According to new reports the Fed is leaning toward an interest rate cut and the prospect of low-cost money has futures suggesting a substantial gap up this morning.  Asian markets closed mixed but mostly higher overnight and although Europe is pondering a punishment for Italy’s continued deficit spending their indexes are bullish across the board this morning.  But does that mean we should throw caution to the wind and chase into this morning gap? No.

The fear of missing out is a powerful emotion but considering the magnitude of the move over the last 24 hours chasing in could prove to be a painful lesson in patience.  Consider the possibility of a pop and drop which would not be out the question after such a big reversal.  Gaps are gifts and I in fact will be looking at the morning gap as a reason to take profits.  Maintain your discipline waiting to see if buyers step up to support the morning gap before considering new long positions.

On the Calendar

On the hump day Earnings Calendar we have just under 30 companies reporting.  Among the notable are FIVE & VRA.

Action Plan

The top story splashed across my CNBC app this morning is “The Fed is indicating that a rate cut is coming”.  Markets love the prospect of lower cost money and we see both Asian and European exchanges rising on the hope.  Consequently, the US futures are signaling a sharp gap up this morning around 150 Dow points.  That would constitute about a 650 point rise in just over 24 hours.  As exciting as that is, too much of a good thing in such a short period could bring out the profit takers.

The fear of missing out is a very strong emotion but chasing into the open after such a big reversal in price can prove to be a very expensive lesson on patience.  A lesson, that had to be taught to me more times than I care to admit.  Rather than chasing into positions on big moves such as this I use it to take profits and scale out of trades.  Gaps are gifts that I tend to open regularly to collecting the gains and lowering the risk of the volatile price action.  I’m not trying to predict anything but this mornings gap could easily set up a pop and drop.   Stay focused and maintain your discipline waiting to see if buyers step up to support the morning gap before considering new long positions.

Trade wisely,

Doug