I wrote this last night on Investools.com, and figured I would post it here also.

Even though it is not any fun, it is not uncommon to see market activity and volume die down ahead of a FOMC announcement. Monday's trading didn't bring about any drastic price action. Therefore, I refuse hold my breath for any conviction in Tuesday's tape either. The market is lying in wait of some direction and comments from those that determine the fate of our monetary policy, inflationary conditions, and weakening currency. The expectation is a rate cut sooner or later, but it is how the committee addresses their stance and future outlook of our monetary policy that concerns most market participants. Once Wednesday afternoon comes and goes, you'll see plenty of money moving back in and out of stocks. That I can promise.

In the process of lying and waiting, I have noticed that the VIX has finally closed below $20, which is telling me that the market is becoming very optimistic in light of all the headlines and price action of the recent past. As an option trader, a falling VIX typically translates into easier market conditions to trade in, and is a great indicator to use to get a pulse on the market sentiment.

As you are waiting for this week's news events to take place, here are a few things to take into consideration.

Economic News

Here are some of the major Economic reports that are due out this week:

Earnings

Most of the market moving components have already reported their quarterly earnings, but here are a list of popular stocks that will be reporting over the next couple days.

Tuesday:

• Archer Daniels Midland Company ADM
• Buffalo Wild Wings, Inc. BWLD
• Burlington Northern Santa Fe Corporation BNI
• Express Scripts, Inc. ESRX
• TheStreet.com TSCM
• Under Armour, Inc UA
• Valero Energy Corp. VLO

Wednesday:

• Akamai Technologies Inc. AKAM
• Cummins Inc. CMI
• FIRST SOLAR INC FSLR
• Garmin Ltd. GRMN
• General Maritime Corporation GMR
• General Motors Corp. GM
• GulfMark Offshore GLF
• Hess Corporation HES
• Itron, Inc. ITRI
• VOLCOM INC VLCM

Financials

The financial sector is still undergoing a lot of headline risk. However, if you look at a chart of the XLF, you'll see that prices are hovering near resistance at $27. A break above this might signal short term strength, but I would keep your time frames relatively short if you are shopping for values at these prices. If you are considering short term bullish trades on a breakout, stick with the stocks that are showing relative strength (GS, MER, and LEH). However, the easier trades in the financial sector have been online brokers, such as TROW and ITG.

On the other hand, if prices retreat from resistance and the market heads lower, you might consider puts on some of the weak names in the group; namely PJC, MS, and LM.

 

Energy

As crude oil prices flirt with the $120 per barrel price level, energy stocks have been on a rampage. The XLE, OIH, and USO are trading at relative highs. Based on what we've observed over the last few months, the demand for oil is strong, and is expected to continue. It is also important to watch Natural Gas via the UNG. Natural gas prices have been soaring higher, and natural gas producing companies like ATLS, EGN, EOG, APA, and DVN have been a benefactor from this performance. Whether its natural gas, crude oil, or alternative energy, you'll be hard pressed not to find a good bullish technical set-up within this red-hot sector. Start looking!

Basic Materials

Be very cautious this week if you are trading in this group. I use the IYM as a measurement of how the sector is performing in general. As you pull up a chart of the IWM, you'll notice that this stock created new highs on a significant contraction in volume.

I think this group is due for a little stabilization and don't currently have any trades going, with the exception of a few steel names (AKS and MTL).

 

Technology

It's no secret that the NASDAQ has outperformed its peers over the short term. This is in direct correlation to the "Four Horsemen" and the unbelievable performance they have put together collectively over the last couple months. AAPL, RIMM, GOOG, and AMZN are all looking fantastic, and are giving generous trading signals to boot. These trends show no sign of slowing and are still trading at great values compared to earnings.

Pull up a chart of AMZN and take note of the inverse head and shoulder formation that has taken place, which is a bullish reversal pattern.

Retail

 

Retail stocks have been sending mixed signals across the board. If you have been watching this group, you'll want to choose your battles carefully. So far we are seeing department and deep discount stores such as WMT, KSS and DLTR leading the way, while high end retail and retail accessories such as TRLG, SKS, LIZ, and APP have been lagging the pack, and giving bearish technical signals.

I also should note that I like retail apparel stocks such as URBN, GYMB, BKE and ARO heading into the summer. These stocks are still trading near their highs, which is great considering where the market and the group have been over the last several months.

Currencies

As global markets continue to strengthen, the "carry trade" is slowly working its way back into investor's portfolios. The carry trade is a strategy in which an investor sells a currency pair with a low interest rate and uses the proceeds to purchase a currency pair with a high interest rate. The idea is to capture the difference in interest rates. If you have experience in the Forex market and are considering putting on a carry trade, I would stick with some of the more stable pairs right now, such as the USD/JPY or the AUD/JPY.

Another important consideration this week is how the Fed meeting will play a role in the performance of the U.S. Dollar. If the Fed signals that they have concluded their easing campaign, then I would start looking for opportunities to buy the US Dollar. I won't be chasing it into strength, but I would consider buying the dips over the next few weeks. There are a few ways to accomplish this. If you have experience trading Forex, then you might look towards the EUR/USD or the GBP/USD. If you have not traded in the Forex market, there are plenty of ETFs that track these exchange rates. For example, if you'd like to mirror the performance of the EUR/USD, the FXE is the ETF that tracks this currency pair, while the FXB will mirror the performance of the GBP/USD. If you are betting on a strong dollar, then you would consider shorting or buying puts against the FXE or the FXB.

Emerging Markets

If you are considering getting a little international exposure within your portfolio, you should look no further than China (FXI) or Brazil (EWZ). A simple relative strength comparison over the last month will show that these foreign countries have doubled and nearly tripled the performance of US equities, as measured by the SPY.

 

 

The chart above shows the SPY (black line) compared to EWZ (blue line) and FXI (green line). Over the last month, the SPY is up nearly 6%, compared to 13% in the EWZ and 15% in the FXI.

 

Take a moment to pull up the chart of the FXI and take note of the inverse head and shoulders pattern. This pattern is signaling potential strength in Chinese equities in the near term, and can also be used as a way to manage your risk in a trade. The "neckline" of the pattern occurs near $155. A stop order can be set slightly below this level, which should act as a new support. The target price as measured by the pattern should be about $35 points (measured from the head to the neckline), or $190 over the next few months.

Final thought

The FOMC's decision to cut or hold interest rates will play a big role in how the market moves this week. Fed Fund Futures have priced in a .25 basis point cut, with a final target of 2.00%. There is a chance that the Fed might not cut rates until their next meeting, but it is more likely that they will make a .25 bp cut Wednesday. However, the most important component that the market will be listening for is how the Fed addresses the future of their monetary policy and inflation concerns. Watch the S&P around the 1400 level and when the news breaks, use that indicator to help position your portfolios in the short term. As always make sure you are properly diversified and using sound money management principles.

Top Picks: RIMM, LNN, DVN, ITG (calls)

                 IGT, GRMN, WFR, SPWR (puts)

If you'd like to catch up with me throughout the week, please visit me at www.optionaddict.net or tune into the Marketcast on Tuesday and Thursday evenings.

Jeff Kohler

Investools Content Developer

www.optionaddict.net