1.30.2008- Fed day (with Thursday update)

Going into today, I can’t help but think Market Psychology will rule the day. I understand both the bullish and bearish cases pretty well going into the trading day.

Bullish – “Don’t fight the Fed”. If they are loosening, they are promotion cheap money and the use of risk capital. In other words, don’t leave your money in a money market fund or CD. Have it in stocks or real estate,etc.
Bearish – We have nearly retraced to our market break levels 1373 to 1406 on the S&P. We have had a bullish reversal of more than 800 pts on the Dow, and 90 pt reversal on the S&P. We have had a large increase in the indexes in a very short time. Nothing wrong with taking some 5% gains in just a few days, or a great time to “escape” and minimize a loss. The market seems to be anticipating (pricing in) a large rate cut. The afternoon’s volume would give the large institutions the volume necessary to sell into. The downtrends are still inforce, and the bullish chart patterns are broken for now.
It would make sense to see an initial strong pop off the announcement (SP 1406), followed by a selloff. Either way. I am 80% in cash right now, and I am slightly delta positive and long volatility.
I may try to exit portions of some positions prior to the number, if I can get the right price. There will be plenty of time to re-enter positions after the announcement.
I was down 1.3% down in acct value on the first two days of trading week. Primarily due to a few positions drifting away from me (AIG, CAL, SCHW)
THIS IS HOW THE MARKET FEELS TO ME:

I am “playing behind the net” this morning. I am looking for some mispricings prior to the announcement. I will take the trades that are being given away.
Upon the announcement, my strategy. As to my contrarian nature.
I plan on fading the move. If we get a .50 cut I will be a seller at the aforementioned levels. To me, it would cue that the fed sees rough waters ahead. And it would present a wonderful selling opportunity. “Buy the Rumor, Sell the news”.
In the case of a .25 cut, there will be an initial selloff. I would strongly consider buying the market (finding a Feb broken wing butterfly BWB) below the market. I believe it would show that the Fed believes the economy is not so gloom and doom.
I am looking at a few Calendars to use as fading positions.
BTW, GOOG Feb/Mar 550c I bought for 9.75 and sold for 10.85 on the 600pt whipsaw day is now 9.85 again. Hmmm. Vega (Volatility) is a powerful greek.
Trades prior to the announcement:
MA- sold 1 unit @ 3.60
Post fed announcement: Cut of .50 bps. This has been good, up 1% on the day due to taking some profits. I sold off much of my long exposure into this rally.
MA – sold 2 units feb/mar 190p @ 3.70 and 3.80. Underlying rose to 197, then fell off to 189 (down 2.21 on the day)
SCHW – sold 3 units of Feb/Mar 25p for .10. and 2 units Feb/Mar 22.5p for .42 and .45. Nice profit on the combined position. I still have 4 feb/mar 22.5p.
WEN- Sold 2 Feb/Mar 22.5p for .57 and .60. I still have 2 units on.
XLNX – bought 2 units Jun 20/17.5p for .60. 4:1 Reward to risk on the options. However, I will loose .20 to make 1.90

PNG – bought 1 unit of 45c calendar for .14.
CAH- 1 unit CAH Mar 60/55p for 1.85.

SDS – bought 200 sh at 60.51, then sold at 62.55.
By the end of the day the combined accts were up as much as 6%, then finished up 3%. This was an excellent day from the beginning. I planned out my reactions based on the announcement, and technicals. And then worked the plan. I could have always went bigger. And be more decisive. But I did pull the trigger on a few small positions, and I minimized my losing position on SCHW, and then took profits on the winning SCHW position. Very Nice.
This market is so technically biased, it is ridiculous. And the Indicies will now have MASSIVE topping tail on the daily chart, let’s see what tomorrow’s daily bar prints. I think LOOK OUT BELOW!
My big trades to the downside are:
AIG – Feb 45/50/55p butterfly
CAL- Feb 25/20/15p butterfly
AMT – Mar/Apr 22.5p calendar
COH – Mar 25p

Tony Crescenzi correctly states:
Today’s policy action, combined with those taken earlier, should help to promote moderate growth over time and to mitigate the risks to economic activity.

I agree with this. But I am NOT looking to jump into the market long, yet. I will be getting long eventually, just not now. Beware listening to CNBC long only Mutual Fund Managers. They have nothing better to do than “buy on weakness”. I am waiting to hear one say, We are mostly in Cash. At that point, I may play to the long side. Until then, I will play the technicals.. and they are saying LOWER.
If the market breaks above today’s topping tail, I will reverse my position.
For some reason, this has become my trading song over the past few months.

THURS trade update:
Market was off sharply at the open. Stabilized by 8am. SP up 23, Dow up 222 at the close. Impressive.
MA- Sold the 2 units of remaining Feb/Mar 190p calendars for 4.25 and 4.85. Very Nice. Premarket the stock traded up as high as 207, but the wide breakeves were helpful. I have no MA position at this time.
SCHW- sold 4 units of Feb/Mar 22.5p calendar for .47. I have no SCHW positions left.
AIG – Feb 45/50/55p butterfly sold 1 of 4 units @ 1.20 this morning. Day’s rally reduced the value of this spread.
Bought:
HAL – 1/2 unit Mar/Apr 32.5p for .35. I am just getting a feel for HAL and it’s price action.
AMT – 35p calendar is moving my way (good)
CAH underlying price is coming down(good)
XLNX – underlying price is coming down (good)
CAL – 15/20/25 butterfly is flying away from me (not good)
I’m getting beaten on CAL and COH.
I am now 85% in cash.
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