Stock indexes take cues from Europe

Eyes on the Fed

TUESDAY'S MARKET WRAP-UP

Market Snapshot for November 1, 2011 (5:12 a.m. ET):

Closing Prices: DOW 11,657.96 (-297.05, -2.48%), S&P 500 1,218.28 (-35.02, -2.79%), NASDAQ 2,606.96 (-77.45, -2.89%), Nikkei 225 8,835.52 (-152.87, -1.7), DAX 5,834.51 (-306.83, -5%), FTSE 5,421.57 (-122.65, -2.21%)

OIL 91.64, GOLD 1,721.00, SILVER 33.315

EURO 1.3692, YEN 78.34, BRITISH POUND 1.5946, U.S. DOLLAR INDEX 77.455

Market Takes Its Cue From Europe

The market is always impacted by the latest global headlines, but over the past several weeks this has been particularly true. Although strategies develop technically, it's overall market sentiment that leads to these technical setups. Lately that sentiment has been quite bipolar. Sharp upside on hopes that meetings among European Union leaders would be fruitful in developing a solution to the region's debt crisis were followed by the realization that there is no "quick fix" and officials are divided on how to best mitigate the disastrous situation.

Earnings

In the meantime, corporate earnings have also been grabbing headlines. This is the last "big week" of third quarter earnings season and while earnings have consistently topped analysts' expectations, most of the growth has been abroad. Companies relying upon strength in the U.S. and Europe have mostly fallen short. Comcast (CMCSA) and Time Warner (TWX) are on the docket for Wednesday ahead of the opening bell, while Kraft Foods (KFT) reports after the close.

Playing the Fed Decision

Also making headlines on Wednesday will be the U.S. FOMC interest rate and policy announcement coming up at 2:15 ET. Interest rates are expected to remain unchanged, so eyes and ears are on the accompanying policy statement. In the past, the market often had wild swings in price action following the Fed, but over the past several years those reactions tamed down as the Fed went into a holding pattern on interest rates. Recently, however, the accompanying statement on economic outlook has stirred things up once again and the market's reaction following the announcement has been amplified.

A typical Fed day plays out as follows: Often there is upside in the morning, often out of the open (less common as Fed reactions diminished). This is followed by a slowdown mid-day as market participants move to the sidelines in anticipation of the news. Trading becomes higher risk simply due to this lack of participation and setups have diminished follow-through.

After the announcement, the market usually has two sets of reactive moves consisting of three waves each. An initial reaction on the 1 minute time frame is followed by a second, counter-move that can be more extreme than the initial reaction. This means that technical biases, such as a breakdown, can trigger following the announcement and then be flushed out shortly thereafter before the third move takes place that confirms the initial bearish bias. This makes trading that initial reaction the highest risk. This set of three is then repeated on a five minute time frame with the first three waves on the one minute charts making up the initial move on the five minute one.

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