Fighting the Fed and Trump

Wednesday, 17 June 2020
Melbourne, Australia
By James Woodburn


Down 7% one day, up 4% the next.

The volatility we are witnessing on a daily basis at the moment is extraordinary. With each bout of selling comes an announcement from the US Fed or the US Government which causes a sharp U-turn and a FOMO rally.

The usual interpretation of increasing volatility is that it is ultimately bearish.

My charts are certainly flashing warning signs all over the place. I’ll let you in on a secret. I just went short on the S&P 500 in my trading service Pivot Trader.

If I didn’t read any news and only focused on the charts I would say to you that my conviction on this trade is through the roof. I rarely see a set up such as this, and in a normal market I would say there is a solid chance that markets could turn down and nosedive in dramatic fashion over the next few weeks.

But we aren’t in a normal market are we?

No, we are in a Clayton’s market controlled by the government and central bankers.

Trump is eyeing off the election and will be damned if he’ll let the markets fall over before then. $1 trillion stimulus bill with debt/GDP flying through 130%? Sure, why not!

If the 10-year bonds start misbehaving and actually sell-off due to the coming onslaught of supply, the US Fed will probably start ‘yield curve control’, which is a euphemism for the death of markets.

If bond yields aren’t allowed to rise, and the money printing continues to fund the borrowing of the government, there is every chance that inflation could start to rear its head.

The real yield on government bonds would start to head deeply into negative territory.

You guessed it; then rocketing gold prices would be the canary in the coal mine telling us that the goldilocks situation of money printing and low yields is a chimera.

Making decisions as a trader when faced with the constant intervention by central bankers is incredibly difficult.

My own journey as a trader has led to the view that I need a model of price action that I trust and a set of rules that I follow religiously.

Those rules are saying that the best risk/reward trade that you can do right now is to get short. But there are immense forces stacked up against that trade.

The old adage of ‘don’t fight the Fed’ is now backed up by Trump in an election year.

Choosing to go short against forces that large seems like a death wish.

In the end, are we all lemmings that have been taught that going short is just not allowed anymore? If the S&P 500 shoots higher from here and heads above the all-time high set at the start of the year, I will fall on my sword and admit defeat.

But while it remains in the sell zone of the wave down in the crash, I will continue to look for shorting opportunities in expectation that we will see a move back to the point of control near 2,800 (nearly 10% below the current price).

That last sentence may have sounded like gobbledegook to you. If you have been watching my ‘Week Ahead’ updates that I release every Monday in The Insider, it won’t.

I have been consistently saying in those updates that the sell zone of the wave down in the crash should see selling pressure.

S&P 500 in the sell zone

The Insider

Source: CQG Integrated Client

You can see in the above chart that the rally over the past few months got within points of the top of the sell zone before encountering serious selling pressure last week.

The 200-day moving average is providing some support for now, but I reckon there’s a good chance if we head back below last week’s low in the short term, we should see a cascade of selling as the 200-day moving average gives way.

The initial target would be to the middle of the range created in the crash which sits at 2,800. That is what I call the ‘point of control’.

If the news about the second wave of virus infections picks up steam, then there is a chance we could see prices heading all the way down to the buy zone of the wave between 2,330–2,480. That’s 20% below current prices.

The rally in the last few days according to my model is just shaking out traders who got short on the sell-off last week. A momentum shift back to the downside from here should see the selling return and there are plenty of dominoes lined up beneath the market.

For my way of trading, this is a classic set up and a cracking trade.

When you consider the trade from the point of view of risk/reward, the potential upside in this trade is substantial. If we see a convincing breakout above last week’s high then I will be getting nervous about holding on, so the level of risk is minimal compared to the potential size of the reward.

But the nagging doubt is the level of stimulus and support that markets are receiving on a daily basis.

At the end of the day none of us knows what the future holds. If we wade into the markets as traders the worst thing we can do is assume we are cleverer than the next guy and can work out what markets will do.

Nothing could be further from the truth.

The more stubborn we become about our views the quicker the market will kick us in the pants.

I may be completely wrong about this trade. US markets could continue rallying higher in a straight line and the trade would be a loser.

As I have done many times in the past, I would swear under my breath, dust myself off and move onto the next trade. As long as I am following a clear process that defines where I am proven right and wrong, and the dollars at risk are a minimal percentage of my capital, whatever the outcome is will be OK.

In a market like this you have to keep your wits about you and remain extremely humble. The moves are so large that traders are fixated on the possibility of making huge bucks. But in the end most traders will end up being tossed around like a rag doll by the volatility. Don’t let that be you.


Murray Dawes,
Editor, Pivot Trader