How To Trade Ahead Of The Fed Meeting

The Captain Goes Down With The Ship

A sea captain holds ultimate responsibility for both his ship and everyone embarked on it. This week, the Federal Reserve, as the Captain of the Market Ship, will have to make a hard decision.

Will they save the "women and children first" thereby sacrificing themselves and breaking their promise to raise rates in order to rescue the global markets?

If a captain abandons his ship in distress, he is generally liable for it in his absence. So, could the Federal Reserve desert the market ship and raise the rates regardless of the consequences?

How to Prepare for Either Scenario

Ray Dalio, whose Bridgewater hedge-fund manages about $169 billion, believes "The next big Fed move will be to ease (via QE) rather than to tighten."

Regardless whether he is correct or not, the important aspect of that statement is that the "smart money" is asking for yet more monetary stimulus.

If the Fed leaves rates status quo, from a technical standpoint and with the markets in bearish phases yet sitting on decent support, we can look to our Modern Family for guidance.

My Favorite "Tell" of the 4 Indices

The Russell 2000 (IWM), has support at 114 based on the September Calendar Range high. If that area breaks, a status-quo posture by the Fed sends a message to the market-sorry, not enough.

If the Fed tightens, we should expect a move at least down to 108. From there, we could see 104-105 which I suspect would be a good place to buy if not IWM, then definitely value stocks that could bounce.

If Mr. Dalio is correct and the Fed eases, IWM will run to 118.75 level, maybe even 121.00.

What do we do in the meantime?

Look for short-term trades both long and short that are aligned with the instrument's phase or trend. Keep stops tight and take quicker profits keeping in mind that your risk should not be more than what you expect in reward.

For example, Retail (XRT) is a weak link. Of the Modern Family, I would look there for shorts.

NASDAQ 100 and many of those instruments are relatively strong. Using 104 as near-term support, over the 200 DMA, equities like Amazon (AMZN) or Facebook (FB), both in bullish phases, should provide decent low risk long opportunities.

Whatever the Fed decides, let's hope they wind up like Chelsey Sullenberger, the pilot of US Airways Flight 1549 that crashed into the Hudson River. A true hero, he was the last person to exit his aircraft after he got everyone on board safely to shore.

S&P 500 (SPY) Range still the same-200 will be the next big resistance to clear with near-term support at 195, then 190

Russell 2000 (IWM) Closed above 114. We can say saved by the bell.

Dow (DIA) 159.74 low from 2 weeks ago is best area of underlying support. 166.75 level the point to clear

Nasdaq (QQQ) 104 to the 200 DMA at 106.91 is a decent trading range to expect ahead of the FED

XLF (Financials) Ended the week with an inside day. Needs to hold 22.00 and clear 23.20

KRE (Regional Banks) Closed at 41.35 the 200 DMA which gives this an unconfirmed phase change to Distribution. Has to close there a second day in a row to confirm

SMH (Semiconductors) Held 50.00 the pivotal area. If the market holds, 51.22 is the 50 DMA to clear

IYT (Transportation) 146 huge pivotal area with 141 next level of support

IBB (Biotechnology) Highest percentage gain on Friday which is why we call IBB Big Bro! 345 key support and a good place to go long if market is firm

XRT (Retail) Support 45.50 unless it resurrects over 46.75

IYR (Real Estate) Got the expected move higher off the support at the 200 weekly moving average. I like this

XHB (US HomeBuilders) Unconfirmed bullish phase-what I mean by if buying, look at relative strength in positive phases

GLD (Gold Trust) 107.70 the 50 DMA resistance and 105 support

SLV (Silver) Probably waiting for the next FED decision

GDX (Gold Miners) Maybe a new low in place if confirms over 13.55

USO (US Oil Fund) With all the buzz about "oil at $20.00" from Goldman Sachs, this held up respecting the 14 level

TAN (Guggenheim Solar Energy) Over 30.93 clears the 200 weekly moving average. 29.50 near-term support

TLT (iShares 20+ Year Treasuries) Confirmed bearish phase even with the green close

UUP (Dollar Bull) Broke the 200 DMA and confirmed the deteriorating phase change

GREK (Greece) Confirmed phase change to recovery (over the 50 DMA)

EWP (Spain) I would consider this if clears 31.20

EWI (Italy) 2 Inside days in a row-on my list for longs

FXI (China Large Cap Fund) Still think a move to 38-39.00 then hits the wall for best short trade risk