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January 25, 2012

Fed pledge rallies assets of all types

As was WIDELY expected, the Fed refrained from making any interest rate policy changes.  In addition, the Central Bank issued an accompanying statement nearly identical to that of the December meeting.  However, there was a slight, yet significant, difference...a pledge to extend their forecast for "zilch" interest rates from mid-2013 to late 2014. 

With economic news seemingly improving, traders were likely a little confused by the extension of aggressive growth policy.  Similarly, speculators concluded that although the term QE wasn't used, it (or a similar program such as Operation Twist) was a likely tool to keeping rates at record low levels.  As a result, asset priced of all types (including Treasuries) rallied as the Dollar tumbled. 

Our stats "guy" (Wayne Whaley), tells us that large up sessions on FOMC days are typically followed by consolidation in the coming two session.  Our gut tells us, the buyers might be remorseful after they think things through.  After all, if the Fed is essentially flooding the market with money to give the illusion of prosperity.  We've seen the market's rally on such for years,  but with the market technically extended it might be difficult for prices to sustain themselves (yes, we know you've heard that before and the market continues to prove the critics wrong). 

In yesterday's newsletter we stated: "... the chart suggests there is risk of more rally to the 1326 area.  However, fading late day Fed rallies seems to work more often than it doesn't."  The high of the day was near our 1326 area, and so we have to lean lower for now in hopes of some sort of pullback.  As we've been saying, greedy bears can't make money in this market but for those willing to sell into resistance and lock in a quick profit this range bound slight up-trend has likely been a gold mine.  For instance, a normal pullback suggests prices could see 1312 by early tomorrow morning but even the low 1300's can't be ruled out.  This market has been trading within an expanding wedge and until it proves otherwise, it has to be respected.  If we are wrong about tomorrow, the next resistance is 1332.  Don't forget, buy the dips sell the rips!

From yesterday but still valid:

Our expectations of a pullback haven't come to light, but our support and resistance numbers are working.  Like we've been saying, despite the lack of pullback the patient bears selling into resistance areas should be doing well as long as they are willing to buy back near support.  Don't forget, catching several small moves is just as good as catching the watershed move if you can do it "over and over". 

If you are looking for a way to play the downside without jumping in front of the train, you could buy the February NASDAQ mini 2360 puts for about 20 points ($400).  Or, you could put a more aggressive spread together.  For instance, a trader could buy the 2430 put, sell the 2330 put and sell the 2500 call for total cost of about $200 to $250.  Risk above 2500 is unlimited, and profit potential is limited to $2000 minus what you paid to get in...but it gives you 50 points to be wrong.

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Past performance is not indicative of future results.  The information and data in this report were obtained from sources considered reliable.  Their accuracy or completeness is not guaranteed and the giving of the same is not to be deemed as an offer or solicitation on our part with respect to the sale or purchase of any securities or commodities.  Any decision to purchase or sell as a result of the opinions expressed in this report will be the full responsibility of the person authorizing such transaction.