Good Morning,
This is the rally you should be used to. Why? Two words: THE FED! The markets have been daring the Fed by rallying significantly in the few days prior to the meeting month after month after month. Basically they are saying: "Hey Ben, here we are. We are rallying 2% ahead of your decision so you better not dissapoint. If you do, we could fall and fall hard. So Ben, please keep the word "extended" in your statement."
After the meeting, we usually take a pause, maybe sell off a bit and then resume a slightly higher trade.
Looking at retracements, we are heading towards the 38 and 50 percent marks for the broad indexes. To me, it is a bonus as I get higher call premiums and will take advantage of it to write protection. If you are a swing to intermediate trader, maybe you use the rally as a protective (hedge) trade.
Before we get to the charts, I want to go on a quick tangent. My last post talked about volatility and showed the volatility chart for a specific stock just before it had its earnings. Remember, when selling options, volatility works against you as it rises into an unknown event. Bottom line, you can' t become married to anything just before an unkown event. Even more so, we always have to understand the correct risk to reward when buying and selling options. When we buy options, we are predicting the markets will move in a specific direction and within a specific timeframe. Meaning, we have to have the stock move in our direction to make money. We only have ONE way to profit. So typically, our risk is smaller than our reward.
When we sell options, we have THREE ways to make money. The stock can go in our direction, sideways or slightly (and slowly) against us. We typically risk a little more to make a little less. Meaning we may risk 2 or even 3 to make 1. So if you have a trade where you don't want to get assigned because you sold an option, you can buy it back at a bit more of a loss then the gain you were trying to get from selling the premium. Bottom line is it takes away your obligation.
OK, enough of that, but hopefully you understand the importance of knowing how to manage the specific strategies you are putting on.
Moving on to the charts, I want to bring fundamentals into play. What if the Fed did say they were raising rates. Who would that hurt more? The Nasdaq with service based companies or the DOW with companies like Home Depot and John Deere and Caterpillar. Raising interest rates means what for plants, manufacturing, land, real estate, parts, etc...
Past performance is not indicative of future results.
Past performance is not indicative of future results.
The first chart above is SPY and the second one is the Nasdaq. The Nasdaq lost more percentage wise on the way down so I am bearish on rallies in the Nasdaq unless the Fed says something that fundamentally changes my focus.
Regarding major support levels, we are holding at 126 in SPY so until we break below that, buyers are winning at those levels.
With the VIX heading back under 20, forex ranges have been muted and most of the trade has been happening in the overnight session. There are some fun swing/intermediate trade set ups that are happening every few days, we just have to be patient to wait for them. Interestingly enough, the EUR/USD and GBP/USD found support at previous levels just like the SPY did. So there is somewhat still a relationship between equity moves and the dollar. GLD is sideways as is the AUD/USD. Could we see a relaunch of the trend meaning GLD and AUD climb higher?
Lots of news ahead with the Fed and unemployment data 8 days away.
Local Tip: Interbank FX Webinar on Trends Tomorrow Night!
Happy Trading and Be Environmentally Cool
Coach Brian
Forex trading is one of the riskiest forms of investment available in the financial markets and suitable for sophisticated individuals and institutions. The possibility exists that you could sustain a substantial loss of funds and therefore you should not invest money that you cannot afford to lose.
