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Here’s What You Should Do Ahead of the FOMC

Posted by Pete Stolcers on October 28

Posted 9:30 AM ET – The market is trying to breakout to a new all-time high. US/China trade negotiations are going well and the Brexit deadline was extended to January 31st by the EU. Traders are expecting a quarter-point rate cut from the Fed on Wednesday and the market bid should be strong until then. Monday and Tuesday could be quiet as we wait for the news. The trading volume has been extremely light.

China made positive comments about trade negotiations over the weekend and they are ramping up agricultural purchases. This benefits Chinese consumers because food prices have soared during the boycott. China will agree to enforce intellectual property laws and they expect the US to hold off on future tariffs. This is not a trade deal, it is a truce. Regardless, an agreement would reduce market uncertainty.

Europe extended the Brexit deadline and that also reduces uncertainty. England voted in favor of an agreement and progress is being made. The laws needed to make that agreement possible will be passed and that’s why the extension was granted.

Economic growth in Europe is slowing and it’s starting to impact US activity. This week ADP, GDP, Chicago PMI, ISM manufacturing, official PMI’s and the Unemployment Report will be released. Investor concerns will be pacified by a Fed rate cut this week.

Earnings season has been better than feared and Apple will be the last mega cap tech stock to report (Wednesday after the close). Sellers are typically passive during this early part of the earnings cycle and we could see profit-taking in the back half.

The light volume rally in the last month suggests a low level of conviction. I’m willing to buy a breakout, but I want to see if the FOMC statement sparks profit-taking. Economic conditions are stable and the Fed could be hawkish with regards to future rate cuts. Earnings season has been better than feared, but the strongest companies report early in the cycle. We could also see a little profit-taking in tech after Apple. Any dip would be a buying opportunity.

Swing traders should manage profits on bullish put spreads. Wait until Thursday before you establish new positions. We have a lot of cushion with our current bullish put spreads so even if the market pulls back these spreads should be well above the stop. If we get the dip I’m hoping for we will be able to enter new bullish put spreads at a better level. Market uncertainty has decreased and I’m expecting a gradual grind higher into year-end.

Day traders need to make sure the early rally holds. We will test the all-time high right out of the gate. If the gains hold buy stocks with relative strength. Know that the trading volume is light and that the intraday range is likely to collapse until the FOMC statement. Set passive targets. I like the SPY bullish engulfing pattern on Friday. Support is at SPY $301 and resistance is at the all-time high.

Favor the long side the next two days. Manage profits on bullish put spreads and reduce risk by buying back out of the money bullish put spreads that are trading for pennies.
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