Volatility Trading Plan: Buy Rumors, Sell News Events?

The market has responded to recent announcements by the Federal Reserve pretty much as expected – forward without stopping.

With no extraordinary changeups in anticipated data, the market had already priced in the arrival of the quarter-point rate adjustment. The Federal Reserve (Fed) suggested it will raise interest rates up to 11 times through 2023 in an effort to stifle inflation.

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Does volatility trading plan count rumors, news?

What follows events such as rate hikes in a market rampant with volatility and chop can often be a news event that makes a soft landing. Emotions were high for a time before the Fed rate hike, but has the concerned market sentiment settled down?

Following the announcement by the Fed, the indexes spent much of the next day in the red. The market has been up-and-down since – this week opened in the red and Tuesday was back in the green – forward with volatility.

The common price action on a news event of this magnitude historically is a retracement in price. These events provide an opportune time for traders to look back at the stock price at the time of the announcement.

With intraday swings of 100 points or better, traders should note the levels indicated as a balance of the highs and lows on the charts for the time of the announcement.

Take a broader market view

Zooming out to a wider time frame can reveal the earlier responses of the market to similar past challenges. With a broader market view traders can watch for technical signals that indicate the price action will resume at that level.

Understanding market past performance in similar uncertain environments provides insight into market response to current events. This is important for traders to understand when traders see the stock market moving into bear territory.

Add market statistics, historical movement

When the overall market moves downward in response to record inflation and geopolitical conflicts, being armed with the statistics of historical movements helps traders resist the temptation to sell during market lows.

Notating key levels of support and resistance allows long, bullish traders to know what area, or zone, they are trying to defend. Traders should be aware of where the price levels are that provide support and keep it afloat.

As the broader market rallies bearishly into resistance toward a low exponential moving average (EMA), the market could be taking a reprieve from selling off. This means that traders should exercise caution in terms of shorting the market.

With multiple Fed rate hikes on the horizon, there is the possibility these rising rates could become a nonfactor.

Buyers may be expecting continued quarter-percentage-point hikes – the Fed is estimating increases to 2.75% by 2023 – yet, cautious buyers may simply move forward.

Market knows how to “price in” interest rates

While the stock market may “price in” these interest rate hikes, it is not clear that the market or traders are thrilled about them.

With fears the rate hikes will drag down economic growth, traders will have to wait and see if manufacturing can supply ongoing consumer demand and lessen inflation. This uncertainty requires traders to stay vigilant in exercising risk management in their volatility trading plan.