Peter Stolcers of One Option (http://www.oneoption.com/) wrote a nifty little article on the day of the last FOMC meeting (Dec 11th) on how to play the news.
pointed out that most investors, traders, Wall Street analysts and the markets in general were of the opinion that the FOMC meeting would bring about a 25 basis point cut in the Fed Funds rate, which indeed happened.
But it was reading between the lines of the FOMC rhetoric wherein lurked the opportunity for a successful day trade on the news.
Fed watchers-which we all are these days-learn to listen closely to what is said by the Fed.
noted, if the Fed makes "dovish" statements, there is a chance that we will see a rally in the markets; conversely if the statements are "hawkish", we are likely to see a decline.
If, on the other hand (does that make three hands?) the Fed makes balanced statements, we are likely to see choppy back and forth action.
Under this scenario, the market will settle down before the close, posting a marginal gain/loss for the day.
To follow on to Fed statements are the reports on retail sales, Producer Price Index (PPI) and Consumer Price Index (CPI), which usually support the Feds decisions.
One way to check the veracity of the inflation numbers is the Libor rate.
LIBOR is considered by most to be the true cost of capital (LIBOR is the London Interbank Offered Rate).
goes on to elaborate on a day trading strategy using the SPY Index as the benchmark.
suggests that a trader first pick the strongest and weakest stocks or options (make sure to check the bid/ask spread on the options).
In the case of the recent December 11th Fed rate adjustment, he
used an SPY at or above 152.50 as a trigger point to go long on strong stocks and 150.80 to go short on weak stocks.
was right in that the SPY plunged to a low of around 148 at close after the Fed announcement.
It would have been a nice day trade on the short side; however, traders had to be very light on their feet to get out before close.
On the following day, December 12th, the SPY gapped up and opened at 151.6.
You can see Pete
really meant a day trade.
The day trade was made strictly by playing on the words.
Pete Stolcers of 1option.com hit me in the sweet spot when he talked about using comparative RSIs to make stock option trades.