Déjà Vu As Traders Await Fed Chair Powell’s Speech
In this article:
- Market rallies higher ahead of Fed event
- Market internal signals guide traders
- Not too bullish, not too bearish
Traders are getting a feeling of déjà vu waiting on the “voice of the Fed” tomorrow.
Federal Reserve (Fed) Chairman Jerome Powell is set to speak at 9 a.m. Central on Friday during the Federal Reserve Bank of Kansas City Economic Policy Symposium in Jackson Hole, Wyo.
Media and analysts alike have been heralding the chairman’s speech as a hinge point for stock market direction to close out a year that has been a whiplash of ups and downs.
Following a positive day across the three major indexes, traders can only wait for what may happen after Powell speaks.
Fed Chair Powell keeps stock market at bay
While the team at Simpler Trading doesn’t work the market from one news event to the next, the stock market has reacted in line with Fed meetings this year.
The Jackson Hole Fed symposium has become a focal point as the market and traders appear to hold their collective breath to dissect every word that falls from Powell’s mouth.
“He is going to do his best to say what he thinks the market wants to hear instead of saying what he should be saying,” said Bruce Marshall, Senior Director of Options and Income Trading at Simpler Trading.
Powell’s verbiage harkens back to a year ago when the official mantra was “transitory” inflation. The Fed tried to pass off inflation as a temporary situation when the investing and trading world knew there was more to the story.
This year inflation spiked to a 40-year high and is expected to continue. The Fed has raised benchmark interest rates with another jump expected in September in an effort to curtail inflation.
Words matter tomorrow when it comes to Powell and the stock market reaction.
“If Powell can pull it off and give a little bit of hope to the market, we could go higher,” said Bruce. “The market always wants to go higher.”
No matter the reaction tomorrow, the stock market will digest the Fed event and move forward toward more “data points.” These include non-farm payroll, consumer price index, producer price index numbers in September. Data releases will be followed by the regular Fed meeting later in the month where the next round of higher interest rates will be announced.
And, like every day in the market, unexpected factors – positive or negative – could influence the market.
Yet, even updated gross domestic product (GDP) data (indicating a technical recession) didn’t phase the market which appears poised to rally off Powell news.
In the market today, the indexes rallied with the Dow closing at 33,291.78 points to gain .98% (adding 322.55 points on the day). The Nasdaq topped all indexes to close at 12,639.27 points for a 1.67% spike while the S&P 500 kept the pace, jumping 1.42% to 4,199.52 points.
What’s the plan in volatile market?
For Bruce, little has changed in his trading plan since the beginning of the year.
He has managed risk, protected capital, and followed the indexes closely.
“It’s been a lot safer this year just trading the indexes,” Bruce said.
In his specialized training – B.I.A.S. – his trading account has grown more than 27% this year. Most of the trades have been what he calls “singles and doubles” – short-term trades with limited capital exposure. This includes plays on the long and short side of fast market moves.
He has focused on targeted trades to create wins in the range of hundreds of dollars vs. “home runs” in the thousands of dollars.
He argues that steady hits with an occasional dinger keep the trading plan active and his account profitable while limiting losses along the way.
“That’s the way to do it in this market,” Bruce said.
Bruce also promotes “taking the money” when a trade is working and the market continues its chaotic course.
“You have to be ready, willing and able to pull the trigger and exit a trade at any cost, win or loss, at any point in time if it starts going against you,” Bruce said.
Courage in this market environment can be described as knowing when to take profits instead of holding for more, because the market has shifted suddenly so often, taking out what would have been profitable plays.
Bruce continues to use multi-leg options setups such as diagonals, condors, butterflies, and credit spreads that have proven profitable for him through the market volatility.
He cautioned traders to make sure they are following the pattern day trader (PDT) rule .
There are strict federal rules for day trading which is considered risky. For most traders to day trade, the PDT rule requires at least $25,000 in a trading account.
This limits traders with smaller trading accounts and how they day trade. The PDT rule limits traders with less than $25,000 to three day trades over a five-day rolling period. Traders who exceed these limits could have their accounts frozen for up to 90 days.
The rules are designed to protect traders.
“When you are in this kind of craziness, limit your risk as always,” Bruce said. “Remember, the best traders are the best trade managers.”
Market internal signals guide traders
A key takeaway about the trading strategy of Bruce and other Simpler Trading team members is they adapt to the current market to trade using a combination of methods and tools.
These can include Fibonacci levels and Voodoo Lines® as they follow the indexes (particularly the SPX of the S&P 500) and key internal signals.
Here are market internal signals followed by Simpler’s traders:
- $ADD – Advance/Decline Line (ADD) indicates whether stocks are trading above or below their prior close. $ADD helps define a sense of the broader movement of the market.
- $TICK – This measures upward or downward movement in price for a security, or how fast assets are bought and sold. Continually negative $TICK indicates more selling than buying, or bear market conditions (lower zones).
- The Chicago Board Of Exchange (CBOE) Volatility Index (VIX) index anticipates market volatility over the next 30 days. The VIX is considered the “fear” index.
- The put/call ratio is the ratio of the volume in trading between put options trading and call options trading. The put/call ratio helps measure market sentiment of bullish and bearish traders.
Monitoring internal market signals is a daily part of the trading plan for traders working to confirm market direction.
This broader view of price action in the market lets Simpler’s traders navigate the persistent volatility that includes sporadic, extreme moves.
“For now, which has been the case since January with this sloppy, choppy market, use tight stops and manage your risk,” Bruce said.
As the market reacts to the next Fed speech, Bruce doesn’t plan to get too bullish or too bearish.