Fed Day Fever…

08/07/2008 12:00 am EST


Another FOMC has passed, and once again, no rate change.  There was an initial sell off, and then the buying began. It never stopped until we hit the close of the day where we ended on the highs.

People often ask me after these events, “Where is the market going from here?”  I wish I could say for certain where the market is going but I can’t, no one can.  What I can do is rely on the numbers to tell me what the odds are of the market moving higher or lower.  When the interest rate news hit the wires a few minutes before scheduled time, which was 1:15 pm CT, the E-mini S&P index market was at 1272.  This is the market that I follow because it is an index of 500 major US companies.  Once it rose above that number it was a slow grind the remainder of the afternoon up to the July open, which was 1283. 

So, instead of making a prediction of where the market is going, I will use 1272 in the E-mini S&P as a pivot.  This number will serve as a line in the sand as to whether or not the accelerated up move holds or fails.  Beyond that number on the downside I will look to see if we break below 1255 again. 

Some may wonder what good the Fed day is with all of the volatility in the market.  There are many purposes it serves for me as well as students of DTI.  One of the most important pieces of information that Fed day gives us is a frame for the market that will allow us to trade for weeks to come.  The other reason to take advantage of Fed day is for the money the market hands out. 

We are able to place swing term spreads on E-mini options as well as trade the index futures profitably, with quick profits and lower than usual risk.  I used the Dax Index Market traded on the Eurex Exchange as a lead indicator after the news came out.  The US markets wanted to sell off but the Dax could not make a new low to confirm the down move.  Once the bears were rejected, I took a long position in the E-mini S&P at 1271.50, removing my position in thirds and trailing my stop to reduce risk as the market in my direction.  The FOMC provides trading opportunities like this eight times per year and it only seems more exciting each time. 

If this rally continues, we will need to see the E-mini S&P break, above 1302 and subsequently 1312.  Using news numbers in conjunction with yearly, monthly, weekly, and daily opens, as well as intraday support and resistance is a powerful tool and any trader would do well to learn how to look for these tell tale signs of the market confirming a move.

By Tom Busby of DTITrader.com

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