The Fed Minutes: Another Excuse to Rally
The highly anticipated jobs number released on Friday was received with resounding approval by market participants. The number was not too hot, or not too cold, but just right. It looks as though the Goldilocks economy is back on track - or is it? The Market by its reaction certainly thinks so.
On Tuesday, the minutes of the FOMC's Sept. 18 policy meeting revealed that the members were indeed concerned about the credit crunch and the direction of the economy. Curiously, there was little mention of inflation as a big risk. Instead, they predict that it will remain steady in the upcoming quarter and that the bigger risk is that of a slowdown. These statements were akin to throwing more kindling on the already red-hot rally and away we went. Both the Dow and S&P closed at nominal all-time highs.
From a trader's perspective, the market's reaction to this press release is telling. You can see from the chart below how the whole complexion of one day's trading can dramatically change with one report.
Prior to the release of the Fed minutes, the ER2 was meandering around a four-point range. The instant this report hit the tape, the market began its dramatic response. Traders had to react quickly to a strong lift in all the major indices. Shorts had to scramble to cover and new longs had to jump on the train before it left the station. In the ensuing 45 minutes, the ER2 rallied 10 points with nary a pause.
I happened to be teaching on Tuesday, so my students received the benefit of seeing first hand how the market can swiftly react to any news. They also learned the importance of knowing when potentially market-moving reports are scheduled. When I teach, I tell my students that part of one's routine as a trader is to look at an economic calendar every day. Having this information will spare them the aggravation of getting blindsided by some of these reports, as well as preparing them to trade after they are released. There are plenty of free resources on the internet where you can find this information. My favorite for students is Bloomberg's economic calendar, because it not only lists the dates and reports, but it also has a section where it explains what the reports are and why investors should care.
Let's shift our focus back to current market conditions. We'll first look at the daily chart of the ER2 below.
Note the extreme overbought reading in the slow stochastic. As we know an "overbought" market can remain overbought for long periods of time. However, notice that in the last several months when we reach these type of extreme readings (red arrows), we have had some type of pull back. The next level of resistance is around 865 – the prior high. That's still 15 points away and would be the obvious level to short. Unfortunately, the market rarely accommodates us.
Next, we'll look at an hourly chart of the ER2 below.
What really stands out here is the fact that with all the new highs being made in some of the other major indices – Dow and S&P - ER2 was not even able to match Friday's intra-day high. Could this divergence be portending something? We'll find out in upcoming days.
The Bottom Line: In last week's newsletter, I sounded a somewhat cautionary note, but I also ended the piece by writing "the trend is still up, so don't fight the tape". My outlook has changed very little since then. Some of those Chinese stocks I wrote about have pulled back some, while others continue their meteoric rise. Semiconductors and small cap stocks have been underperforming this week and I continue to see signs of extreme optimism in some of the sentiment measures that I follow. Does this mean that I'm ready to start shorting this market? I will do so only at resistance, or until the market begins to show real weakness. For now, though, the dominant trend is still higher. And as such, I'm going to trade it likewise - no matter what I feel.
So until next time, I hope everyone has a profitable week.
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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
