I have to say that trading in front of FOMC this week will be a hit or miss proposition. Unless you have a profitable long position established already, it will probably not be too prudent to initiate a new long or short right before the decision on Wed @ 2:15 pm edt. Here is the reason:
Ben Bernanke has decided to extend the meeting to two days. He announced it in his Jackson Hole speech. It is a weird venue to discuss particular details about upcoming Fed meeting, has never been done before. In that speech he usually discusses Monetary Policy, like prepping us for QE2, but rarely says anything specific like one-day extension on upcoming meeting. So my thought is he may have a rabbit in his hat. What can it be? Market is ready for and has already priced in "Operation Twist". It is a reshuffling of maturities in Fed's Treasuries portfolio. I think that market has also priced in elimination of 0.25% interest paid on bank funds kept at Fed overnight. And that is all the market has priced in!! What if Fed goes one step further and does QE3? That means they will sell nothing in their portfolio and buy more Treasuries. Then my earlier thesis about shorting after FOMC decision goes to hell. I will not dare fight the Fed in that scenario. Market will go absolutely nuts and rally like crazy for days, if not weeks. I will join :) But if Fed does what market has already priced in, then it is a late-day rally into the close and after that the "disappointment trade" is on for a week or two.
I hope this makes it clear on what I will do next week. If you have any questions, you are welcome to ask them in comment box.
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