Gabe Velazquez is a professional trader with 14 years of experience. His focus is intra-day and swing trading the ER2 (Russell 2000 e-mini) using technical analysis as his primary tool. Gabe has managed both stocks and futures accounts as well as conducted educational seminars on technical analysis for the past ten years. He is a frequent guest on Biz radio, where he shares his market knowledge and utilization of technical indicators. Gabe also teaches the 5 day E-mini course for Online Trading Academy.

To Ease or Not to Ease?

That is the question the Fed will be contemplating in their upcoming meeting on December 11. The Non-farm payroll number, due to be released this Friday, should shed more light on this ongoing debate. Hope remains high that the Fed will cut interest rates once again, which may serve as another short-term fix to the ongoing credit crisis. The Fed funds futures are forecasting a nearly 100% probability of a quarter point rate reduction, and much lower odds for a half.

The market has been drifting lower since last week, due in large part to the fact that credit worries continue. This comes despite a concerted effort, by politicians and Federal agencies, to bring about proposals that would give relief to the afflicted parties. I wonder if the actions being taken to stem the flow of further damage to the economy, and the markets, are analogous to putting a band-aid on a gaping wound? It's hard to say, but ultimately, I think it will just take time to work through this rough patch.

In the last two newsletters, I mentioned that I thought the market had become extremely oversold and was due for a correction. Since then, the Dow has rallied roughly five hundred points. The S&P and Nasdaq have also managed comparable gains. Lately though, the market has lost its recent volatility leading to smaller intraday ranges. These conditions are not likely to change until Friday, when the aforementioned jobs report is due.

Let's move on to a topic that seems to be a source of frustration for many traders. What I'm referring to is the topic of execution, or "the consistent implementation of a clearly defined plan". In my many years of trading, this is something I continue to work on daily. I believe that a trader's first challenge is to build a trading plan that will engender confidence in its implementation. To this end, I would start by asking the following questions: Does the trading style you plan for fit your personality? Does the trading plan have a good risk-to-reward balance? This should be at least one to two (preferably more). What's the win/loss ratio? This becomes more critical if you have a low reward-to-risk ratio in your plan. Additionally, if you were to "practice" your plan on a simulator, for an extended period of time (three to six months), how would you have done (Profit &Loss)? Doing this work will give you the conviction needed to pull the trigger – without hesitation - every single time you get a signal!
Let's move to our weekly review of the charts. First, I'd like to show a comparison of the YM (e-mini Dow) and ER2, shown below. Note the recent bounce in the market has been markedly stronger by the big caps versus its small cap brethren.

The YM has retraced half of the move from its summer lows to its peak in early October, while the ER2 (below) barely managed a 38% retracement of the same move. The inference here is that not all boats are being lifted by the tide.

A closer look at ER2 hourly chart below reveals a short term down trend taking hold. This trend will reverse on a break of 760. Note how the bounce off the lows is almost entirely undone. This market sure could use the Feds' help next week.

In summary: This week boils down to one piece of the data. We know what it is, so I won't belabor the point. I believe that regardless of where the jobs number comes in, the fact is that things in financial land are getting worse, not better. Consequently, the Fed has no choice but to act. The only question remaining becomes, how low will they go? We'll have to wait until Tuesday to find out. We'll also know on that day if Bernanke gives the market a Santa Claus rally, or if he turns out to be a Scrooge. I believe that the former is the most likely outcome.

So until next time, I hope everyone executes their plan to perfection.

DISCLAIMER:
This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results.

Reprints allowed for private reading only, for all else, please obtain permission.