‘Walk-Down Day’ Precedes FOMC Minutes Release

An inside look at the central bank’s last meeting minutes showed no signs of backing off raising benchmark interest rates.

And the stock market reacted as it has with another up-and-down day after the minutes were released Wednesday.

Trading through this volatility requires traders to avoid getting in the way of the next market move.

FOMC maintains plans to raise interest rates

Slightly receding inflation the last several months hasn’t been enough to convince the Federal Reserve (Fed) that monetary tightening is having a strong enough effect on the economy.

That was the overall message among Federal Open Market Committee (FOMC) members relayed in the release of meeting minutes on Wednesday. The last meeting, held Jan. 31 to Feb. 1, showed a lingering desire to keep raising interest rates.

According to the FOMC minutes, “participants agreed that, while there were recent signs that the cumulative effect of the committee’s tightening of the stance of monetary policy had begun to moderate inflationary pressures, inflation remained well above the committee’s longer-run goal of 2 percent and the labor market remained very tight, contributing to continuing upward pressures on wages and prices.”

These factors contributed to several members leaning toward higher interest rates and not letting up until inflation is under control.

“Almost all participants agreed that it was appropriate to raise the target range for the federal funds rate 25 basis points at this meeting… A few participants stated that they favored raising the target range for the federal funds rate 50 basis points at this meeting or that they could have supported raising the target by that amount.”

Upon the release of the minutes and notice of these plans, the stock market gapped down before recovering most of the losses into the close of the Wednesday session.

In the market today, the Dow closed at 33,045.09 points to slip .26% (dropping 84.50 points on the day). The Nasdaq managed to hold near flat at 11,507.07 points for a .13% gain while the S&P 500 dipped by .16% to 3,991.05 points.

Learn to identify walk-down day in volatility

Before the stock market dropped today, equities prices started moving lower on Tuesday to start the holiday-shortened week.

John Carter, Founder of Simpler Trading, described equities losses on Tuesday as a “walk-down day.”

The overall market started to the downside and never clicked back to the upside. Such a walk-down day is a signal that the market doesn’t appear ready to rally significantly.

How can traders identify a walk-down day in all the volatility?

John pointed out that the market will have a low $TICK reading. The TICK will not spend much, if any, time above 0 during the session when looking at the 30-day, 5-minute simple moving average on a chart.

Stocks will simultaneously show strong selling, John noted, with maybe a slight move higher, but will keep sliding downward. He also pointed out that following the TICK chart at this level gives insight into a walk-down day that won’t register on other indicators.

Other corroborating signs are the Volatility Index (VIX) and the U.S. Dollar Index (DXY) moving higher. While these may be muted some, they should be higher during the session.

John made note of this type of market action because traders were having trouble working through the Tuesday session.

“It’s important to identify a walk-down day because you can really waste a lot of energy, mindpower trying to fight it,” John said. “The best strategy is not to fight it.”

Don’t fight market when prices drop

When the market is walking down, John will look to sell call credit spreads and ride the downside movement.

“That’s the way I’ve found – if you’re not already positioned (short) – to effectively play a day like this,” John said.

The tough part of this type of session is knowing that it is a walk-down day as the session progresses. The key is to identify the day and not fight how the market is moving.

“Fighting it – like continuing to double-down on longs – is where your account can get destroyed,” John said.

Walk-down days and sessions facing uncertainty, like the FOMC minutes release, require traders to be cautious.

“Remember, in trading, a lot of times it’s not how much you make… it’s how much you don’t lose,” John said. “On a day like this if you’re not already positioned for it the goal is to focus on some light trades and get set up for the next day.”

Short high flyers in days ahead?

Despite the stock market moving higher into the close on Wednesday, John doesn’t see the market likely to rally in the short-term before falling off later in the year.

“I don’t think we’re going to get a huge run out of this,” John said. “I think it’s going to go into more of a chop mode.”

He pointed out how the market has cycled through these drops and rallies since last year.

Overall the market has displayed a “hurry up and wait mode” as it awaits the next Fed meeting and policy actions.

“Anything that spikes up gets whacked pretty good,” John said. “Maybe one of the safer trades in this market is shorting high flyers.”

To follow John and the Simpler Trading team, check out the live-trading online community.