Another week, another rate cut. Helicopter Ben Bernanke gave the market what it had been crying out for by cutting another 0.5% off interest rates on Wednesday and holding out the promise of further cuts. No surprise there - while some saw a more meagre 0.25% in the pipeline, most traders had already priced in a half point cut.
The fact that it wasn't a surprise didn't stop the market from going bananas, with the Dow running up by 250 points in the hour after the announcement before giving almost all of it back in late trade. Fed day follows a familiar pattern every time. The hours leading up to the announcement are mind-numbingly boring, with stocks crawling around in a 'I'm too petrified to move' fashion. Then, at 7.15 Irish time, all hell invariably breaks loose, with wild swings in either directions. It doesn't matter if the announcement is a predictable one - the market always goes nuts anyway.
The best option for indices traders is to ensure that you've got no position coming into the announcement. It's all too easy to get stopped out as the market lurches around. Sure, anyone who was long going into Wednesday should have done fine, as the market immediately took off and gave traders enough time to take profits. On other occasions, however, the action is positively manic and a triggering of one's stop loss is almost guaranteed. Even worse, one is likely to get stopped out at a lousy price. For most of Wednesday, for example, Dow futures traded in a tight 12,420-12,460 range. On an ordinary day, a trader who is short would place his stop just above the 12,460 level. As soon as theannouncement was made, however, futures shot up to 12,535. Chances are that one would have been stopped out at an absolutely awful price.
Anyway, the euphoric reaction was short-lived, especially after Standard & Poors said that the carnage in the mortgage market was likely to result in total losses of $265 billion for financial institutions.
I'm relieved that the whole 'Waiting for Fedot' thing is over. I was loath to open positions based on technical grounds when such a massive market-moving event lay just ahead. It made sense to let Bernanke to do his thing and allow the market settle down. The fact that we're in the middle of earnings season makes the situation worse for a trader like myself - I'm continually coming across technical set-ups only to discover that the stock is reporting earnings the next day.
That said, I did manage to open my first swing trade of the year by going short Elan. Elan tends to plough its own furrow and I was confident that any Fed decision wouldn't impact the stock too much. The stock has been in a broad trading range since last October, going back and forth between $21 and $25 without ever showing much conviction that it wanted to break out in either direction. I shorted on Wednesday with the stock trading around $24.75, placing my stop just above $26. The little pup powered straight past me, hitting $25.50 within 30 minutes or so. It's never nice to be down 300 euro or so in such as short time but the stock did provide some minor comfort by slipping back to the 25 area later in the day.
Anyway, while I'm down a few quid at the moment, I'm in no rush to close out the trade. The stock has raced ahead since hitting a low of $21.30 last week and should see some profit-taking at this juncture. If I lose, well, so be it. Sometimes you lose money by taking a trade you should have passed on but this isn't one of them. These trading range plays tend to be pretty reliable ones so you've got to take them as they come.
By the time this column has been published, I'm also likely to have shorted Caterpillar. After bottoming near $60 recently, the stock has rebounded up to its 50-day average near $70. I'm looking to short on a break of Wednesday's low (around $68), with my stop going above that day's high (and the aforementioned average) above $70. The stock reported earnings last week so at least that's out of the way.
I'm also looking at Research in Motion (RIMM), both from the long and the short side. I know that sounds a bit peculiar but I'd be tempted to short if it got near resistance at $100 and long if it came down to its 200-day average around $84. Ideally, I should have gone long last week after it tested that same average for the first time in eighteen months. The first test of such affairs tends to be a successful one and the stock predictably bounced. However, I only noticed it after the event. That kind of sloppiness isn't good enough. It can be a pain in the butt ploughing through chart after chart but it has to be done if you want to find the low-risk set-ups. Anyway, it's probably quite obvious that I don't have the same faith in the new RIMM set-ups as I do in the Caterpillar one so I may yet pass on it. We'll see.
Whatever happens, I don't want to be lumbered with a bunch of short positions and yet that's all I seem to be noticing. Both the Dow and the S&P look shortable on further rises to resistance (at 12,750 and 1400 respectively, although I would pick one or the other ). I'll have to locate some decent long set-ups to balance things out a little. That's not just for the sake of prudence - I'm not particularly bearish in general. Last week's bottom looks like a significant one to me and I don't envisage it being tested anytime soon. The present environment calls for a balanced portfolio, not loading the boat in a particular direction.
Weekly gain/loss:-€144
Overall balance: €19,662
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