Fed days have a similar pattern, here’s how to trade it
Pre-market futures are slightly green as
we head into the cash market’s opening bell. FOMC sessions like today generally
proceed in rather predictable fashion.
Stock index futures often make one directional
move right from the opening bell to roughly 10:30am ~ 11:00am EST. Once that
general settlement of position squaring ends, a sideways coil on practically no
volume ensues. These sideways coils of death often last two – three hours long.
When 1:30pm rolls around, momentum traders
start itching to lay on positions ahead of the news. Tapes begin to gyrate
around, often failing at key points of inflection such as R2 or S2 values,
recent lows or highs, filled gaps, etc. Last thrusts into these zones from
1:30pm ~ 2:00pm can reverse by a few points’ distance just before news is
released.
Once 2:15pm arrives, all retail traders’ eyes –
ears tune to Hampton Pearson on CNBC as the Fed’s verdict is read. Did they
raise rates or not, change the wording or not, whatever. If the initial news is
surprising, stock markets (and especially currencies & bonds) will take off
directionally. In the case of stock index markets, initial bursts usually
retrace 38% to 50% before heading off into their ultimate direction for the
afternoon.
If the news is not surprising to financial
markets, expect wide swings in both directions until one side or the other
prevails. It’s common to see the minis swing up and down a few times before any
directional surge takes hold. Just because it is an FOMC day does not guarantee
stock index markets will make big moves… potential is there, but no
guarantees.
Crowded Markets
I know from operating live trade forums since early 2001 that FOMC days
crowd room capacity to near full. Members who tune in sporadically if at all
somehow clear their schedules on Fed day. Such true across the board. Lure of
fast action and big profit potential in rapid fashion draws everyone into the
market. Trade action can be wild following the news release. Limit orders
commonly go unfilled or partial fills at best. Market orders can slip several
ticks in the lesser liquid symbols. Solid profits unrealized in your account can
turn to dust within minutes or even seconds flat. This is not a time for anyone
except gamblers playing or experienced professionals working to be in the
market.
When things get wild on FOMC days, there is
still great order in the chaos. If one knows what to look for in the charts,
they usually see certain technical analysis tools work to utter perfection. The
speed of decision – actions may be fast, but price behavior is orderly thru the
process.
Occasionally we see nothing but sideways chop &
coiling after the news release. Such is life, especially in these current times
where volatility levels remain mired at decade lows. Lastly, today’s closing
hour direction has little or no correlation to tomorrow’s eventual trend. FOMC
sessions are reversed next day as often as they continue… no bias or edge for
overnight traders today.
Summation
Posting charts and observations here is a futile effort heading into
this afternoon’s known event. Overall, look for a directional swing this morning
before midday coil erupts in potentially wild action this afternoon. More eyes =
expectations = wild (something) guesses surround this specific meeting than
we’ve seen in a long time. My guess is we’d better buckle up and prepare for
some fast & furious intraday trading ahead!
Trade To Win
Austin P
(free pivot point calculator, much more inside)
Austin Passamonte is a full-time
professional trader who specializes in E-mini stock index futures, equity
options and commodity markets.
Mr. Passamonte’s trading approach uses proprietary chart patterns found on an
intraday basis. Austin trades privately in the Finger Lakes region of New York.