Head-spin, Tail-spin

Dec 12, 2007: 10:31 AM CST

I must say I was quite surprised by the ferociousness of the sell-off following the announcement from the Federal Reserve to cut rates .25 basis points. Typically, the market rallies in three pulses on those days but it appears the market discounted the expectation for a .50 point cut and was slammed instantly when expectations failed.

However, this morning, it seems that traders reassessed their initial thoughts and decided the rate cut wasn’t so bad, or that there could be future cuts in the works, that the Fed will support global central banks to avoid a global credit crisis, or whatever news-related data they wanted.

Nevertheless, the screaming price action of the last two hours of yesterday and the first two hours of today make for some interesting ‘spinning heads’ (instead of talking heads) on TV and in the trading world:

“Oops! Price fell off a cliff!”

This was the view from the 5-minute chart on yesterday’s cut. There wasn’t even a counter-reaction like there usually is.

And today’s action so far:

There was almost a 300 point overnight gap in the Dow (something extremely rare, it would seem) which is now being faded, and has now reached the 50% level (half-way point).

This is a “gift from the gods” for the gap faders, as many stocks gapped higher and are coming off those highs, some forming picture-perfect “gap fade” candidates, while others exceed the percentage filter I like to use when fading gaps.

Nevertheless, these are absolutely interesting times we live in for those who live on the ‘thrill of the hunt’ or the ‘journey for instant profits.’

For me, I prefer more stable, ‘swinging’ markets with clear targets and stop levels (aka support/resistance, prior highs, swing levels, etc).

“Make hay while the sun still shines” if you love these high volatility, mega-momentum environments.

If not, don’t try to force it. Step back and wait until your patterns appear and your strategy is ‘in favor’ for the day (or week).

4 Comments

4 Responses to “Head-spin, Tail-spin”

  1. Traderthoughts.com Says:

    Hii… came to know about your site from the MTA discussion board. We, at Traderthoughts.com, posts blogs on various financial sites. You are invited to have a look at our site http://www.traderthoughts.com

  2. ainkurn Says:

    I was in “Make hay while the sun still shines” mode today. My brother got burned shorting the YM right before the pop and got hit for 40 points on one contract and 109 points on another before his stops got filled. I was fading the gap up in stocks and got a nice win on my third try in FSLR for $1,800. The days around the FED are very crazy but do offer good opportunities. You just have to keep your risk in check.

  3. Corey Rosenbloom Says:

    Oh my gosh! Yes, moves like that are typically rare but can be very dangerous. If at all possible, I avoid high momentum environments and do not trade them at all. Sometimes they can’t be anticipated, though and we just trust our stops to take care of us should those conditions develop.

    But just like you mentioned, stops rarely if ever trigger at the exact price we want, and sometimes they’re far beyond what we expected. It’s sometimes a brutal ‘game’ we play while trading… or gets played on us.

    I’ve traded Fed days in the past and have had to write into my trading plan “Avoid Fed Days!” Either you’re up a whole lot or down a whole lot and it’s somewhat random and there’s little way to protect yourself. I get most of my profits from small swings or moves and only one major move can wipe out profits (or losses) on a number of smaller trades with higher probability.

    Thank you for the comment.

  4. Traderthoughts.com Says:

    Hii… came to know about your site from the MTA discussion board. We, at Traderthoughts.com, posts blogs on various financial sites. You are invited to have a look at our site http://www.traderthoughts.com