Market Loved, Hated the Fed Decision

Jun 25, 2008: 7:44 PM CST

As evidenced by today’s intraday price action, you’d think the market either had schizophrenia or was potentially bi-polar.  Once the decision to hold interest rates unchanged at 2%, the market swung sharply four times before settling down for the close.  Was there any chance of profit in this volatilty?  Let’s look.

The NASDAQ QQQQ ETF:

At first glance, it looks like a jumbled mess.  The NASDAQ gapped up and then appeared to be forming some sort of trend day, and we had the expected major price consolidation prior to the actual decision at 2:00 EST.

Price then broke the consolidation patterh and surged to the upside, happy at the decision.  But like I said earlier today, be sure to parse out the words and meaning that was spoken, especially if the Fed spent too much time talking about inflationary concerns.

As such, the markret swung back hard against its initial direction, but changed its mind once again and surged stronger to the upside before forming a quick top and long-legged dojis (gravestone dojis, to be exact) and plunged back to where it was prior to the Fed decision.

The volatility did offer the potential to make money studying order flow and ultra-short term direction, but it was an exercise best left to professionals, and not for ‘at home’ retail traders.  Quote screens flash constantly and fills are often not given at expected prices, and emotion causes us to buy after a run-up and then hold through a sell-off, only to sell at or near the bottom.  It’s so much harder than the price chart above shows.

Try trading a Fed day reaction with a practice account a few times before trading the day live.  There’s often at least three large volatile swings that can reverse direction on a dime, leaving you trapped.

Let’s look at the Dow Jones (DIA) to see the similar pattern.

The only major difference between the two charts is that the Dow closed roughly where it opened, forming a gravestone doji/hammer on the daily chart.  Normally interpreted as a bearish signal, this reversal signal comes not only after yesterday’s doji, but at potential support from the March lows.

Trading a Fed day reaction is very difficult, and requires iron nerves and quick reflexes and a willingness to tolerate rapid swings both in and against your favor.  If you desire to trade these moves, get plenty of experience before trading large positions in these environments.

3 Comments

3 Responses to “Market Loved, Hated the Fed Decision”

  1. HeadlineCharts Says:

    Hi, Great blog… and I agree it was quite a day in the market. I did notice that NASDAQ new lows were at a very high level while the market was rallying after the announcement, and that generally indicates a rally will fail into the close.

  2. Richard Says:

    Nice charts.

    It was a day to add some to one’s short position, as stock prices rose in advance of the Fed announcement, if one is guided by an investment maxim such as mine: “in a bull market be a bull; in a bear market be a bear. In a bull market, one buys on dips; in a bear market, one sells into strength”.

    Yes we are in a bear market and it is going to get very ugly.

    Having said that, however, and having set forth a model short selling investment portfolio in the website link, I suggest that one not use short selling, as all one has is a dollar denominated investment

    I recommend that one dollar cost average and investment in gold.

    Best to all.

  3. Corey Rosenbloom Says:

    I’m with you, Richard. The trend of the indexes is now confirmed as down, so the successful strategy (for active traders) has been to short strength, though the rally off the March lows was in the neighborhood of 14%.

    The Fed is in a hard place, and Buffett came out today and said the Economy is probably worse than we think (or along those lines).

    Thank you, and Headline Charts for the comments.