The Dow, the Fed and your expectations

March 31, 2010 07:00 PM


The overriding consideration in understanding the data is to remember that the market will react based on what it thinks should happen. If market expectations are not met, then the resultant volatility is greater than the norm. This was evident in the September 2008 announcement when the Fed held rates steady and the market traded in a 312-point range over the last two hours.

Again, not forecasting direction, this analysis sets expectations of the trading range based on what the FOMC decides to do with rates. Historically, when the rates are left unchanged, an average of 150 points is realized between the high and low points going into the close. Conversely, when rates are changed, the activity ranges upward of 300 points. Needless to say, respectable profits are available to the educated trader during this period.

The use of drawing tools can help traders recognize ranges and mitigate the emotional swings that occur during this time. By applying a box to the right of and centered on price depicting the 75 and 150 point ranges above and below the current price, traders can use drawing tools to recognize boundaries and mitigate the emotional swings that occur during this time.

VOLATILITY REIGNS
Like refining any other skill, properly gauging expectations requires time and experience. Once established, expectations serve to signal to the trader whether the probable market conditions fall into their individual comfort and skill levels. Nowhere is this more critical than when trading during periods of increased volatility, such as the FOMC announcements. Garnering an understanding of how the market flow preceding an announcement complements data from technical indicators, such as the average true range, gives the trader a competitive advantage.

The YM trader is now armed with the knowledge of what to expect going into the periodic FOMC meetings. Expectations are for a contracting market starting about a week before the announcement. On the day of the statement, the YM regularly trades in a 120-point range in anticipation of the forthcoming news. Finally, the Dow e-Mini will reward the patient, prudent and educated trader a sizeable reward as it oscillates in a 150- to 300-point range over the last two hours of the day. Applying reasonable expectations, such as these, into a trading strategy allows the trader to keep the profits earned during periods of high volatility.

Steve Bobbitt is a private trader and a futures instructor with the On-Line Trading Academy. He holds degrees in Finance and an MBA. Contact him at trail8llc@gmail.com.
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