Option Investor
Market Wrap

The Ghost of John Pierpont Morgan Rises Again

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Recently Bear Stearns (BSC) had denied persistent rumors about liquidity problems. This morning, market participants learned that some of those rumors were true. BSC said, however, that its liquidity situation had deteriorated rapidly over the past day.


J.P. Morgan & Chase (JPM) worked together with the Federal Reserve Bank of New York to provide funding for BSC, giving rise to memories of John Pierpont Morgan's famous efforts to rescue the financial system. Some may remember those stories of how on one very bad day in 1907, financial wizard John Pierpont Morgan gathered his cronies together and engineered a bailout that prevented a financial collapse.

In 1907, faltering banks and trusts had led to a situation similar to the current one. A credit crunch had resulted when some banks were reluctant to make loans. The economy had slipped into a recession. Lending was tight, and the whole financial system threatened to freeze.

JPM has come to the rescue in other instances since, and it did again Friday. Through the Fed's discount window, JPM obtained funds to provide secured financing for BSC. That funding was for an initial period of up to 28 days.

JPM assured its shareholders that they would not incur "material risk" as a result of the efforts it was making on behalf of BSC. The Federal Reserve assured the rest of us that it "is monitoring market developments closely and will continue to provide liquidity as necessary to promote the orderly functioning of the financial system."

Some signs suggest difficulty keeping the financial system functioning in an orderly manner. Thursday, the Federal Reserve's own figures showed that outstanding commercial paper, a measure of liquidity, declined $15.1 billion in the week concluding March 12. The decline was prompted by financials, both domestic and foreign. As noted in Thursday's Wrap, we need to see financials finding ready markets for their short-term paper (30 to 180 days) before we can feel any assurance that the credit crunch is easing. Companies that can't place this paper, needed to fund operations, are forced to go to banks for more expensive loans. If they can get them.

Friday, the Libor rate (the London Interbank Offering Rate) soared to a three-month high. This is the rate banks charge to borrow money from each other. It is not the same as the official target rates set by central banks. Those are the rates at which central banks lend to each other.

The British Banking Association sets the Libor rate, meeting each morning with representatives from 16 major banks. They all decide how much they're willing to lend and the rate at which they'll lend, and a rate is then calculated.

The rising Libor rate suggests that banks are afraid to lend to each other, not knowing the risks that each holds in their portfolios. The spike in the Libor rate perhaps indicates that the Fed's surprise efforts to increase liquidity, taken in cooperation with a number of central banks across the globe, are not achieving the desired results.

It is in this context in which JPM will be fulfilling its agreement to continue working with BSC to obtain permanent financing or alternative solutions. Some believe that these alternative solutions will result in BSC being taken over by another entity.

What happened to BSC?

Some blame BSC entirely. One article called BSC a "trafficker" in highly leveraged mortgage-backed complex securities. Some are kinder, saying that BSC just didn't get out of these securities fast enough when things started going downhill, as if it were a timing issue.

If you've been reading other Wraps recently, including mine, you know that there's been a growing disparity between the book value of mortgage-backed securities and their market value. A little over a week ago, when Swiss banking giant UBS was forced to sell its entire portfolio of Alt-A securities at what were deemed fire-sale prices to Pimco, the action was indicative of the spillover of the subprime mess into other types of mortgage-backed assets. When UBS sold at fire-sale prices, it could be reasoned that other counterparties to repurchase agreements would devalue the portfolios against which they had loaned money. They would insist that more margin be put up. And they have done so.

Here's some background from a previous Wrap for the benefit of those wondering what a repurchase agreement is. Repurchase agreements are forms of short-term borrowing. For the company selling the security, it's a repurchase agreement, and they're agreeing to repurchase it at a later date for a higher price. For the company buying it, it's a reverse repurchase agreement. The repurchaser buys them with the agreement to sell them at a higher price at some specific date. Companies might use the borrowed money they receive under the repurchase agreement to finance the purchase of other securities, such as portfolios of residential-mortgage-backed securities backed by Fannie Mae and Freddie Mac. When the value of those asset-backed securities drops too far, the financial counterparties to that agreement send out a margin call.

That's happened to Thornburg and Carlyle, both in the news for the last couple of weeks. BSC holds some of those mortgage-backed securities and collateralized debt obligations: too many of them, apparently. Although BSC blamed accelerating client withdrawals, it should also be noted that banks are insisting on higher margins and imposing higher borrowing costs on BSC, hamstringing its ability to conduct business.

BSC's stock plummeted amid speculation that it would no longer exist as a separate entity by Monday morning. Although JPM had issued assurances to its investors and its leadership role suggested that it must be in sound financial shape, its stock dropped, too, with JPM closing near the 3/10 low. Some speculated that banks other than JPM are being approached to acquire BSC, with rumors surrounding Washington Mutual (WM) among others.

BSC closed at $29.91. A MarketWatch.com article noted that BSC's stock price had dropped further than its record one-day 22 percent drop in the October 1987 stock market crash, a comparison that must send shivers through any who traded through that infamous day. When announcing that it would report its latest quarterly earnings Monday, BSC noted that its book value remains above $80.00, well above its current stock value, but that claim did nothing to stem the losses.

Amid the turmoil, Standard & Poor's noted that it has lowered ratings on BSC's long-term and short-term counter-party rating to BBB and A-3, respectively. Former ratings were A and A-1. Both were placed on Credit Watch with negative implications. BSC also garnered downgrades.

Articles speculated on other financials that might suffer similar fates. Lehman (LEH) was mentioned due to a widening in its credit default swaps. Financials such as Washington Mutual (WM) and National City (NCC) joined BCS in receiving downgrades in credit ratings, by Moody's in their cases.

Other financials have been impacted. Carlyle Capital got into trouble when it borrowed money to buy a portfolio of securities issued by Fannie Mae and Freddie Mac, with those securities backed by mortgages. In the past, these have been highly liquid because most believed them to have an implied government guarantee. However, with no market for anything backed by mortgages, what was once liquid had become illiquid. The value of the fund dropped, margin calls were made, notices of default were issued when Carlyle failed to meet those calls. By yesterday Carlyle announced that it expected its lenders to seize most remaining assets.

Carlyle Group's co-founder David Rubenstein told reporters of his desires to make amends to investors in Carlyle Capital. He said he was searching for legal and other methods of compensating those investors, allowing them some reparations for their losses.

However, the developments during the pre-market period evaporated the good feelings engendered by the milder-than-anticipated CPI. Prices on indices hesitated a moment after the cash open and then dove. The rest of the day saw choppy price movements that result in a new low in the afternoon for many indices and then a soon-failed rally attempt.

Let's see how much damage was done.


For those not accustomed to reading my Thursday Wraps, I consult a number of charts--standard and nested Keltner--of different time intervals--intraday, daily and weekly--to determine possible support/resistance levels and interpret chart action. The annotations bring together information from daily and weekly standard and Keltner charts. The end of the article includes a number of intraday charts providing benchmarks to watch early Monday morning.

The daily charts, especially with the weekly information included, provide an overview, but don't neglect to look at the intraday ones. Thursday, the daily chart suggested that the indices were poised to push up toward their 30-sma's, but the intraday charts provided benchmarks to watch to determine if that looked feasible. The potentially strong resistance indicated on those intraday charts held; the potentially strong support did not, and down prices went.

Annotated Daily Chart of the SPX:

Barring a weekly close above about 1340, the SPX still looks vulnerable to the bottom of the blue channel and perhaps even to 1235, a Keltner target. That vulnerability should be factored into trading decisions as should the potential bearishness of the possible triangle shape setting up on the daily and weekly charts.

Typically prices stay inside the triangle until they've moved about two-thirds of the way through toward the apex, which would give the SPX time to act on that potential reversal signal on the weekly chart and push up through the triangle one more time. That's not a given, but traders who elect to participate in a bullish trade on the hopes of a move up through that triangle should assess how much risk they're taking home with them each evening and whether they feel comfortable with that risk or should lighten it before the close of each trading day.


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Bears should do the same. Some Fed actions appear to be calculated to do as much damage as possible to short positions. This morning on CNBC, Art Cashin mentioned the "suicidal shorts" who have gotten slashed on several separate occasions by pre-market developments. We don't want our subscribers to suffer that consequence.

Even a casual glance at these charts shows how often steep declines are met by strong bounces and bounces that end on the highs of the day, erasing literally days of losses, are followed by strong declines. If the triangle interpretation proves valid, it's only going to get worse.

This week's economic developments, coupled with BSC's earnings, option expiration and the FOMC decision, provide plenty of opportunities for an upside breakout or downside breakdown out of that triangle. Although great trading opportunities can result heading into an FOMC meeting, this triangle interpretation and the more typical chop leading into the decision might combine to produce untradable conditions ahead of the FOMC decision. Those may be worsened by typical option-expiration gyrations. Decide by Monday's close how much risk you want to carry into the trading day Tuesday morning.

Annotated Daily Chart of the Dow:

Annotated Daily Chart of the Nasdaq:

Watch the wedge's defining trendlines for potential support and resistance, and look for RSI confirmation. Remain prepared to be whipsawed out of a trade as typical technical analysis tools are rendered less useful pre-FOMC and during option-expiration week. Next week will be all about positioning portfolios ahead of that FOMC decision and expiration, and not about what some oscillator says.

Annotated Daily Chart of the SOX:

This triangle has narrowed enough that the SOX must either break through it quickly or it will be useless as a technical analysis tool. Once prices move too close to the apex, any little jit or jot will constitute a seeming breakout when the SOX may just be widening the formation again. Watch the SOX, as it sometimes leads other indices and may do so by breaking out of this triangle before other indices break out of theirs, but be aware of its tendency to hit a few stops and then settle back in again.

Annotated Daily Chart of the RUT:

Annotated Weekly Chart of the TRAN:

I don't follow the Dow Jones Transportation Index (TRAN) as a trading vehicle, but rather as a sort of indicator index. Although their charts have diverged, in most times, the Dow, SPX and OEX do not travel too far in one direction if the TRAN is headed the other.

I follow another chart as an indicator of where U.S. equity prices might go: the USDJPY or the U.S. dollar valued against the Japanese yen. For several years, the SPX's chart tracked the USDJPY's with the USDJPY often leading. Both intraday and daily charts showed congruence. Then, in October 2007, the two diverged. For example, the SPX made a higher high while the USDJPY made a lower one, after which it rolled down. The SPX soon followed.

The shapes of their charts still show some congruence, although I'm attentive to the possibility that the yen carry trade might be unwound and will not soon be reinstituted. For those not familiar with the term, a simplified explanation is that because Japan's interest rate was so low compared to others, traders would borrow cheap yen. They would then use the borrowed funds to buy equities or other securities that they expected to provide higher yields than the rates they were paying on borrowed yen. For a while, those securities purchased were often U.S. and European equities. When the yen began climbing against the dollar and euro, those trades began being unwound. Quickly.

Now we see an interesting phenomenon. The USDJPY has dropped to a new low while the SPX has not. I've been taught that any difference at a market low is a bullish divergence. No bullish divergence predicts that price will climb, but equity traders should keep the USDJPY on their radar screens and bears should be alerted to keep their profit-protecting plans in place in case this bullish divergence is confirmed.

Looking at the chart now, however, nothing screams reversal.

Annotated Daily Chart of the USDJPY:

A fitted Fib bracket does not foretell a target, as Thursday's did not. For now, all we know is that there's tentative bullish divergence when comparing this chart to the SPX's, but that vulnerability to the mid 90's exists. If the USDJPY does dive to the mid 90's, equities will likely suffer, too, and the tentative bullish divergence may be reversed.

The selection of Governor Fukui's successor, if it happens next week, could change the entire character of this chart. If that governor is perceived as hawkish, likely to raise rates in Japan and unlikely to intervene in the currency markets, the USDJPY could soon drop further. If Deputy Governor Muto is selected, the USDJPY could bounce. If no one is selected, the values could wander around in some unpredictable manner, or perhaps could be reactive to rather than predictive of U.S. equity behavior. That has sometimes seemed to be the case over the last week or two.

Friday's Developments

Addresses by Federal Reserve Chairman Ben Bernanke and President Bush figured prominently in Friday's news. When speaking before the Economic Club of New York, President Bush acknowledged the difficulties facing the U.S. but asserted that this administration had reacted quickly to the crisis. He assured listeners that the U.S. economy has rebounded stronger than ever from each such challenge in the past.

He also mentioned the need for a strong dollar. As noted in Thursday's Wrap and in the chart section, the dollar's weakness signals continued weakness in U.S. equities, too. When the USDJPY began sinking beneath 100 overnight Thursday night, commentators across the globe called for intervention while other decried the effectiveness of any intervention even if it was attempted.

And who will attempt it? Intervention in the form of yen selling has typically been the tactic taken by the Bank of Japan, but the Bank of Japan is in a bit of a muddle these days. Next week marks the last work days of the Bank of Japan's Governor Fukui, with his successor not yet named, as was mentioned in the chart section.

Although it had been widely believed until recent elections unseated Governor Fukui's political party that his Deputy Governor Muto would succeed him, but Muto's nomination was rejected last week by the ruling party. That presents the specter of a central bank led by committee. This could occur at a time when concerted action by central banks across the globe is needed to keep credit markets from freezing and the financial markets functioning as smoothly as possible.

No one knows the hawkish versus dovish position of the next governor since that governor's identity is yet unknown. In this climate, Japan may be of little help in driving the yen lower against our dollar. Others have clamored instead for the Fed to stop easing or at least ease less drastically, in an effort to support the dollar. Other central banks have been staunch in their claims that their efforts must be directed toward stemming inflation, so they remain firmly against easing while our Fed continues to do so.

Chairman Bernanke spoke before the National Community Reinvestment Coalition's Annual Meeting in Washington, D.C. He said it was not appropriate for him to comment on the BSC situation when asked.

He titled his address "Fostering Sustainable Homeownership." As he has done in other recent speeches, he first detailed the process by which the country arrived in a situation in which "more than one in five of the roughly 3.6 million outstanding subprime adjustable-rate mortgages (ARMs) were seriously delinquent." He pointed out that independent mortgage companies not regulated by the federal banking agencies originated more than 45 percent of 2006's high-cost first mortgages. Those entities typically sold all mortgages they originated. He felt that lower mortgage rates and the efforts of the Hope Now Alliance may somewhat mitigate the effect of all subprime ARMs yet to reset, about 1.5 million this year alone.

Some would argue with him about how much mortgage rates have decreased. Last week, average mortgage rates for a fixed-rate, 30-year mortgage ticked up again, as did rates for all mortgage products. At 6.13 percent last week, the mortgage rate for those fixed-rate, 30-year loans was only slightly below the year-ago level of 6.14 percent.

More disturbing because it's indicative that the problem is deeper than first anticipated, about "45 percent of foreclosures [in 2007] were on prime, near-prime or government-backed mortgages," Governor Bernanke said. The problem will not stop with subprime mortgages.

Chairman Bernanke went on to detail the efforts that the Federal Reserve had made in response. The Fed has put together a proposal that would address such issues as unfair or deceptive advertising practices by mortgage originators, the prevention of lenders from paying a broker more than the borrower agrees in advance, a ban on prepayment penalties and other such changes.

The twelve Reserve Banks across the nation attempt to anticipate and mitigate foreclosure problems, he said. They supply analysis to groups who provide emergency funds or counseling or who attempt to draft policy remedies. Some efforts are being made to protect communities from the problems arising when a large number of properties are vacated.

My general impression is that while Chairman Bernanke provided an overview of the difficulties and the efforts of the Fed to respond to current problems and anticipate future ones, the response to current problems might not have satisfied. Perhaps Friday's tenor was just so negative that nothing would have done so, but some market participants want to know what the Fed is going to do right now, and they don't want to wait until Tuesday to find out. Those who would like to read Chairman Bernanke's prepared speech can find it at this link.

By the end of the day, the Fed funds futures showed what market watchers want and expect the Fed to do. Those futures showed a 64 percent chance that the FOMC would ease by 100 basis points next week. I'm not so certain they'll get their wish, although Friday's CPI certainly pushed away barriers to the FOMC's decision.

Friday's other developments included that long-awaited February 2008 Consumer Price Indices (CPI). Produced by the U.S. Department of Labor's Bureau of Labor Statistics, CPI delighted those who had worried that inflation figures might stay the hands of the FOMC members when they meet next week.

Futures popped on the report. However, when Art Cashin stood on CBNC and questioned the portion of the report that included a 0.5 percent decrease in February's energy prices, he was giving voice to the skepticism many felt. Thursday's February Import and Export Prices had shown an even larger decrease in February's imported petroleum prices, 1.5 percent, so that same odd decrease has been showing up on many reports.

That odd decrease on the CPI, at least, appears to be due to the time period in which the data was collected. Gasoline prices had dropped for the period in February when the data was collected then spiked higher again. With the current soaring crude costs, even those who believe in a February decrease think its beneficial impact has long since been erased.

Both CPI and the core CPI (less food and energy) were unchanged if seasonally adjusted figures were checked. Year over year, however, CPI has risen 4.0 percent and core CPI, 2.3 percent. Core CPI remains above the Fed's perceived comfort level. Both were below January's annualized levels of 4.3 percent and 25 percent, however, providing a measure of good news.

Medical costs rose a seasonally adjusted 0.1 percent month over month, and 4.5 percent year over year. As mentioned, energy costs fell a seasonally adjusted 0.5 percent.

Our FOMC members have noted that they expected inflationary pressures to moderate, and this report appears to vindicate them. Other central bankers across the globe have not been so certain about inflationary pressures, and their results have been different. Friday morning, the Eurozone reported February's CPI, too. It rose an annualized 3.3 percent. That was even higher than the anticipated 3.2 percent. Although many have called for concerted actions by central banks around the globe, believing that all should lower rates in concert, the ECB's President Jean-Claude Trichet has stood firm, not changing his hawkish tenor when speaking about near-term price pressures.

Many believe that China will be forced to raise rates, too, to control inflation pressures that have been ramping up. When other central banks are keeping rates steady or ramping them higher while our central bank lowers rates, our exporters benefit but we pay more for imported goods.

That's because something else happens: our currency tends to weaken against others. This week, something monumental happened, something shown on the USDJPY chart in the chart section. The USDJPY (the U.S. dollar compared to the Japanese yen) dropped to sub 100. It took fewer than 100 yen to exchange for one U.S. dollar. The dollar also hit a record low against the euro.

Because of the importance of the yen carry trade over previous years, our equity performance has tended to track the direction of the USDJPY, as noted earlier. Those who want a steadying or a bounce in U.S. equity markets have a quandary when looking forward to next week's FOMC decision. That quandary may complicate the reaction to the FOMC's decision. Should equity bulls pull for more easing, hoping that will improve the subprime and credit crunch situations? Or should equity hope for a smaller easing, perhaps 25 basis points, to keep the U.S. dollar from weakening even further than it has?

Those who would like to peruse the CPI report in its entirety can find it at this link.

March's University of Michigan/Reuters Consumer Sentiment had been expected to drop 69.0. In a better-than-expected result, the sentiment number dropped only to 70.5 from February's 70.8. The March number still proves to be the lowest result in 16 years.

Breaking the number into its components showed the current conditions index gaining to 84.6 from 83.8. The expectations index fell to 61.4 from 62.4. That also marked the lowest number in 16 years.

Other developments on Friday included new records on retail gasoline prices and diesel and heating oil futures. Those followed crude's record prices earlier in the week. Crude retreated ahead of next week's futures' expiration. Jim Brown detailed his expectations for crude in Tuesday's Wrap and will update those expectations in this weekend's Leaps column and next Tuesday's Wrap.

Next Week's Economic and Earnings Releases

Next Week's big event is the FOMC decision to be announced at 2:15 Tuesday, March 18. Other events are as follows:

Monday, March 17
8:30 am March NY Empire State Index
9:00 am January Net Foreign Purchases
9:15 am February Capacity Utilization
9:15 am February Industrial Production
After Market Close: Bear Stearns's Quarterly Report

Tuesday, March 18
8:30 am February Building Permits and Housing Starts
8:30 am February PPI and Core PPI
2:15 FOMC Policy Statement

Wednesday, March 19
10:30 am Crude Inventories

Thursday, March 20
Before the Open: Stein Mart (SMRT) Earnings
8:30 am Initial Claims
10:00 am February Leading Indicators
10:00 am March Philadelphia Fed

Friday, March 21
Market Holiday

Both Monday's March NY Empire State Index and Thursday's Philly Fed are sometimes predictive of the ISM's take on manufacturing, and both can prove market moving. Monday's number occurs before the market open, but Thursday, traders should be aware when making any early morning trading decisions of that approaching report at 10:00 am.

Each day other than Wednesday features possible minefields for either bulls or bears, and market craziness will already be impacted by the FOMC decision and option expiration.

One note about option expiration: This month's expiration occurs during shortened week. We have a market holiday Friday. Check with your broker for complete information, but that will change the expiration schedule. Wednesday, March 19, will be the last trading day for March index options such as the SPX's. Settlement values will be determined at the open on Thursday, March 20, rather than Friday, since no trading occurs Friday. March 20 will be the last trading day for March equity options and for indices such as the OEX.

Don't let the altered expiration schedule take you by surprise. If you're trading something other than index or equity options, check the schedules because the times when they stop trading or are settled vary.

What about Monday?

I've eliminated some Keltner channel lines on my intraday Keltenr charts for clarity. What remains notable on these charts, however, is how little the Keltner support or resistance has mattered as prices chop back and forth. Usually black-channel support and resistance are strong enough to stall prices or bounce them, as they did on occasion last week, but mostly prices have just chopped back and forth willy-nilly.

It's not that the Keltner channels are failing: in fact, they're illustrating what we know from our own impressions as we wake each morning. With worried glances, we study television or computer screens to determine direction the markets are going to gap. Markets are disorganized, pushed around by each new announcement. The failure to adhere to any kind of typical behavior around Keltner channels illustrates that there is very little pattern or predictability about what might happen next.

Annotated 15-Minute Chart of the SPX:

Ordinarily, sustained values below the channel line now at 1276.24 would set a potential downside target of 1257.70, but Thursday's break did not move anywhere close to the potential target. Also, ordinarily, sustained 15-minute closes above the line now at 1320.82 would set a potential upside target near 1343.53, but the SPX hasn't traded closer to the red price channel's boundary than the Keltner setup.

Annotated 15-Minute Chart of the Dow:

Annotated 15-Minute Chart of the Nasdaq:

Annotated 30-Minute Chart of the RUT:

For now, prices churn within price channels or formations on both these intraday and daily charts. The price behavior within those channels on intraday charts appears somewhat unpredictable, as indicated by their atypical responses to Keltner channel support and resistance, as well as they way they chop back and forth across the 9-ema's on those charts. They neither trend along those 30-minute 9-ema's nor have they flattened them, as is typical in range-bound trading. The good news is that there are more than enough potential developments next week to break the stalemate and perhaps even get at least a short-term trending market going. Watch for breakouts out of the price channels, confirmed by breakouts out of black-channel Keltner resistance levels. For those who don't have Keltner channel capabilities (black channels are defined by a central 45-ema with a multiplier of 3), watch those price channels for guidance.

When making decisions to either go long support or short (or go long puts) at resistance or else wait for breakout trades, cast these charts intraday charts in the context of weekly and daily charts. The weekly charts show potential reversal signals. To best support the case for those reversal signals, prices should not push below last week's lows. It would instead be preferable if they opened near or above last week's open and then stayed above it other than for quickly reversed spikes lower. That open was 1293.16 for the SPX. Those conditions do not have to be completely met for a potential reversal to be possible, but those are the optimal conditions.

Where might indices go if they do reverse? If they bounce and if your trading the long side, prepare profit-protecting plans for tests of the 30-sma and the other benchmark levels indicated on the daily charts. If those levels haven't been reached in the course of the trading day in which you entered the trade, ask yourself if you want to carry those long positions overnight or if you want to just lock in your profits, considering the market environment and the potentially bearish setups on some charts.

The charts show me that possibility of a reveral signal being confirmed on the weekly charts. When looking at the weekly chart, it even looks like the most probable setup. However, if indices do rise, they'll be rising within consolidation zones of various shapes on intraday and daily charts, whether they're the possible bearish right triangle for the SPX on its daily chart or the less bearish versions on other indices. All such formations on the daily charts are forming at the bottom of steep declines, mostly within the descending price channels that began to form late last year.

And there's this other thing. For those of you who celebrate Christmas, can you remember that feeling of letdown that occurred sometime about midday Christmas Day, when you'd finished opening all presents, when you realized that the gifts you'd gotten didn't really change your lives?

I'm afraid that market participants have pinned too many hopes on the FOMC's March decision. Whatever that decision is--the dollar-saving lower easing or the market-hope-building greater one--it's not going to prevent further upheavals such as the one created by BSC's situation on Friday. Other BSC-type situations still might arise. Market participants hailed the recent steps that the Fed took to increase liquidity, but the euphoria didn't last, and when that after-Christmas disappointment sets in, the possibility of a real capitulation day exists. That's a fear, though, and not something yet showing up on the weekly charts, with their potential reversal signals.

If that letdown occurs, it could precipitate failures from support rather than any attempted push up through consolidation zones. If so, follow with account appropriate stops and ask yourself each evening if you want to lock in profits or carry that risk overnight of one of those wild gaps higher.

Trade lightly if at all ahead of the FOMC decision as well as in the immediate aftermath, when volatility arises and true direction is not usually predictable. Realize that you don't have prime trade setups right now. If your trades aren't working, it may not be your fault. If they worked before, it may only be that the market conditions have changed so drastically. Realize what's happening and scale back trading in response. You may not be responsible for the market conditions but you are responsible for protecting your trading capital.

The consolidation formations on many daily charts prove that setups aren't prime, as does the squirrelly reactions to typical Keltner support and resistance levels. So does the fact that your blood pressure escalates each morning when you turn on the television to find out that the nice cushion you had at the close of the previous trading day has evaporated. Unless you're one of those "traffickers" mentioned in that report on BSC, you're not responsible for market direction. You can't control it. In many cases these days, you can't even predict it.

What you can control is your own reaction. You can do this. Scale back or refrain from trading if the setups aren't working out. Use the time to listen to webinars and practice new trades on paper or with your broker or trading platform's simulator. While your long-term portfolio deserves consideration, too, remember that we are options traders and we can benefit from moves both directions. Wait for the optimal setups because they will occur. Not right away, however, if markets continue to churn within those price formations on the daily charts.

Make a practice of evaluating the risk you're carrying home each night before the market close. If that risk is more than you can afford to lose, lighten it. If you're balanced too heavily toward the long side in too many stocks or LEAPs or even long calls, and you can't or don't want to close those, consider buying protective puts or collaring some of your long stocks or LEAPs by selling an OTM call and using the proceeds to buy an OTM put. (Consult your broker about the pros and cons of such positions.) If you're too heavily short, consider locking in some profits by stepping out of at least a portion of your positions.

Consult your broker if you want to hedge positions and remove some of the delta, vega or theta risk that way. Take profits too early rather than too late.

And good luck.

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