Tough Trading Markets...

Rule #1 is never trade FOMC days. Whipsaws do not describe what happens right before, during, and after the announcement. There is simply no good reason to try and trade this action. The best thing to do is wait it out, let the amateurs get burned and let the market reveal its true intent. Today, of all days I chose not to follow the rule. I took advantage of the volatility to buy back some of the puts I wrote against my shorts for a gain. At this point I have closed all of my options except for a large number of puts on the SPY and DIA. These puts are bought and paid for through the profits made on the other options in the spread. Ideally, the SPX will see 1000 and the DOW 9400 so I can really make some decent change.

OK, I have decided to post the 20 day hourly chart as an understanding of all the recent technical’s is vital for trading going forward. Before discussing it, I would like to indicate that we are slowly forming that right shoulder. If you recall I suggested that it would take 5-7 sessions and would top in the range of 067-077ish. We'll see if that still makes sense from the hourly:




Important features of the chart:

1. There is a new - widened down channel in play that is labeled in dark red. Red because the trend is down. Note how the highs today line up nicely with the falling highs from the top. Whenever you create a channel, it must be parallel and it must involve at least two reaction highs/lows. I started with the top line and then "duplicated" it to ensure parallelism. Moving the duplication down I was able to find a good fit with the most recent reaction lows. Hence, we have a new widened channel.

2. I have also left the falling wedge (in green) on the chart. This wedge was the early indicator that price would move to the upside. You can always double check my posts for that discussion. The key is that the reaction highs started to sink and the reaction lows started to rise. This is generally a bullish indicator and alerted me to expect the sudden break.

3. The original down channel also remains in tan/yellow. Never give up on a channel - price often comes back to visit. I did label a very important event at A. That was the break of the original top trend line on the channel. This was expected once we broke from the wedge. Look how we popped through the line with this mornings rally.

4. As soon as we popped through the line, I immediately drew the bottom trend line following the lows of the rally that started from the last reaction low (1029). Unfortunately, I have "blackened" the wicks on these candles, but check your charting program and you will see that the bottom trend line touches nicely. Applying the "duplication" rule I discussed earlier, I started a duplicate trend line from the prior reaction high (047ish) at the wedge top. Note how well this trend line predicted the very top of today’s rally. We now have a new Up-Channel in green!

5. I labeled B because it demonstrates a first rise/first failure event. As soon as the second attempt failed to take out the rally high - it was a signal to go short. If you had the nerve on FOMC day - you could have made a good chunk of change. I did partake in this move - though I only nibbled at the top for a few points.

The most astonishing thing about today is that we did not reach the base of my right shoulder range. I have highlighted that with a trasnparent box. I really did expect a run at 067 resistance. Not.

What does this tell us? I am not sure. I can say that we are now in an Up-Channel - contained within a Down Channel. I suspect we triangle our way out of this with either a break to the upside (across the wide channel top line) or a break to the downside (across the down channel bottom line). Do note that we are sitting at the 50% retracement level for the last reaction and if you follow my blog, you know that this is a decision point. Trading rule of thumb expects a bounce from the 50% level and an up leg equal to the prior reaction. So that would be about 33 points from here – or around 1080. Adding support to the possibility is the fact that we are sitting on the 20p MA. If this happens, we could get a high right shoulder – perhaps too high for my taste.

Alternatively, price action could continue down from here – retesting the original down channel top line near the 62% retracement level. That would invite further breakdown to the start of this last reaction (or a full retrace) at 1029ish. If this happens, I would say we see that test of 1017.

If I were a betting man, and I am, I think we see a firmer shoulder than what we have so far.

Good luck out there!