Source: TVB

Here is a case where knowing what happened can put you in a better position to profit.

Well, the picture becomes clearer when you take a look at other related markets.

Markets

Here we have our US indices, S&P500 and DJIA indices. Massive drops on friday.

Here are the US 10 year bond yields, we got a move higher on yields at the same time.

Right now you’re probably wondering, if the equity markets sold off, shouldn’t the bonds have been bought up and yields drop instead?

Read on, it shall become clear soon.

Here we have the USDx, the USD got a lot stronger around the same time that the indices were dropping and yields were rising during Friday's US market session.

If you take a look at the JPY and CHF pairs, you also see them strengthening during the same period.

Now take a look at this economic news releasing in a couple of weeks.

Yes folks, there's a strong expectation that the FED is going to raise interest rates again.

The key role of the central bank is to “to promote sustainable growth, high levels of employment, stability of prices to help preserve the purchasing power of the dollar and moderate long-term interest rates.”
So the general idea is that the Central Bank raises rates as a pre-emptive action against run-away bull markets. Vice versa for cutting rates, they aim to prevent a sharp market drop.

So how will markets be affected?

What we saw on Friday is a good indication of this.

The effect of an interest rate hike would make the USD stronger.

On the equities side, we will see a rebalancing of expectations. As businesses price in an interest rate increase from near zero, valuations will certainly take a hit. So an increase in downside volatility can be expected as we saw on friday.

But can we expect a large sustained market down move from just a 25 basis point rate increase? How about 50 basis points?

Hard questions to answer. Give it some thought. =)

What's the play here?

I believe the short term plays will be on the long side for USD and short side on US equities. If you have a good profit buffer on your trades, after news release would be a good time to take profits. Without a good profit buffer going into the news, I think the wiser thing to do is taking profits or scaling out of positions before the news release.

We have the fed interest rate decision on the 21st of Sept.

Trade safe folks!

The post MASSIVE 400 Points Drop On The Dow! Here Is How You Can Still Profit From It! appeared first on The Systematic Trader | Trading Courses | Collin Seow.