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Don’t Play Checkers in A Chess World

Jeff BishopJeff Bishop ·

The Federal Reserve Bank officials are gearing up for an upcoming meeting that is set to have heavy implications on the bond and stock market—a week from now. 

However, as we all know — with the Fed — you don’t have to wait for its all-important interest rate announcement to make substantial profits off its actions.

In fact, many of the best trading opportunities occur days before…

 

 

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While there are plenty of traders speculating on what the Fed will do…  yields have been pushed down substantially — and many experts are predicting a Fed rate cut. 

Furthermore, the market is pricing a 93.5% chance that the Fed will cut rates by 0.50% in next week’s meeting.

 

Source: CME Group

 

However, if you think about it… when traders are flocking to safe havens like gold, silver, and bonds… it pushes the Fed against the fence… limiting their strategic options. 

As Peter Navarro — White House trade advisor — said, “The problem here, the thing that worries me is that we’ve got a Federal Reserve playing checkers in a chess world.”

That’s true to an extent… because we know the Fed is data-dependent and are naturally behind because they have to wait for clues.

On the other hand, us traders, are forward-looking and are able to adapt to news in real-time.

The Fed plays a different game than we do… and it’s troubling.

You see, when you investigate the clues, you’ll come across some scary signals that could lead to a potential stock market crash

For traders… that means…countless trading opportunities.

Why?

Because traders thrive off volatility. 

Right now, we’re noticing plenty of disconnects in the market… and with the Fed monetary policy meeting scheduled next week, there are a few clues as to how Powell and company will act — and what its impact on the market will be.

 

Everyone Expects A Crash… But No One is Prepared

 

If you know me, I’m a contrarian by nature. I don’t see any value in following the herd… because I know that sheep get led to the seller.

When everyone and their mother is buying the dip… I want to position myself and look for shorts. When everyone is selling… I want to be buying.

However, what happens when everyone has the same view as you?

The inevitable happens.

Things get a little twisted here… because we’ve seen all the data points signaling a potential market crash…

… and when everyone expects it and things hit the fan… then you’ll see many market participants panic and look for the exit doors… dumping all their shares and sending stocks lower.

Just take a look at the daily chart in the SPDR S&P 500 ETF (SPY).

 

 

We’re seeing so many signals of a weak economy… but the market is closing in on all-time highs — but it’s approaching a key psychological level at $300… and shorts could pile in around there.

That seems like a pretty disconnected market to me.

The thing is… we know the Fed can change all this with one swift move and put traders in check.

Right now, we’re seeing yields slide… but bond traders will be very reactive to every single word that comes out of Powell’s mouth next week, as well as any comments that come out before next Wednesday.

That means there will be opportunities in some bond exchange-traded funds (ETFs) — TLT to be exact… which has been ballooning over the last few months.

Just take a look at the 10-Year Treasury Yield.

 

Source: Federal Reserve

 

We haven’t seen yields at these levels since the aftermath of the global financial crisis.

We’ve seen so many traders flock to bonds in order to protect their portfolios… and that’s pushed yields a lot lower.

Just take a look at this massive runup in TLT over the past 6 months.

 

 

Those are signals that traders expect a decline in the market.

What they don’t expect is a crash, just based on the recent price action.

Everyone’s positioned in bonds. At some point, traders will take profits and that safe-haven bubble will burst.

I don’t know any trader out there who looks at the 10-Year Treasury yield and TLT — thinking those moves are sustainable.

Sure, most could see yields doubling from here.

But what happens if we see funds get pulled from bonds?

Due to the inverse relationship of bonds and yields — when bond prices rise, yields drop… vice versa — it’s not crazy to think that traders would take profits at these levels and look to other safe havens, which would throw a barrage of needles at the bubble.

I don’t think the market could handle that right now… and that could spark a crash.

With this sort of action in the bond market… you better believe the Fed will mention inflation and the state of the economy.

So what can we expect in this Fed meeting?

 

The Federal Reserve is Shook

 

The Federal Reserve is worried about inflation… and they will most likely talk about where inflation levels could head next.

Any dovish tone about inflation should send the market higher… as well as bonds because that’s the market we’re in now.

Bad news is good news… and good news is bad news.

Just take a look at where expected inflation is at…

 

Source: Bloomberg

 

Expected inflation one year ahead plummeted to 2.4% — the lowest level since 2013.

You better believe Powell & Co. will be focused on inflation expectations because that’s a key driver in the economy.

We’ve already seen Fed officials cut interest rates — back in July, for the first time since the 2008 financial crisis… and you know what the reason was?

Low inflation… slowing global growth… and the trade war.

Right now, we’re seeing that same pattern…

… trade war uncertainty has caused concerns about global trade to hit 10 times its peaks in the previous decades… and it could damage global growth by 0.75%.

With that being said, traders are expecting the Fed to deliver yet another rate cut after it’s all said and done next week.

However, on the off chance, Fed officials don’t cut rates and indicate that inflation should pick back up… the markets will be sent into a frenzy, and you could see a pullback in SPY, TLT, as well as GLD (the gold-tracking ETF) and the PowerShares QQQ Trust (QQQ) — the tech tracking ETF.

I’m seeing some interesting price action in these ETFs, and I’ll be ready to pounce when I see a clear pattern.

Take a look at the hourly chart in the iShares 20+ Year Treasury Bond ETF (TLT).

 

 

We actually saw a bearish pattern in TLT the other day — the blue line crossing below the red line in the encircled area — causing the bond ETF to pull into a key inflection point at the blue horizontal line.

TLT is sitting right at the 200-hourly simple moving average (the green line)… and this will be a key level I’m focused on all week.

The reason this is so interesting is the fact that traders are pricing in a 93.5% chance of a rate cut… and we’re actually seeing bonds pull back, when they should be grinding higher.

The same idea with GLD.

 

 

It’s also at a key inflection point right around $141… and sitting at the 200-hourly SMA. If we see a break below ahead of the Fed — there will be multiple ways to profit in both GLD and TLT.

When we look at the overall market… we’re seeing some really weird action.

 

 

The SPDR S&P 500 ETF (SPY) was on its march to all-time highs… but my money pattern seems to be flashing a sell signal right now — blue line looks like it could cross below the red line.

If I do see that pattern materialize, I’ll be ready to place a strategic options bet in SPY.

With QQQ, I actually jumped the gun a bit… because tech stocks are the most susceptible to plummeting fast… and we saw that yesterday morning.

 

 

With this setup, I saw the money pattern set up, as the blue line was approaching the red line fast — a signal that QQQ could head lower. Now, I placed a strategic options bet on Monday… and have already seen QQQ have a “massive” move.

All eyes will be on the Fed for the next couple of days… and there are so many trading opportunities out there that sometimes, it gets hard to find the best one.

However, I’ve actually simplified trading for everyone and developed Bullseye Trade. It’s my highest-conviction trade idea — it’s all about 1 trade, once a week and I’m looking to return at least 100% on these trades.

If you’re having trouble figuring out what to do with the Fed… then check out Bullseye Trade and see how it can make trading easier and more profitable for you.

 

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