The Fed to the Rescue!

Sep 18, 2007: 7:40 PM CST

Score one for the so-called “Plunge Protection Team” today! We had a 300 point surge on the Dow, which hasn’t occurred since October 15th, 2002.

The Fed surprised the market with a ‘larger than anticipated’ 50 basis points cut. The market anticipated a 25 basis points cut, and likely already had that ‘baked in’ or assimilated into the price, and the larger than expected cut is likely due to the large surge, catching many traders by surprise and decimating those who were short stock prior to the meeting.

There are plenty of sites and pages to read about the ramifications of what happened today from a news or fundamental view, but let’s focus on what the current structure of the price charts exists:

Intraday DIA (Diamonds):

Dow Jones Daily:

  • Wow.
  • Price is now ‘suddenly’ and definitively above all major moving averages
  • The averages “appear” much more bullish than they did last night or last week, meaning more people ‘feel’ bullish
  • Price broke resistance at both 13,700 and 13,500.
  • Volume was less than that on other days, especially through late July and early August
  • Price has not yet made a new momentum high, according to the chart
  • The 20 period MA may soon cross over the 50 period MA
  • Congratulations Bulls and Thank you, Fed

Dow Jones Weekly:

Nasdaq:

S&P:

  • In the S&P, price did carve a new momentum high, but is 30 points shy of an all-time price high
  • Price found key support at the confluence of the major moving averages
  • Price – in all indexes – shattered any conceivable ‘downward sloping’ trendline today
  • The Nasdaq is 75 points away from a new multi-year high

Does it get any better than this?

The Materials and Consumer Discretionary (along with Financials) were the dominant sector leaders today, suggesting a strongly bullish and positive posture in terms of sector rotation theory.

If bulls ‘climb a wall of worry,’ then it seems like they completely scaled the wall today.

8 Comments

8 Responses to “The Fed to the Rescue!”

  1. Jonathan Says:

    Looking at the weekly chart of INDU, I thought for sure it was forming a bear flag in preparation for a plunge, but there were stocks still breaking out and the daily’s just didn’t support a down move. I even thought the NASDAQ was primed to rally based on the daily chart.

    Do you even try to “predict” the movement of the general market? Individual issues seem to be easier to make an educated guess as to where they might go. I don’t even try to figure out where we’re headed in the general market anymore except to know if it’s trending up or down. Thoughts?

  2. Corey Rosenbloom Says:

    Hey Jonathan,

    Let’s face it – technical analysis is absolutely useless in the face of unexpected, sudden moves where ‘fundamentals’ or ‘news’ dominate the direction. Had the Fed chosen to raise interest rates by .25, we would have had a subsequent ‘plunge’ day. Had they kept them the same, the market would have fallen probably 200 points. Had they lowered them .25, the market probably would have been up but by less than 100 points or so. We got the unexpected – a 50 cut – and the market rallied that 300 points. No chart pattern, trendline, or indicator could have told us what was going to happen until it happened. All we could have done would be limit our risk… such as “There seems to be support below. I’ll put a trade on with a stop below the converging trendlines (which usually act as support) and play for a small target to the upside.” In this case, the trade would have worked, but not because “the chart said so” but because our risk/reward ratio was favoring an upside (buy) play. Or if you saw a bearish pattern, you would have gone short with a stop maybe above the trendline of the wedge or flag, and would have taken a small stop-loss.

    Do I try to ‘predict’ the broad market movement? Absolutely. But I do it unconventionally. I honestly don’t care what the market will be like 3 months from now. I don’t have the skills or sophistication to do that. 6 months out? No way. A year from now? No chance. I take it one day at a time, and one swing at a time. I have a strategy that utilizes mainly the Dow Jones ETF to “swing” with defined risk points. I day-trade with the @YM (Dow-Mini) contract and often put on larger leverage when the signals I study line up, or I believe we are in a confirmed swing, and use the intraday (usually 5 and 15 min) chart to time trades. I’ll probably make 3 to 5 trades per day that way.

    I will swing trade individual stocks based on sector rotation theory, but I have not had any swing positions on since the initial market plunge stopped me out of the ones I was in (late July).

    I also use my market analysis to put on swing trades. If we’re in an uptrend, and we’ve pulled back to a support level, and I believe the general market is about to ‘swing up,’ then I will likely establish a small position in the Dow EFT (DIA) and then smaller positions in about two or three stocks that I believe show a similar momentum pattern or retracement pattern that the market does.

    I am definitely a “Top Down” analyst and trader when it comes to swing and position trading. I am a ‘reaction’ trader when it comes to intraday.

    Is it important to predict the general market? No. Not at all. It helps, but it is not essential. I tend to shy away from individual stocks because of gap risk and company specific risk. You don’t get that when you trade a major ETF. I stick with the DIA because I’ve always been trained on the Dow and it – the numbers, structure, and pricing – have almost become intuitive for me.

    You can get by just fine if you never look at a major market index, but I as a trader and analyst could never do so. I would be totally and hopelessly lost. We’re all different, though!

    All the best,

    Corey

  3. Jonathan Says:

    Wow, what a great explanation. Eliminating gap and company risk is something I rarely take into consideration. Although I should as I once went long a stock, was margined heavily, and the stock split overnight. I was very close to a margin call based on the split. As it turned out I only lost a little on the trade. Sloppy research on my part, but still a lesson learned.

  4. Corey Rosenbloom Says:

    Ouch! It’s the margin that gets us into trouble. I’m “margined” in the futures market, but one benefit is that the major market futures don’t (necessarily) gap, and they trade (sporadically) when the market is closed, so there’s (brief) opportunity at different times outside normal hours.

    With a split, it honestly shouldn’t affect your margin, unless the program calculated improperly. It’s technically the same amount of money, unless there was a negative reaction immediately following the split. I know a trader who traded only splits and did marginally well. There’s supposedly a “Five Step” pattern to splits that he was able to capitalize on effectively.

    What’s important is that a lesson was learned. That’s the key to this business. We try new things and stick to the things that work. It’s also why there’s so many different types of traders, because there’s so much to learn!

  5. Jonathan Says:

    It was a broker mistake. Got it resolved, but it was so unexpected I liquidated the position.

  6. Glyn Says:

    Hi Corey,

    CROX – I keep throwing you these symbols but hopefully your insight is sinking in this end. Looks to me as though CROX has broken through the upward trend line drawn from April this year. Is this signifcant?

  7. Corey Rosenbloom Says:

    Hey Glyn,

    No problem! I see CROX as having potentially made a ‘topping’ pattern. We saw ‘euphoric’ conditions, and we are potentially seeing a double top (or at least a ‘failure test swing’) that has set up a marked momentum sell divergence.

    Caveats: I see price’s next level of support at the 50 period MA, which is about $54, and price is now at the bottom of the rising trendline, for its third test. I don’t see the break just yet.

    Volume has been very light on the most recent ‘swing’ (or test) and that is a negative sign.

    If you want to go short or buy puts, wait until we break $54 – below the moving average. That would also signal a break of the trendline, and with those two breaks, the momentum sell divergence, double top pattern, and previous ‘euphoric’ condition, it would be a high probability trade. You could potentially play for a larger target if need be.

    (Oh, and CROX was recently in the news that the shoes cause toes to get trapped in escalators, and many wearers have been injured. That can’t be good for the stock).

  8. Jonathan Says:

    It was a broker mistake. Got it resolved, but it was so unexpected I liquidated the position.