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Hey! It’s Sasha Evdakov it’s September 17th and welcome to the Rapid Recap. This week's lesson is how the Federal Reserve or also known as the FED and interest rates move the stock market.
Now I love doing these Rapid Recaps because I feel like you get so much knowledge, information and insight about the markets because when I first started trading it was not any of this YouTube going on there wasn't a lot of videos in fact the internet was a lot less bandwidth. I remember still when I had to use dial up to connect to the internet.
A lot of things were very static so I didn't really understand or have a lot of Education around to learn number one what the Federal Reserve did but more importantly what it did in terms of how it move the markets and then taking it a step further. What I should be doing with my stocks or my positions based on the federal reserve so how should I be positioning myself.
You might be wondering the same thing especially if you're new to the Rapid Recap if you've just joined me maybe just started trading a month or two ago. So you might not understand how the Federal Reserve plays a role in the stock market and I will tell you it plays a pretty heavy role in terms of the big boys the institutions and how they purchase or sell stocks in companies.
The Federal Reserve is pretty powerful in the sense of moving money in the control of supply and demand of money but really they can only do one thing to simplify things they're either raising or lowering the supply of money and that's what they do with interest rates so they can hike or cut interest rates and that's what they do.
This week's recap is really focused on the Federal Reserve or the FED and about interest rates and how they move the stock market. So that's what we're going to start with today.
Looking at a quick glance out of the markets to see what it's been doing and we’re recording in 1080pixels today, just setting up my screen is a little different. Hopefully there's a little bit better resolution for some of you and to see the charts better but in either case what happened in the markets is here we were consolidating for a short period of time and as we were consolidating it looks like the market was going to push higher and potentially get back to this level potentially retest and then maybe reject it.
Now, today looking at the intraday chart just take a look at what happened today we basically had some statements that came out right around this region. You can see all this volatility in the five-minute. We dropped heavily then we popped dropped again, pop again and then now we're back below the close or the open I mean. So we're back below the opening price which was right here so if we draw that across you can see the markets were a kind of idle and this is what things people were doing.
Really, the professional traders were probably not trading as much here or slowly and lightly positioning themselves for this move so when we look at it or during the intraday we opened up right here we go a little lower and we’re basically idling we're moving very slowly then things drop. Some people said “oh it's very risky I'm gonna take my position off because based on the way that are positioned I don't like or don't foresee the market moving higher”.
There's a lot of sellers that came in then we popped back up people started buying based on the wording based on analyzing the words. Continued to pop higher and then eventually people sold it back off.
Now you have to keep in mind that a lot of times during this action during this action, during this action, there's going to be a lot of day traders or people that are going in for the short term these aren't usually people or traders that are trading for the long haul for the next stop 3 - 6 months or even two to three weeks to position their trades. They're looking for short-term gains and this really is a volatile session.
Now some of the other traders before that were slowly starting to position their position their trades their accounts they were really starting to position a lot of their accounts a lot earlier probably the day before right around here or even before over here and that's why you might have gotten this spike or this last couple of days of spiking because they could be positioning themselves for a potential interest rate movement whatever they were positioning for.
Keep in mind we still did have technical data coming into a triangle here so it was bouncing right here off the support line so the technicals were there to confirm it but positions were probably also being stacked right there based on this report and now based on this report you can see we have many more volume and shares coming in traded.
Based on that report looking at the SPY you can see exactly what was happening. Look right here the volume basically dies down and when that volume dies down right here so there's our volume dying down then we have this huge spike everybody was waiting and building for this event because we had this huge surge earlier and I’m looking at the SPDRS, SPY here because it's easier to see the volume than on the SPX there's more shares traded and so forth.
Looking at this position or looking at the overall markets you can see that we were building for this event so if you're a trader or if you're an investor you're looking to position yourself for this probably a few days before the event. Now if you're doing day trading you can probably do it the day off because you don't need to move a lot of shares, you don't have to position yourself in a unique way in order to manipulate stocks because you just don't have maybe twenty - thirty thousand shares to get rid off or to purchase but for the other people for institutions the large traders they're trying to position themselves for this move and that's what they were really doing throughout the week.
If you're a little bit heavy positioned on one side and you don't like that position because we have earnings coming out you do the same thing for the Federal Reserve, you change your position and you start changing it a few days before you start changing it early to prepare for that event.
Looking at the Federal Reserve what is really happening when the Federal Reserve peaks or what is it really doing. So first let me explain that let me explain what the Federal Reserve does. Essentially it is basically an interest rate hike or cut so what they're doing is controlling the supply and demand of money. That's basically borrowing money and how the banks borrow money so they have to use the bank's money needs to be used for a mortgage so if you're purchasing a house if you're purchasing a car any larger purchasing that has to happen and where lone has to be created then interest rate,s that rate to borrow money for a regular person is more expensive.
For example if we're looking to purchase a house and we want to take out a loan let's just say $100,000 to keep numbers and simple math easy, you know they may give you a 4% interest rate the bank does through the federal reserve right? Because they set the interest rates and so forth so once this interest rate is locked in your good to go you get it at your four percent however if let's say you didn't buy that house this couple of months and you're looking to buy that house maybe a year later but the interest rates were higher.
Now all of a sudden that hundred thousand dollar house in which case you're going to be paying let's say instead of 4 percent interest similar to a credit card where you may pay 18 or 22 percent interest every month for a house you're paying you know 3% or 4%. Now that 4% might actually be four and a half percent or 4.25% it's more expensive because it's more expensive for the banks to borrow that cash as well.
What does this do to the people that are actually borrowing money for let's say a house or a car and so on so comparing our two different variations if you're borrowing money for $100,000 home depending on your down payment the interest rate and so on let's just keep things simple $100,000 home four percent interest rate. You know let's just say that hundred thousand dollar home actually will end up costing you in the end $200,000.
Now if the interest rate goes up let's say half a percent or more percentage points higher now instead of buying that hundred thousand dollar home and paying it off you spent $200,000, instead of $200,000 it may actually be $225,000. So what does that mean? That means the monthly payments are going to be larger that means that you're going to be paying more for things which in the end causes you as the buyer or consumer to have less money in your pocket and when you have less money in your pocket you go out and spend less at restaurants you go out and spend less at businesses you spend less at different stores and purchasing your phones or whatever it is that people purchase these days. You just end up purchasing last because you have less money since you're paying more money for these interest rates you’re paying more for these sort of say.
In general to sum things up it gives a ripple effect as the Federal Reserve raises rates that means, the cost of borrowing money, the supply of money becomes more expensive so everybody else has less money and businesses also generate less revenue because people have less money to spend.
Now when they lower rates and cut interest rates people have more money because interest rates go down. They'll do this because of different situations in the economy if the economy is great then they may raise those rates and you know let people pay more money on interest 'cause things are going fantastic but if things are not going so great or things are a little bit like a depression or recession or whether things are going really bad then they'll cut rates that way people can go ahead and stimulate the economy they'll buy homes and then they'll have more leftover capital to go and use them to spend on discretionary things like food or going out to eat, buying gadgets, computers, and new cars.
It stimulates because typically a dollar or a purchase rolls over three times so if you go into a store you buy something then that business owner has more capital he goes buy something and then the next person buys something so it typically rolls over multiple times and that's really essentially what the Federal Reserve does so how does this affect the markets in terms of movements?
Well if the cost or the income that businesses are generating becomes less in the future or becomes more expensive than revenue can slip or revenue can fall so there are a lot of other factors and ripple effects but all those things are not immediate.
You're probably wondering when looking at the markets what's the immediate effect on the FED and you know what happens to the market. Well, what happens to the markets in general is you get this volatility effect that’s similar to earnings when you take a look at a stock like let's just use Apple as the example when you have earnings, you have these major selloff points like this now this one is company specific.
You'll have the same thing on like GMCR right here they have huge drops and the gap downs that happen because of earnings now with the Federal Reserve since it affects the overall economy and health because it's the interest rates they affect everybody you know that's why the market becomes very volatile and that's why the news goes out on the market. That's why we have all this volatility because people are quickly trying to make a decision usually the professional institutions to decide what direction they want to go.
Now when you do this or look at this typically for me I leave my positions as they are for some time for the last couple of days if my positions were stable if my positions were stable I will typically leave them on as they are.
Let's say for example take for example the Dow Jones or the diamonds if you’re trading the diamonds and you got into this position you shorted this over here or even if you are late over here you get into that position you short it you continue sell some in the strength whether it's somewhere over here you sell some into strength. Now you're out about half of your position let say and now you're waiting.
Now let's say the market starts moving higher right here and you're starting to approach your stop levels so for simple sake let's say your stop level is going to be right around this level now if we have a Fed meeting that day this is probably the only time I give it a little bit of cushion room or wiggle room to wiggle beyond my stop and that is because many people get freaked out when things happen and news happens in the FED.
For this hour you have to be mindful and understanding of what's going on underneath the market depending on how it's moving, where the shares are traded, and if you go to the one minute chart you can kind of see this high frequency this is really what happens is the high frequency so we have a lot of high-frequency trading right here that happens to the downside first then we start popping so it makes me wonder ok so are we actually going up or we’re actually going down. Then we see a cluster of this volume right here of this bullish spike so that brings the stock back to even or neutral since the announcement.
Then we get another dip and where we have a few more bearish spikes so to me this kind of tells me people are positioning on the negative sense so what is happening here now the next pop higher huge leg up this could be some shorts covering that we’re in a little too tight. So what happens is these things these prices start to accelerate. We have a few little pops and then you get people that are scared and then they may jump into all of this and it rides those stocks or these indices a little higher and then what happens?
Now we start really the calm minded more professional step back in and short it again so look at how this plays out as people digest the news we basically go from very heavy bearish spikes to any time we pop we get bullish spikes, bearish spikes, bullish spikes, bearish spikes and you can see what happened we continued to move lower. We got up to the opening price the opening price broke through it a little bit but then rejected and continued lower
There's a lot of volatility that's going to happen so you either have to be mindful and be patient that this is going to happen or really look underneath.
If you’re brand new to the stock market or trading, I recommend you don't trade one or two days before these federal announcements these FED announcements and that is because it's going to whip you around with the volatility. Now if you’ve been trading a while you can hold your position so long as you took your profits earlier or previously.
Now when looking at all this you know you have to be mindful of your positions, your stops what you're willing to risk and how experienced you are and the better you do it the more frequently, you do it, you watch it you'll get a sense of what's going on and what's happening in these markets and how you should be positioned. Hopefully that explains to you how the Federal Reserve really kind of works and how it plays in the stock market.
Now a lot of these effects will come over the next three to six months if we did get a raise in interest rates then the market would be positioning for that maybe in a little bit of a different way and again some of the actual effects in the consumer space in the business is probably wouldn't happen until maybe six months later because it takes time for people to save money on interest rate. It takes time for them to go out and shop to spend it on businesses such that cause and effect the energy mentality.
With that in mind let's move on to some actual stocks and take a look at them specifically just that what's moving what isn't moving and just some stock picks in a sense of what's going on with the technical.
Looking here GMCR, still acting weak, coming back to this trend line looking at that daily you can see we're starting to accelerate again lower it's in this gap but this was that gap we're looking on all the way over here at that trend line so it came up to it retesting and rejecting it you can see it's on wider price spread meaning 5 percent in a day rather than little tick marks here earlier.
We have DISH right here I was looking for this stock to break lower that was actually when I was waiting for was for it to break lower but it didn't happen so no position taken no trades occurred you know that's what we're waiting for waiting for that break it was building cost for it but it's bouncing right now so move on either wait patiently for another opportunity sometime in the future or move on to another stock.
AAPL right here again looking at it here we are building cost, what happens we build cost we decrease in volume and anytime the smart money comes in here we are selling right there as we decrease here in that trend line of volume. Now one thing that's interesting about this those of you that took the technical analysis course here's an interesting little thing for you guys take a look at this and how that plays into the trade. this is the Fibonacci levels looking at the two points right here.
Here's our swing highs and it's a critical point in area because we've came up to these levels multiple times but those are the highs we take them down to here and look at where it retraces all the way to that 61.8% comes out really nearly perfect so we basically rejected it a handful of times and now again looking at it it's building for a potential next leg down. So cleaning things up you could say that here is an ABCD pattern it's a little sloppier one but you can say that A to B, B to C and potentially we could see lower prices to that earlier price mark I mentioned in the critical charts.
Looking at the overall other companies UAL is the only one that kind of caught my attention today but I don't like to trade to the bullish side in a bearish market state, you can do it but I don't prefer to do it. LoPoking at the financials is really where I was looking at today and this is going to be funny to really look at how all these different financials are moving. Take a look here they are breaking it down.
Here we got BAC, Bank of America here's our resistance line similar to Apple and as we look at it here take a look. Here we have our rejection and then we have a bounce and now it's starting to break this supporting trend line on heavy volume. So we have again A to B, B to C potentially C to D. W
We could see some serious trouble in the financials if things accelerate that's if things accelerate. They can of course bounce but if we start seeing an acceleration followed through tomorrow you could see some trouble.
AMTD, this one on the weekly take a look weekly trend broken as we zoom in. Let’s just go to a two day might be a little bit cleaner look at that similar to Bank of America. What do you think they're doing their building and look at them volume here recently, higher volume.
Next one JPMorgan another financial, look at this here's our daily here's our rejection level right here you could say that here we have our A to B, B to C and C could be coming in right there so this one didn't fully break yet. Here's that support line you want to watch it we see a rejection right here or breaks lower of the support line that's going to be trouble big trouble.
CIT, Citigroup same pattern, its building its building all you need to do Morgan Stanley is watch these patterns and when they break the one that breaks the fastest, the cleanest, and the shortest amount of time you don't have to trade all of them you just have to trade the one that's the best even if you get the one that 2nd or 3rd best imagine the potential your profit potential from that move.
Here they're all the same patterns they're setting up to give you an opportunity this one SunTrust is breaking earl. It's breaking earlier than the other ones so here's our pattern look at it it's breaking right now today and already broke it. There's the heavy volume here's our rejection levels here some other little clues they were subtle but there was our A to B, B to C and potentially C to D.
The signs are right there there's all your signs and it's breaking that's exactly what some of the other stock that's what you're watching for, for these other stocks to do this this exact break.
Then we have BBT same thing look at this one starting the break it's right there making its move. Again if we zoom out just taking it out to the weekly you can see there's our break here’s a little pop if it continues you could see trouble. If we go to the three-day there it is.
WFC financials, Wells Fargo go back to the daily same thing breaking and what is it doing it on heavy volume what were you doing before, we were building cost right here decreasing building cost for lower prices and there we go there's our break take it out right here you can see how that plays out nicely and perfectly and that's exactly what you may see with some of the others stocks. You're watching these other stocks as well for similar breaks and allow you to capitalize you know especially if we continue on that moved lower to rate here 49 – 30 dollars, that’s a 3 dollar gain and probably a couple days or a week.
That's what you're watching for in these companies in these sectors and in the financials and the reason I’m talking about financials today is because of the FED and the interest rate. Overall the market and my opinion is still the same. I don't change my opinion thinking that everything is rosy everything is perfect and we're going to fly to the moon and skyrocket higher. In fact I still think we're building for lower prices but things can change we will see what tomorrow's action is if tomorrow's action is healthy and we start moving higher all of a sudden change directions then of course I may change my mind but it will be usually in a week or two.
I don't change my mind very quickly because I look at multiple weeks rather than high frequency trading or just a one-time event. I'm looking for stability and so far the past, the last few weeks and months have told me that we're building for lower prices and if you take a look at the weekly and you just take just the most recent couple of weeks let's say what's happened in the last four weeks right here where were we in and where are we now we're basically even.
If you take the last let's say since June where was June, June was over here and just draw a line to here are we lower higher or lower? Lower, draw it from before are we lower or higher lower? Lower, still lower. How about from August of last year are we lower or higher? Were about even so really if we're still even from August on the last year does that tell me we're going to sky rocket to the moon? For a year we haven't done anything. No, it doesn't in fact that puts me more in the bearish camp and really that's where I'm looking at based on where things are setting up.
Watching this line right here at this is the line you want to watch and we've talked about this before if we get here we could reject, there's a couple scenarios I'm watching when it when we're watching this level if we get here and we reject this confirms a bearish trend and more negativity will come into the markets if we break this and move sideways then again we're just moving sideways idly and then it's a traders market your stock-picking. If we break this and then we continue to move higher very quickly and we break this next level right here then you can see some real trouble because we're moving up on air chances are that's too fast too quickly too accelerated.
That could also spell trouble of course we could reject here and then again I would be adding more to my short so at this point anytime you see weakness like this like an apple when we're looking at these levels right here coming into this and you see these rejections you can start adding to your short right there or adding when it breaks this because you potentially should be or could be short right around that level. So you're short at that level or even if you were in it right around this level you could have been short right there you're still way at higher prices you’re short at higher prices and if you really got in at the right time it’ll be here right around this level.
You should be at higher levels and now you're waiting for the next leg down to add to your position if you're in Bank of America the same thing you got these three that you were short potentially really only have these two options for the short so you had these options because this was your swing high so you were short at either this point or this point and now as we pop right here and we start to reject again the second time you add to that short.
Now you're putting back additional shares that you were short and where you took profits here now you're adding those shares back again because you're short somewhere over here, you had multiple weeks to get into that stock short.
That's how you play these markets in the FED I hope that gives you some insight some things to think about if you're new I highly recommend you step aside from trading during these days the Federal Reserve as you can see we basically we're moving up on air and then the rest of the day was sold off and we're back below the opening price this whole day was about the FED and that's one of the reasons the last couple of days I didn't post critical charts because of this.
My goal is tomorrow or even Saturday to post some more critical charts for you guys to evaluate things with better state of mind and that's really what we're going to go and look at but if you're trading during these days it's like trading during earnings waiting and wondering what's going to happen you want to get rid of your position before that happens and then if things still continue moving in your direction the right way then you go ahead and add to your position or change your position.
Alright so thanks again for joining me I hope you learned a lot today regarding the Federal Reserve. How things move and operate, maybe what you should do regarding your position. Keep those things in mind when trading if you’re doing things more high-frequency it's going to be a roller coaster ride if you’re little more calm and more stable you should be able to really adjust your positions lightly are slowly as the Fed announcement starts to come in.
Keep those things in mind as your trading and investing in the markets. Hope you enjoyed the lesson and had a great week so far enjoy your Friday, make it a great one have a great weekend and I will see you next time.