Fed Bounce Part Deux

I will add to this post later, but for now: I took calls on DIA, SPY, EOG, and STLD today. I started some calls on EOG, TEX, CRM, RIG, and XTO yesterday on the big fade as I was locking in my puts for a gain. If we gap tomorrow morning I will sell half of everything but the gas stocks into the gap at the open. If we flag the open, I will pick up the other half of my STLD trade. I will get back to this later when I have time.

Ok, it's later now and I've had a chance to go through the markets, the news, and over 300 stocks. Let me dive right in with the news that drove the bounce:

Here is the wrap from Briefing.com, this sums it up perfectly, so I will save the typing and just copy in their comments:

[BRIEFING.COM] On Tuesday, the Dow, S&P 500 and Nasdaq posted their largest one day percent gain since 2003 on the announcement of a coordinated central bank effort to increase liquidity in the financial markets. The major indices finished the day sharply higher, near their best levels of the session, thanks to broad-based buying interest.

The Federal Reserve announced a new Term Securities Lending Facility (TSFL). The Fed will lend up to $200 billion of Treasury securities to primary dealers secured for a term of 28 days, rather than overnight. The borrowers will be able to pledge a variety of collateral ranging from federal agency debt to private AAA rated residential mortgage backed securities (MBS). The auctions will take place on a weekly basis.

Basically, this plan stands to improve liquidity by allowing more thinly traded securities to be used as collateral to borrow highly traded Treasury securities.

The Fed also announced it is increasing its swap lines with the European Central Bank and the Swiss National Bank to $30 billion and $6 billion, respectively. This equates to an increase of $12 billion.

This is a coordinated effort with other central banks, which announced measures of their own. Participating central banks include the Bank of Canada, the Bank of England, the European Central Bank and the Swiss National Bank.

The Banks, Brokers, Insurance, and Housing sectors were the biggest of the big bouncers today (those are the "short covering bounce" sectors). Chemicals, Energy (and especially the Gas stocks I have been highlighting for you the past week), Steel, Copper, the Construction/Machinery/Agriculture stocks, some Tech stocks, and a couple of Gold stocks were areas of big buying interest - especially Chemicals, Energy, and Steel. As you can see from the early post before the close that I was hitting the market ETF's, Energy/Gas, Steel, and Machinery/Agriculture pretty hard. But it was good pickings in a lot of other areas as only 6% of my watchlist universe was down today!

Watchlist (Bullish Short Term):

Energy: OXY, EOG, APA, XTO, DVN, and DO are on my "A" list. HES, RIG, SWN, MRO, RRC, CHK, SU, ESV, MUR, and ECA are also playable (more of a "B" list).

Chemicals: A-List: MOS, B-List: CF, AGU

Steel/Metals/Mining: A-List: CLF, STLD, B-List: POT, NUE, AKS

Machinery/Construction/Agriculture: B-List: FLR, TEX, CAT, IR

Tech: A-List: HPQ, IBM, CRM (services) B-list: RIMM

Gold: B-List: GG, AEM

Biotechs: A-List: GENZ, B-List: DNA, GILD

By the way, although I'm not trading it yet, GENZ is setting up for a classic channel breakout (a setup that I came up with from observing this pattern over and over). MACD-Line is the indicator (besides price and volume) I use to clue me in that momentum is ramping up. A move above 76 could lead to a 3-4 point swing short term and a 10 point trend intermediate term. HPQ is in a mini version of the same type of price behavior (IBM is also similar to HPQ).

As far as the call trades I'm in now, here is how I am playing this bounce going forward. If we gap up on the open tomorrow on the SPX into the 1330+ area I am immediately selling half my SPY and DIA position and 1/4 - 1/3 of my other positions (especially the Energy stocks, which I will lock a little down regardless ahead of the mid-day inventory report). If the gap holds, then I may get back into some more of the ETF positions at a better price. Now, if the market instead Flags at the open on the 15m or the 30m charts (30m would be ideal) and the SPX has a nice little bull flag back into the 1305 area - plus or minus a couple of points - I will add to my positions and maybe pick up one or two more stocks. On the downside, I want to see the 1297 - 1300 area hold on the SPX.

This market could have a decent swing into the Fed meeting next Tuesday on short-covering, and real buying. I would not be surprised to see a little choppiness in the swing just like mid-January after the Fed cuts. The reason is that we still have to get through Retail Sales and CPI on Thursday and Friday this week. So I am keeping things tight as usual, and I am looking to start scaling out of some of these calls as soon as tomorrow. I want to keep enough on the table, though, because this swing smells like it could weather the storm and reach for Tuesday. As always, we shall see...