June 18, 2013

Logical Market Update: When the FOMC Speaks – the Markets Will Respond – Is it Time to be Long or Short?

When the FOMC Speaks – the Markets Will Respond – How to Trade the Chop– Is it Time to be Long or Short?

So what’s up with the stock market lately – it’s neither bullish nor bearish – but is sure is choppy! It has been a great week for day trading the volatile moves in the broader indexes as well as several stocks, bonds, forex, and even gold and silver.

Last week, the DJIA moved more than 100 points in one direction or the other every day, the S&P swung between 10 and 15 points, the NASDAQ and Russell also played strongly into the volatility as well. The end result – if you are a position trader you likely lost money or are back at break even since the DJIA finished yesterday almost where it started the month – if you are a day trader your P&L should be firmly in the black.

This type of action though is indicative of a trend change as the momentum flips from bearish to bullish and back again. Swings lower of the magnitude seen last week make many bulls nervous and the sharp rallies will usually wash out some shorts that jumped in too early.

Look for tomorrow to bring clarity to direction at least for the near term. The FOMC meeting is expected to result in no changes or action, but the subsequent press conference by Bernanke will have traders on edge. Seems that the Fed’s communication strategy has unraveled a bit over the past few weeks, and all eyes and ears will be on Bernanke to regain some control. This leaves the big question as to whether he will be able to or will he create more confusion and angst in the markets.

I suspect the broader indexes will start the day with a sizeable rally with volatility getting a solid whacking (options). The momentum oscillators, though, are pushing into strong overbought readings, which does lend some clues that a turn lower is likely at hand. The U.S. Dollar/Euro has also moved into strong overbought readings suggesting dollar strength should prevail likely for the balance of the week if not month.

Treasury Market

Any confusion as to near term direction for bonds should also be cleared up tomorrow as Bernanke takes care of or doesn’t take care of any confusion as to the pace of asset purchases. Fed governors speaking over the past week have lent opinion that it remains too early to reduce monetary accommodation. If their data confirms that inflation is actually lower than expected the bond market should rally over the near term.

However, as I discussed yesterday the U.S. bond market correction is still in force, and has been in progress for almost a year with the 30-year bond reaching a high at 153’11 on July 9, 2012.

The patterns in progress are incomplete suggesting some major trouble ahead for bonds. Check out the (monthly) charts below for the 30-year bond future and the 10-year note future. On both charts the red arrows are support areas and thus far both are holding initial areas, but don’t expect it to continue. Near-term is remains likely an additional bounce higher will occur, before yielding to the next round of downside pressure.

30-Year Bond

10-Year Note

Equity Markets

Here again, the equity markets also remain in corrections. Intervening rallies appear nearly complete setting up the next leg down. The charts (daily) below continue to indicate support to complete the corrections lies well below current levels. I would anticipate a few “ugly” days of downside activity. Longer-term I still believe the broader indexes will move to additional new highs before the advance is complete.

DJIA

S&P 500

Russell 2000

NASDAQ 100

It is interesting times in which we live and choose to trade. I have advocated changing strategies as a trader in becoming more of a day trader (no overnight risk) versus carrying positions. This remains important during times such as these. When the dust settles it will be important to have the cash to invest for the next move.

Diversified Trading System

I continue to recommend as the best trading platform available to a broader range of traders from novice to expert. The Diversified Trading System offers a cost effective product that allows a trader to enter into the “chaos” and trade more effectively.

Trade Manager from Indicator Warehouse automatically calculates the correct amount of contracts or shares based on your account size or market volatility. Automated stop-loss management and position sizing eliminates most of the problems most individual traders have. Day trading and position trading both require (actually demand) good risk management. Trade Manager does the job across the board and is an essential trading tool that ensures that you take the maximum profit from all your trades.

A newer member of the money management tools available from Indicator Warehouse is the Profit Finder – System Back Tester. When implemented it allows the user to:

Immediately know the impact of parameter changes.
Automatically reads all of your DTS entries and exits
Calculates the profit/loss of each trade
Performs a wide number of essential intelligence boosting calculations instantly
Provides solid details about the effectiveness of your trading strategy/ methodology/ indicators

The last two points above are valuable tools to use. It will show you where some “tweaking” is needed to improve results through the back testing feature.

My point on money rotation and sector rotation is similar to that on parabolic moves that they happen with frequency within many time frames. As traders these types of moves can be a bonus for day trading or position trading so again don’t get caught up in the “what’s the catch.” Realizing a rotation is occurring within a stock you trade or a sector is a great source of stocks to plug into the Diversified Trading System. Allowing DTS to cleanly and beautifully capture the moves though any or all three DTS trading platforms. Our goal remains to assist traders to make greater profits during all types of markets. Sector and money rotation is another tool.

The Diversified Trading System used together with Trade Manager should continue to produce numerous trading signals in the DJIA, YM (mini), S&P 500, ES (mini), RUT, TF (Russell 2000 mini), AAPL, AMZN, GOOG, NFLX, and LNKD, GS, and Tesla Motors (TSLA).

Here is an updated list of the markets where I have found that DTS (all three birds) are producing numerous signals:

DJIA future (e-mini available) – Highly recommended
S&P-500 future (e-mini available) – highly recommended
Russell 2000 future (e-mini available) – highly recommended
NASDAQ 100 future (e-mini available) very highly recommended
US$/Euro futures (e-mini available) – very highly recommended
GS (Goldman Sachs) – good two way volume –
AAPL (Apple Computer) – very highly recommended
GOOG (Google) – very highly recommended
LNKD (LinkedIn) – solid intraday range
NFLX (Netflix) – solid intraday range
TSLA (Tesla Motors) – highly recommended
30-yr Treasury Bond future – did not get quiet – opposite took place
10-yr Treasury Note future
TLT (Treasury Bond Long ETF)
TBT (Treasury Bond Short ETF)
Gold (futures and ETF – GLD)
Silver (futures and ETF – SLV)

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