. I
am in agreement with Goran; the Fed should not cut rates. Easing credit will not
cure the problems affecting our economy.