Will we see a “Fed Reversal”?

As expected, immediately after the Fed announcement, market indecision set in and we witnessed the typical wild vacillations for roughly 15 minutes. Then, what a surprise, buyers stepped in and drove the market to another new all time high.

Historically, when the market moves higher after a fed announcement we will see a “Fed reversal” pattern where the initial move is reversed in the days following.

Couple the difficulty sustaining post-fed gains with the current “overbought” to “very overbought” state of the major benchmarks and the extremely low reading in the “average true range” of the higher-beta Nasdaq 100 (QQQQ) and you can see why the probability of a short-term move to the downside is high.

As I stated in the blog yesterday, we were able to get out of our position in the ETF Extremes strategy for a 6.5% gain. Not bad, especially considering had we held we would have had a loss of well over 10%. Most of the indicators that we follow are short-term (1-5 days). Also, remember that when I state 1 day this can be an intra-day move. This is why we are forced to be nimble in our trading, but this is what we know best, particularly in the ETF Extremes strategy and our performance speaks for itself.

Overbought/Oversold levels for May 9, 2007

• SPY -  78.3 (overbought)
• DIA - 92.1 (very overbought)
• IWM - 58.4 (neutral)
• QQQQ - 80.5 (very overbought)
• GLD -  45.0 (neutral)
• OIH - 68.8 (neutral)

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