As the Federal Reserve gears up for next week's meeting, short-term traders are keenly focused on the potential implications of a quarter- or half-percentage point interest rate cut. With market dynamics closely tied to central bank decisions, anticipating such a move generates intense speculation and shapes trading strategies. Here’s what short-term and option traders are preparing for as the Fed deliberates.

1. Immediate Volatility and Market Reaction

Short-term traders thrive on volatility, and a rate cut, especially one that deviates from expectations, could trigger significant market swings. A quarter-point cut is more likely priced in, with many market participants expecting it. If the Fed goes this route, the market could see a brief rally, but the reaction may be tempered by the fact that it aligns with general forecasts.

On the other hand, a half-point cut would likely shock the market, creating heightened volatility. Such an aggressive move could signal that the Fed...

A rate cut at the Federal Reserve's upcoming September meeting appears increasingly likely as the job market softens and inflation returns toward the Fed's 2% target. The unemployment rate has climbed to 4.3%, up from a historic low of 3.5% just a year ago, heightening concerns about a potential recession. In response, economists are now forecasting that the Fed might reduce interest rates at all three of its remaining meetings this year, with cuts ranging from a quarter to half a percentage point. 

A rate cut could have a significant impact on the stock market. Lower interest rates typically make borrowing cheaper, which can stimulate economic activity and boost corporate profits. This, in turn, often leads to higher stock prices as investors anticipate stronger earnings and seek higher returns in equities over lower-yielding bonds. However, the potential for rate cuts also signals concerns about economic weakness, which could create volatility as the...

Tuesday July 23, 2024. UVXY chart 15-minute had a double bottom and MACD divergence to the upside.  Signaling volatility was going to go up, and when that happens, the market goes down.

The QQQ 465 puts expiring July 24 were around 1 or 2 cents yesterday when the divergence occurred. You could have also gotten in this morning for under 10c. Prices rose in under 3 hours to 80c, by the end of the day $2.

At the start of the trading day Friday, June 21, 2024. UVXY, the short volatility ETF reached a new high near 26.2. The 10-minute chart clearly shows the higher top with the MACD diverging down. We expect The SPY to show the opposite and anticipate an opportunity to find OTM calls on SPY under 10 c and expiring that same day.

 The 10-minute chart of SPY at that time did not display a clear pattern with MACD divergence to the upside. Our opportunity to make money without the pattern in place is limited. Looking at call options expiring June 21, the first options available under 10 c were the 548s. They crept up to 14c and fell away from there.

 With no clear pattern on the major market ETF, we returned to UVXY and examined the options. The chart below shows the UVXY 25 put around 7c and rose to 60c in 2 hours.

While this is a good move, the volume on these options is in the hundreds rather than the many thousands we usually like for the major ETFs, and trading fewer...

Are you paying attention? 1:45pm Eastern 10:45 Pacific There's the VXX clearly showing a divergence on the 5 minute bars. Went right over to SPY not as clear a pattern but a divergence down 534puts exp today 9c at 1:50pm EST over a $1 by 2.10pm EST

VXX diverging up on MACD June 7, 2024 5-minute chart

SPY small divergence down June 7, 2024 5-minute bars

SPy 534 puts expiring June 7, 2024, rose from 9c to $1

#MACD #optionstrading

So you buy a hundred contracts, the ten thousand shares you're controlling at seven cents So how much is that $700 right? So you have almost your thousand dollars there and only a hundred contracts. But just a couple of hours later, you see your $700  investment turned into, Oh let me see here What's a hundred times seven hundred That's $70,000. That would be $80,000+ in about two hours. I just have to ask you the question Is a little bit of patience worth it in a situation like this?

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