Savvy Traders Prepare for Volatility Ahead of Rate Cut News
Here is my strategy for trading a coming interest rate cut with a "picture perfect" reaction for the Federal Reserve.
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After a furious run up, investors are locking in some profits on the eve of a likely Federal Reserve interest rate cut.
Breadth isn’t bad with around 40% of stocks in the green, and the Magnificent Seven MAGS is still holding up despite some very frothy action. Small caps are bearing the brunt of the selling with the Russell 2000 (IWM) down 0.85%.
The setup for a "sell the news" reaction to the Fed is picture perfect, but it may be too obvious to work well. Investors who are worried about a negative reaction will likely start taking some profits before the news. We are seeing that so far on Tuesday morning.
Another thing to keep in mind is that a news event like a Fed cut is likely to trigger some big swings rather than just a one-way move. Many sophisticated traders will be looking to take advantage of that volatility on the news on Wednesday.
My current game plan is to focus on stocks that I want to buy as the chart develops. For example, Xeris Biopharma XERS is still one of my top plays. It has been pulling back and is down for the fourth day in a row today, and has declined seven of the last eight trading sessions.
Nothing has changed there, but some holders grow impatient while waiting for news, and then the weaker technical action causes more selling. I want to add to this position substantially when I feel it has support. It is likely that the third quarter earnings report will help to restore buying interest, but it could sink further since there isn’t a lot of good support on the chart after the big run up.
There are quite a few other names that I’m watching that need chart development, and if the Fed rate cuts turn out to create some topping action, then there should be some good opportunities in those names that find support.
Ideally, some corrective action on the Fed would then set up a very good end-of-the-year rally. It would help quite a bit if there was more negativity, but it is going to take some negative price action to put the fear of the bear into some folks.
My best advice right now is to protect gains and wait for better chart development if you want to put money to work.
At the time of publication, DePorre was long XERS.
