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Trader's Corner

Did Ya?

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Did you trade the indices the early part of this week? Although some traders, including some of the commentators on the OptionInvestor's Market Monitor, successfully traded during that difficult period, others must have pounded their keyboards in frustration when indices flattened.

A February 4 Trader's Corner article addressed the importance of knowing when not to trade, listing the time leading into an FOMC meeting as one of those times for all but the most accomplished traders. Action tends to flatten. Action flattened sooner and stayed flatter longer before this week's FOMC meeting.

Annotated 15-Minute Chart of the SPX:

As was pointed out in the February 4 article, the SOX's performance is sometimes more volatile than the SPX's heading into the FOMC meeting. That volatility this week took the form of quick moves followed by long periods of that same tight-range trading that was seen in the SPX.

That February 4 article noted that when indices begin displaying this tight-range behavior into the FOMC meeting, conservative traders might find it best to remain in cash until after the decision is made. First reactions after the decision also tend to be volatile, sometimes reversing directions several times.

Annotated Five-Minute Chart of the SPX:

Those quick reverses in direction sometimes set up a formation, most often a triangle. The break of that formation may then be more predictive of final direction. Is that what happened this week? Sure did.

Annotated Five-Minute Chart of the SPX:

Daily pivots, weekly pivots, extended-to-the-downside RSI, bullish divergences: none mattered Thursday after that formation broke. There's often a retest, sometimes one that briefly moves past the resistance or support just broken, but prices never even successfully retested the broken support Thursday. A trailing stop would have worked well, although it's probably true that the depth of the decline was likely exacerbated by options-related activity. This Thursday was the Thursday before option-expiration week. Rollover-related activity that used to be most prominent options-expiration week now frequently takes place on the Thursday and Friday of the preceding week.

Why make this hard? Some times exist when you just shouldn't trade, and the period leading into the FOMC meeting is probably one of them. There will be times when the market fears or looks forward to a certain decision and indices move ahead of that decision. That just means that you've missed one of the many successful trades that you're going to miss when you decide against a cowboy/cowgirl trading style and opt for a more conservative and possibly account-saving style. This exact setup happens far too many times to encourage traders to increase their blood pressure and decrease their trading accounts by trying to mentally move an index ahead of an FOMC meeting. The setup occurs so often that the text of this article, up to the "Is that what happened this week? Sure did." paragraph was written Tuesday evening, before the decision. All that was needed to complete the article were the after-the-decision charts and the summation.

You can find other times when it's best not to trade in that original February 4 Trader's Corner article. A note of caution, of course: even if this setup occurs often, as it does, stops are needed if you enter post-decision on a formation break, because . . . well, just about when you've figured out how markets tend to react, they change their reactions.

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