First there’s an important caveat to declare. The moments leading up to and after a Fed announcement can exhibit a lot of drama and chaos. Only those with a clear grasp of the risks and plan to deal with them (i.e., smaller positions, clear exit strategies, etc.) should participate.

In fact many seasoned traders say sit this one out until a clear direction forms. Kirk says Hang Loose and Wait It Out. Hansen advises to be ‘less active until Wednesday’. However Toni describes the typical market reaction to a Fed announcement that prompts us to create a strategy session called, ‘The Fed Watcher’:

Typically the Fed reaction will be three-fold on two time frames. Initially there is a three wave reaction on the 1-2 minute charts with one move, a counter-move, and then a return to the initial direction. This three-wave activity is then repeated on the 5 minute charts. Often the second move, countering the first, can be stronger than the initial reaction, so it’s important to not think that the market has actually reversed and will continue with the trend of the second move. This is rarely the case. I do not expect to do much ahead of the announcement this time around and will likely remain less active until Wednesday.

The Strategy: ‘The Fed Watcher: Bulls’

We will model Long opportunities in this window. Try to create the opposite version (‘The Fed Watcher: Bears’) in another window and display both side by side to get a feel for direction the market is taking.

How Its Modeled:

This window features:

• The “Unusual number of prints” alert to highlight which stocks are actively being traded
• The “Strong Volume” alert that is similar to the above alert in that it highlights stocks with a lot of activity but considers volume only
• The “Large Spread” alert to indicate where trading “chaos” exists and where the market is attempting to compensate by hedging the ultimate direction with larger spreads – it indicates a state of uncertainty
• The 50 and 20-day moving average crossover alerts indicate which direction stocks may take as they cross significant markers
• The “25% Pullback from Highs” alert captures the ‘counter-trend’ that Toni mentioned and offers a good possible entry into a stock that ‘takes a breather’ before climbing again

These alerts are all subject to the stocks that pass the Trade-Ideas FILTERS. Our trading universe contains stocks greater than $5 trading a daily average volume of at least 500,000 shares. We also filter for only stocks that are trading at the moment of the alert at least 2x their average current volume for that time of day. On top of that we included a Min Position in Range filter set at the 70th percentile so that any good long opportunity happens in the upper 30% of a stock’s daily trading range. Also there is a Min Up from the Close filter set to $0.05 so that the stock is at least positive when the alert occurs. The settings for the “Fed Watcher: Bears” are the exact opposite.

Who Can Benefit

Anyone who likes reading the tape and certainly trading the news. This often means short term traders and scalpers.

Footnotes

• We modeled a similar strategy of interest called, The News Watcher
• We also have a sample strategy called, Breaking News, that attempts to do the same thing as these strategies. While the alerts may be the same, they are different due to the filter settings
• Link to other Strategy Sessions here
• Remember that these set-ups are sketches meant to give you an idea how to model your own trading plan. Use this ‘as is’ or modify it to your own liking as many others do. Know, however, that Trade-Ideas.com and all individuals affiliated with this site assume no responsibilities for your trading and investment results. The indicators, alerts and all other features are for research purposes only and should not be construed as investment advice