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Fed rate announcement due at 02:15 PM EST

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While the FOMC decision on interest rates is expected to reveal a "no decision" today and have the Fed keeping its Fed Funds Rate at 1.25%, many expect the Fed to change its bias to a more guarded view of weakness in the economy, much which may have been attributed to a decline in consumer confidence and uncertainty with Iraq.

However, in last night's address, President Bush put to rest the thought that a drawn out resolution with continued U.N. weapons inspections would continue to delay the uncertainty.

President Bush's address, combined with U.N. weapons inspectors and various diplomats and many reporters leaving Baghdad in the past 24-hours brings to a head the event of war and most likely has traders and investors now implementing action plans as to timelines and once a war begins, how a war campaign impacts the equity markets.

On chart I'm using to try and help myself "envision" a market trade is the Dow Industrials (INDU) 8,178 +0.4%, which has been seesawing back and forth the unchanged level today. I'm using our weekly and monthly pivot analysis to try and ascertain certain levels, which might be traded under both successful early results of a U.S.-lead attack on Iraq, but also compensate for a negative trade should the campaign experience difficulty.

Dow Industrials Chart - Daily Chart

With Treasuries seeing another round of selling today, it would be my view that the Dow Industrials (INDU) will most likely continue to build bullishness up into a zone of resistance from 8,214-8,251 from our WEEKLY (blue) and MONTHLY (red) retracement. In last night's Index Trader Wrap at OptionInvestor.com, we looked at the Dow's point and figure chart, with a focus on the "apex" of the triangle that had formed in the Dow in March and April, with the apex of that triangle at the 7,890 level. This is a "zone" of support that I feel should hold should the markets become a little "jittery" when a first attack strike on Iraq takes place.

President Bush gave Saddam Hussein 48-hours from last night's address to leave the country and that would put the timeline for a first strike to at least Wednesday night. However, while I would no way be giving away any type of "U.S. secret," I would think that it might be "best" if the U.S. were not to strike until at earliest Friday evening.

My thinking here is that this would allow U.S. citizens and investors around the world an opportunity to follow news events during a market closure, from the safety of their homes, to monitor how things go.

Again... I doubt seriously that President Bush or his military chiefs would strategize around stock/bond market trading, but a timeline for a weekend strike under "code orange" might make sense.

In past commentary, I've profiled two "partial position" bullish trades in the Dow Diamonds (AMEX:DIA) in an attempt to gradually leg into a bullish trade, from a level of bullishness that I felt was "oversold" longer-term. Yesterday's trade offered bulls a pleasant surprise when the very narrow Dow Industrials Bullish % ($BPINDU) reversed up into "bull alert" status at 16.66%, after having fallen to as low as 9.99% in recent sessions. Also somewhat "comforting" to Dow bulls is that the recent reversal in the Dow came just as the Dow Diamonds had traded their bearish vertical count of $75.00, which is equivalent to Dow Industrials 7,500.

My current thinking is that at the earliest, this weekend would be the earliest for a U.S. "first strike" on Iraq.

World newspapers have been reporting that Saddam Hussein has vowed not to leave Iraq and relinquish his Presidency.

While the FOMC is not expected to change interest rates at today's meeting, we had been seeing a mixed Treasury bond trade earlier this morning, but as the session has progressed, were seeing selling pick up, especially in the shorter-dated 5-year YIELD ($FVX.X) which rises to 2.885% and continues to have a flattening effect on the YIELD curve. As noted in earlier commentary today, this flattening of the curve near-term should help hold a bid in stocks. The benchmark 10-year bond is also seeing a pickup in selling at this hour, with its YIELD ($TNX.X) rising to 3.894%.

With strength in the U.S. Dollar Index (dx00y) 101.02 +0.27%, it becomes my observation that money is flowing back toward U.S. assets, and the combined selling in Treasuries has many MARKET participants looking for a quick resolution with Iraq.

Jeff Bailey

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