Ahead of tomorrow morning's (Australian time) FOMC rate decision and statement, markets are moving away from risk assets, locking in recent gains. While some of this selling may be precautionary, there are good reasons to think the Fed statement could spark further pressure on shares and commodities.
There is a gap between Fed thinking on US interest rate rises and the market pricing of interest rates. The Fed releases a "dot plot" after some meetings. This shows on a graph where Fed board members expect cash rates to be at points in time.
The problem is that the dot plot is pointing to a further three rate rises by the end of 2016, while the market pricing is closer to one. Now that market sentiment has stabilised after a very weak start to the year, the Fed may move to address this gap with tomorrow's statement. And if interest rate markets move closer to the Fed view it's likely shares will sell off too.
And it just so happens there is a neat set up in the Germany 30 Index, tracking the DAX:
The Fed statement is announced at 5 am Australian east coast time - and the Germany 30 trades through to an 8 am close (re-opening at 6 pm). It is "live" to the announcement. The chart shows a reversion back through the Bollinger Bands, and the band width is steady.
This will have many traders looking for a move back to the moving average (dark green line) sitting just around 9,625.
The target is defined, as is the stop loss, which is placed above the reversion candle high at say, 10,050. At the moment futures markets are pointing to an opening around 9,940, giving a reward/risk ratio 315 /110, or just below 3/1. The opening in the Germany 30 is therefore crucial. If it opens substantially below 9,940, I'll need to re-assess the trade.