Let’s look at the intraday action of the S&P around the Fed’s announcement. (December 19, 2018)
SP-500 SPY
Let’s see how the market reacted today when the Fed announced their interest rate hike and see how you could game this ( INDEXSP: .INX ). Because, frankly, it’s really easy to get whipsawed. I was looking at it and I kind of got the sense; I wasn’t as confident as so many of these other people were, that they were going to raise rates 25 basis points. I thought if they do that, that’s probably going to tank the market. That is what I thought; The market is already weak so they are probably not going to do that. Of course, I was wrong.
Initially the market gapped up and then it totally tanked. Here’s why I am going through this; this is a 5-minute chart. The first move on these things a lot of times is typically the wrong move. You could look at this and what I mean by this is, you see the market come up and then it tanks. You’re thinking, Okay, I have got to sell this thing. And then sure enough, as soon as you sell the market rockets up to the upside.
Let’s look at this on a 1-minute chart. It’s the same thing right here. You sell this right down here because, Oh my gosh, the market is going to zero. That’s just the way it looks and then, boom, you get a move the other way. And then everybody says, “Well, I guess it’s time to buy. The market has been weak but quarter basis point they are only going to do two times instead of three, Yes, I think this Powell guy is an idiot but, hey, whatever, two is better than three so sure let’s buy them; the end of the year, lets party.” That is what you would expect a lot of times but it didn’t happen.
Here’s what you have to know: Because it didn’t happen don’t expect it to happen later. Once the initial zigzag is over, once it is over and then it picks a direction, either one way or the other way, you are not going to get somebody stepping up to the microphone saying, “You know what guys? I opened up the wrong envelope. The Oscar doesn’t go to whatever it was. It goes to the other one.” No. Once the market picks a direction on a day like this it is pretty much going to stick to that direction.
We did get a little bit of a move to the upside and I kind of think this was right around when people were waiting for Powell’s wonderful press conference so, Well, let’s wait and see what he says. Once he starts speaking, right about here, you are looking at the volume weighted average price, the VWAP. In fact, we’ll do it this way, SPDR ( NYSEARCA: SPY ); this gives you a better sense of where things are. The market starts selling off and then at some point it starts to rally. Then Powell is in his press conference; this thing goes right up to the volume weighted average price level here and it does not move higher. So once this starts to roll over if you are a trader you need to be liquidating your long positions.
This is just a good chart to keep in mind and this is why: Because the next time this type of thing happens it’s going to be easy for you to get kind of sucked into this thing and start looking at the same thing, Oh, maybe it’s going to bounce. Yes, and by the way, it actually did rebound a little bit. You are going to forget about the big picture is what I am saying and you are going to get whipsawed. Like I said, it’s happened to me. It never makes me happy and so that is why I like to keep these long-term trends in place. Where I remember what’s happening here.
So the takeaway for you here would be VWAP, volume weighted average price. This is what you want to be looking at. If the market is below it, that’s a weak market. If it comes up to it sellers are going to look at this as a great opportunity to sell because it is close to where most of the stock has traded hands. Buyers are not going to look at this as an opportunity to buy because it has been lower. They don’t want to buy up at the VWAP they want to buy below.
So right here is a real critical juncture, right here. And so you are waiting. If this started to rally to the upside, let’s say you got a buy program or something, we could have a totally different market here. Because suddenly everybody is rushing to buy before it gets too far away from the volume weighted average price. Shorts are covering. Everybody that was shorting confidently here is going, Crap, I am not going to be able to buy my Christmas presents after all. I have got to cover my shorts. That’s not what happened. Instead, we did get this sell-off.
So once you see this inflection point and you see the direction, that’s what you need to cue in on and just stick to your guns. As long as the trend is moving then stick with the trend and don’t be trying to pick the turns. You are not going to be able to do that.
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