Looks like the market is going to ignore the shift in the Fed for now. It was not long ago that a rate hike with anticipated aggressive language would have put the markets into a tailspin. But not this time. When bad news has no effect on a market going up you do not want to stand in the way of the market.
Of the many indicators out there one of the best is how the market reacts to the news. This indicator is saying an all clear for the markets. Combine that with the tailwind historically this time of the year in the markets and you want to be on board this run.
Now the tricky part is when do you get off the ride. Sure you could look for any number of divergences that might crop up. Or you might embrace a mean reversion strategy. That strategy right now would be breaking you!
I think the best approach is a simple moving average strategy. For the Daily charts the simple 10-day moving average is a good bellwether. Or the 20 day on a 240 min chart works well also. The rule I use is more aggressive above these averages and safety mode below.
When one embraces a strategy of this nature it’s important to realize your only dealing with probabilities. Nothing in the markets is gong to work perfectly. Also, nothing is going to work forever. Once word gets out what were once profitable strategies tend to go way down in value.
So what is one to do? It is important to have a positive EV set of rules to trade. But more importantly, its an absolute necessity to have a systematic position sizing methodology in place. Sure you could risk the same amount on each trade infimum but you would be short changing yourself. Pick a bankroll and use the 2 to 3% rule for the size of your trade.
That would be 2 to 3% maximum risk per trade. That way as your bankroll fluctuates so does your trade size. Also, this makes it relatively easy to figure out how much to invest in the trade. If you have a 100,000 bankroll set aside for trading and you are using 2% maximum risk than 2000 is the amount of risk on the trade. If your stop is saying 1 point on a 20 dollar stop than the amount you purchase is 2,000 shares.
Now we also have gaps to factor in along with at times fast-moving markets. So you want to give yourself some leeway on this. So you should set an amount to take into consideration slippage. A good rule would be to reduce the trade size you come up with by 10 to 20 percent.
Now, onto today. I am long looking to get longer. The Fed announces today and it’s already built into the market that there is going to be a hike and the language is going to change substantially.
My guess is the language will be very aggressive and will initially surprise a lot of people. So the knee-jerk could very likely be to the downside for today and maybe tomorrow. Or maybe just 30 min or so. If we get this type of knee-jerk reaction it would be a buying opportunity.
I have one more prediction and that is Yellen will not remain head of the Fed for very long after the change in administrations. I have to think a replacement is already planned and selected. Let’s see how that prediction plays out:)
The markets 30 min before the open is taking a rest however QQQ is up while SPY is off slightly. The SPY and QQQ weekly chart are not showing anything close to triggering a long. I was hoping to see it trigger this week which would set up a great entry to coincide with positive seasonality. It would take a big move the next few days to trigger this by Friday. But I will be watching it.
If you want to follow some of my trades along with my thoughts typically given after the open you can go to @rickjswings. It’s my private twitter feed for the stock market and its free. Sports Handicapping is the subscription-based part of this site. But considering the cost of joining it’s almost free:)
Good Luck Today
RickJ
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