Interpreting the “Language”

Can Fed Comments Trigger a Breakout?

By Bryan Bottarelli
Wednesday, April 30, 2008 10:22 AM EDT
Wed, 30 Apr 2008 14:22:00 GMT

Dear Bottarelli Research Member,

All eyes will be on the Fed this afternoon — but the emphasis on what the Fed says and not what the Fed does. This means that the markets will base their directional move off the interpretation of Fed language, and this always points to choppy and volatile trading in the moments after the release. Leading up to this afternoon, it looks like the bulls are hoping (once again) that the Fed will spark an upside move that sends the bears running for cover, but whether or not the Fed can orchestrate another upside catalyst remains debatable.

However, at the open of today’s trading, the markets are opening with a slight bounce-back from yesterday’s losses. This has offered some much-needed upside for our ABX June 42.5 Calls (ABX FV) and the second half of our NVDA June 20 Calls (UVA FD).Since both of these positions have June expirations, continue to hold both positions for further upside.

ABX

On the flipside, we’re also seeing some early-session strength in our put positions. Our speculative CLF May 145 Puts (CGJ QI), our broad-based SPY May 140 Puts (SFB QJ), and our AGU May 80 Puts (AGU QP) are all making mini-bounces in the early going, but you never know what’ll happen leading up to the Fed announcement. After all, when you look at the SPX chart, it would appear that there hasn’t been any major market action over the last three days — but that’s certainly not the case. Although the S&P 500 (along with the other major market averages) have all traded in a very tight range leading up to their critical 200-day moving averages, a vast majority of the momentum stocks we follow on a daily basis experienced pretty large sell-offs.

SPX

This trading pattern (which I called “awkward” in a previous alert) sets off a warning bell in my head that any forthcoming market downside action could easily spark further pullbacks in these top momentum plays. I’ll continue to watch this situation closely for instant trading opportunities.

And as you probably know, I’d prefer to lock in any short-term profits that we have in hand leading up to this afternoon’s Fed announcement, so should anything come up over the next 3-4 hours, you’ll be the first to know. But until then…

Lock and load!

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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