Heading Into the Fed Rate Decision: Two Markets That Are Positioned to Rebound if The Fed is Friendly
Aaron Armstrong, October 30, 2007
With the Dow having been up for six straight sessions heading into today, a narrow range day after a gap-up on Monday and the unknown of the Fed just ahead of us I thought we should take a look at what might be setting up as potentially oversold heading into the Fed as a potential catalyst for a relief rally. Higher prices make it difficult for a buy the news reaction but more importantly they make it more difficult for a buy the news reaction to be sustainable, Fed reactions are notoriously unsustainable as they are. However, I have found a couple places in this market where a buy the news reaction might just be more probable based on the existing market structure as we await the Fed. OIH, it's been a source of endless traps but could the Fed be a catalyst for change?I haven't traded the OIH since they briefly caught me in a bull trap a couple of weeks ago. They have been nearly impossible trade because they haven't responded to Oil and the intraday ranges had really narrowed. However, could recent selling be setting up a bear trap if the reaction to the Fed is bullish? Generally I like to only focus on what has been working the best but the Fed decision could represent change. Below you will note the 30 minute buy Countdown for OIH, it's a rare signal, the last such buy Countdown occurred on April 20th just as prices were completing a sell-off from recent highs. The problem we face here is that the daily chart is so much more of a mess with a rather obvious head-and-shoulders top formation. Too obvious, it could be.
Next on our time frame analysis is the 60 minute chart for OIH, on bar 7 of a potential buy Setup 9. Key support comes at the TDST support level of 183.51. If the buy Setup 9 can record above TDST support and prices respect the 30 minute buy Countdown then I will strongly consider buying OIH for a relief rally.
China, Oversold?Only in terms of TD Sequential market structure but that's actually a good thing. It has become increasingly difficult to locate potential lower-risk entries into the strongest bull trends, an hourly buy Setup for PGJ, the Powershares China ETF, could help setup a more sustainable rally should the reaction to the Fed be a positive one.
PGJ is on bar 8 of a potential buy Setup 9 and it's above TDST support, that indicates a counter trend pullback. Should the buy Setup bar 9 record above this TDST support I will consider adding more to my existing position in PGJ. Another China stock, SNP, is on bar 8 of a daily buy Setup 9, there is some evidence here that should the reaction to the Fed be a continuation of our bullish trends that counter trend pullbacks such as this could be relative outperformers. However, all of this is predicated on the idea that these few potentially oversold market structures will be able to overcome an S&P 500 that is currently not setup in a friendly position for longs, new or existing. A lot will depend on the reactions of these buy Setups to support and when and where the confirmation signals occur. A lot will also depend on whether the S&P can overcome many of the headwinds it faces. These are really two of the main themes and potential trades I am looking at. October has been a good month and hopefully we can get past the Fed and into November with some greater clarity. Either way I have been trading lighter and will do so until the Fed reaction becomes known and reacted to itself. Hope it helps!
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