By: Elliot Turner
Well this morning was some volatile, choppy, and schizophrenic trading. This morning when I woke up, I knew I would be trading Caterpillar (CAT). CAT had been a high flyer and recently broke support after a failed breakout attempt. With earnings out this morning, I knew there would be a catalyst for a move, but did not know which direction to look. CAT gapped down big, then tried to rally to $54–it’s most recent strong support level. When the rally failed, I initiated my short position and patiently traded out the move. That helped keep me somewhat sane amidst the chaos.
In sticking with my plan, the middle of the day, as is the plan on any Fed Day, calls largely for inaction. I have a small position left in my early CAT short and will leave that some room to run with a trailing stop. Other than that, I will not initiate any new positions and will patiently await the Fed’s announcement due out at 2:15.
In anticipation of the Fed, I like to prepare several “if…then” scenarios and to have a planned course of action. Typically there are far more potential variables when the FOMC rate decision is due out; however, considering the recent past and short-term expectations, the scope of possible outcomes is rather narrow. I fully expect nothing too surprising. The key to this Fed Day are those two magical words: “extended period.” This of course refers to the Fed’s stance of maintaining aggressive monetary policy and low interest rates for some time. As long as those words appear somewhere in the statement, then the liquidity pump remains open and the Fed remains concerned about near-term deflationary pressures.
On the other hand, should those two magical words disappear from the Fed’s statement, everything changes. While that is unlikely, it’s important to be prepared. If that were to happen today, then this already oversold market could come under INTENSE selling pressure. Again, I reiterate, this is highly unlikely! I mention it solely with the intention of preparing myself for all POSSIBLE outcomes.
Often times, after a Fed announcement, the market makes several false moves before picking a direction and sometimes the real directional move takes another day to develop. Be patient and do not get chopped up in those initial moves. If you are a scalper, there should be some great opportunities, but be wary of holding onto any positions too early in the post-Fed chaos.
Best of luck to all on this Fed Day!
