Good Evening, Friends. Tomorrow, we have Fed Chair Bernanke’s Humphrey Hawkins testimony before the House Committee on Financial Services (with the Senate on tap for Thursday), something that I’m sure he looks forward to. These are likely to be his final appearances, however, which should offer some solace. Interestingly, his prepared remarks are being released at 8:30; in the past, they have always been given to the press just as the session begins at 10 AM EDT. Supposedly, this is so the members of the Committee can familiarize themselves with the contents over their oatmeal. Cash bonds and FX, and of course equity futures, will already be trading. I do not plan to trade this using Todd’s First Half Hour Breakout techniques; it will take traders and analysts a while to go through the text, and the chance of being whipped around is too great for my taste.
Since changing expectations as to the Fed’s next steps have been important market inputs of late, the text and Dr. Bernanke’s responses to questions could generate some volatility. My sense of market sentiment is that traders at the moment believe that the Fed will not begin to withdraw quantitative easing (buying of long maturity government and mortgage-backed securities) in the near future. My personal view, which could easily be proven wrong by 8:31 AM EDT tomorrow, is that while the Fed will maintain the discount rate at zero to 25 basis points for the foreseeable future, it will begin to reduce the rate (currently $85 bn monthly) at which it buys bonds. I think that this could be a negative factor for equities, and I did purchase some SPY Aug 165 puts near the end of today’s session. Those closed at an implied volatility of 13.58; I would expect to see that come higher if a Fed shock does occur tomorrow.Â
Todd teaches a lot of great trading techniques in his courses. I’ve adapted some of them slightly; like most people who grew up (so to speak) on FX desks, I’ll experiment with trades, and persist with those that work until I’ve lost money twice in succession. One that has stood the test of time is a variant of the First Half Hour Breakout. This one can occur at various times (to be fair, the First Half Hour Breakout doesn’t necessarily occur at 10 AM). Basically, it involves using a 3 minute bar chart of the ES (again, the timeframe and tradable instrument can vary), and then watching for ledges, levels where multiple bars have found support or resistance. As Todd observes, the more frequently a level is tested, the greater the degree of followthrough when it breaks.Â
This morning, I was slightly bearish, anticipating some profit taking ahead of the Hump Hawk testimony tomorrow. The 9:42 vertical bar tested 1674.50, it was subsequently retested six more times prior to 10:33. It seemed that a break was likely to create some downside momentum, so I placed a sell stop at 1674.25. I was filled at 1674.00; the price action quickly ran down to 1668.00, a good bit of which I missed, since I took profits on half at 1672.25, and the remainder at 1671.25. These moves can reverse very quickly, and I’ve had them come back in my face often enough so that I place my profit orders and stops (in this case, 1675.75) and then leave the trade on autopilot.Â
Tomorrow has the makings of a potentially very interesting day; we may see new highs, or the beginnings of a meaningful correction (or even a trend reversal). We’ll see how it goes beginning at 8:30 EDT; best of luck!
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