The Rooster Call: Fed Meeting on Monetary Policy

Hit the Mark Trading’s Brief Review of Overnight Market Action Setting the Tone for the Trading Day

Equity index futures are relatively quiet marking time as the Federal Reserve starts a two day meeting on monetary policy. While everyone believes the FED will not taper until 2014, anything can happen and traders are playing trades close to the vest not really buying or selling with any enthusiasm. This is typical and expected if you remember bonds and US dollar are directly affected by the FED and spill-over to most instruments.

The entire world awaits Wednesday’s 2PM ET policy statement. If the FED says “we expect tightening sooner, rather than later,” we should see a repeat of the May drop in bonds. However, the most likely action is more of the same…language of how the FED remains data dependent ready to do more if required or taper if economic data points reveal an expanding economy with importantly, a lower unemployment rate.

Now let’s consider knee-jerk reactions. If we do not have talk of impending reduction in the US$85 Billion per month quantitative easing, equity markets are accustomed to rising. Since the US dollar would see continued debasement of the currency, US dollar should fall. If US dollar falls, gold should rise. If gold rises, silver rises.

How do we trade this event?

Using futures you sit by the computer monitoring the charts looking for a move Wednesday at 2PM ET. Forex pairs likely will momentarily go berserk with whips or price pops then trade in normal movements. Equity index futures should pop higher unless the FED issues an overtly gloomy assessment of the USA recovery. Gold can rise on lower US dollar, but also falls on expectations of no inflation. Regardless of what initially happens at announcement, understand professionals are likely watching for the “action” then entering on the “reaction to the action.” The retail trader feels compelled to make a quick trade on the news. The professional is measured in his/her response.

Trading options on SPY, IWM, and QQQ is also a strategy if the trader thinks a knee-jerk reaction will occur. The conservative trade is a long strangle betting on both sides before the FOMC announcement. The aggressive trade is directionally long buying calls or buying a directional vertical spread. Try to remember this is event trading and anything can happen. Remember too if you sit on your hands during this event other trades are always coming down the pike. Always!

As for today, other than morning trading, it is hard to get excited about a wide range trading day in front of Wednesday’s FED announcement. Plan now to enjoy your afternoon. Research trading methods, research stocks, research commodities, or better yet, leave the trading desk for an extended lunch. Why not?

Today’s Reports and FED Activity

Federal Reserve Open Market Committee (FOMC) 2-day Meeting Starts

8:30AM ET – Retail Sales
8:30AM ET – PPI
9:00AM ET – Case Shiller Home Price Index
10:00AM ET – Business Inventories
10:00AM ET – Consumer Confidence

Overnight/Pre-Market

The Reserve Bank of Australia’s leader is on a push to talk down the Australian dollar evidenced by his comments Australian dollar levels are “not supported ” by relative levels of costs and productivity. This is preparation for a potential fall in US dollar. RBA, in my opinion is trying to stem their currency rise which hurts exports. Euro’s rise will soon likely be “talked” down since Euro has hit a two year high.

Corn and Soybeans took a tumble yesterday on harvest news and fundamental pressures weigh on price. A bounce today in soybeans retracing some of yesterday’s losses is possible. The USA bean crop is 77% harvested and looking good. Corn harvest is 59% complete. Thursday is first notice day for November beans. The USDA issues an export report on Thursday for the month of October.

  • Crude incrementally lower.
  • Gold and silver incrementally lower.
  • Bonds incrementally higher.
  • Aussie dollar lower thanks to RBA.
  • US dollar incrementally higher.
  • Yen incrementally higher.
  • Euro incrementally lower resting on S2 intraday. European banks reporting huge losses as they fix themselves.
  • All other futures seem very quiet.

Day Trader Bench Marks

Intraday ES Floor Pivots – Using 24 hour electronic market hours 1800-1715 ET.

R3: 1773.50
R2: 1767.75
R1: 1762.75

Main floor pivot: 1757

S1: 1752
S2: 1746.25
S3: 1741.25

Intraday Euro Floor Pivot – Using 24 hour electronic market hours 1800-1700 ET.

R3: 1.3868
R2: 1.3844
R1: 1.3825

Main floor pivot: 1.3801

S1: 1.3782
S2: 1.3758
S3: 1.3739

Think About This…

Equity markets have two reasons for continuing the climb short-term. First, the idea the FED will not taper or issue an overly gloomy read on the US economy. Second, the idea new money flows into the market from pension funds and 401k plans the first few days of the month. Friday is November 1.

Have a great trading day!

To learn more from Martin, visit HitTheMarkTrading.com to join his mailing list and receive blog updates.