One Small Step

 Will a Fed-fueled rally following the most recent interest rate decision be the catalyst that sends our bedraggled stock market on a prolonged upward march? 

With the market heading essentially straight down week over week for the last three months, that's like me asking if that one chip shot I somehow put in from 80 yards out actually means I'm a good golfer.

A sustained market move in either direction takes time to prove before we can confidently claim that a move is underway. So while Tuesday's rally off historic lows to end the session, followed by Wednesday's strong advance after some initial post-Fed volatility might have been a sight for sore eyes, it by no means signifies a bull market in the making.

 And, what about the overall economy? The Federal Reserve's .75 basis point raise on interest rates, the largest single rate hike in almost 30 years, means that it just got more expensive for lenders to borrow from each other, therefore making it more expensive for us to borrow. The immediate silver lining is that you'll also earn more on your savings and investments (provided, of course, that you still have any savings and investments to speak of). The goal of all this is expensive lending is to slow economic growth so that inflation will eventually level off and begin to come down. Imagine that! But for now, the things we buy are expensive thanks to a myriad of issues both domestic and global many of which are quite frankly out of the Federal Reserve's jurisdiction, and the higher interest rates means that the things we buy won't be getting much cheaper any time soon.

Like all of the best things in life, we'll have to wait a little while for inflation to wane and for prices to come down. But it's hard to get too jazzed about an economy that our Central Bank is actively attempting to shrink. Just remember folks, that a recession, should we get there, is in fact a vital aspect of a healthy economy (Checks and Balances!) to be embraced for the opportunities it yields, rather than feared and loathed.

Then there's the stock market. After enduring a merciless beating since the middle of last quarter, the market seemingly took solace in the Fed's suggestion that subsequent rate increases would be somewhat tapered and rallied to end the day on June 15th well into positive territory. What, if anything, does this brief 90-minute rally mean for traders?

Very little, if anything.

Whether the market and the economy go up or down, there's money to be made in every move and our goal is not to concern ourselves with the overall outlook, but to react by discovering trading opportunities no matter which way the market blows.

When the market reacts violently after a key announcement such as an interest rate decision, it's crucial that we use our discipline and avoid jumping into the market too eagerly. The wild swings may be enticing for their quick-reward potential but they're also extremely risky because the volatility can just as quickly work against you. But if we're patient, with an awareness of areas and formations that might hold, we tip the percentages in our favor when the time comes to make a trade.

Above is the 5-Minute intraday chart for the Diamonds ETF (DIA) which tracks the Dow Jones Industrial Average. The blue arrow points to the period of massive volatility immediately after the Fed's announcement, when DIA swung in a $4 range, between $303.50 and $307.50. If you attempted a trade during the approximately 10-15 minutes when this range was put in and while the market was coming to terms with some initial shock, you likely got burned whether you bought or sold; unless you were incredibly quick and nimble. But, if you waited just a few minutes longer, you could have held out for a formation, which in this case was DIA coming right down to the previous day's lows, as indicated by the red arrow. There is no rule that says a low, or any level of support for that matter has to hold. But in this case, at least there was a formation, some point of reference to go by, and with a fairly easy stop. DIA enjoyed an $8 rally off of this higher percentage area, which is exponentially superior to getting chopped up in a $4 range.

Here we have the 5-Minute chart for JP Morgan (JPM) and see the same formation as we saw with DIA. In this case, JPM got a few ticks below the previous day's low (113.17 vs. 113.23) before rallying mightily along with the rest of the market. In this example, the previous low basically held but with the market being so skittish, you must allow for some slippage caused by volatility, making sure not to stop yourself out too soon under the lows.

The 5-Minute chart for Walt Disney Company (DIS) gives a slightly different look, but it was a strong formation all the same. The blue arrow in the chart above draws our attention to the closing price of the previous day, while the red arrow points out the low on the day in DIS after the initial Fed reaction. Notice anything? If you caught on that the post-announcement low was approximately the same price as the previous day's close, or in other words that DIS traded down to roughly unchanged, then you would be right on the money! On this chart, the unchanged area also provided DIS with some additional support, but more importantly it gave a reasonable area on which to base a trade.

As we saw upon waking the morning after the Fed's rate hike announcement, the brief rally was not immediately built to last. It did not carry over into the next session and we actually saw new lows in the indexes as trading unfolded, followed by another accelerated sell-off towards the end of the day. There are just too many factors working against the markets, as well as the reality that rate increases don't lead to immediate relief, to have much faith in a bull market right now. However, that does not mean that there wasn't money to be made on the rally and the day trader, patient when needed, but aggressive in the right areas, could have collected some substantial profits off of reliable formations. This will continue to be true no matter which way the market goes.