The Dow Retains a Modicum of Respectability

Barely a month ago the Dow Jones Industrial Average was a solid performer. The bourse was trading above the 17,500 level, and while year-to-date returns were modest, they were positive. Now we are looking at a situation where the Dow has plunged from its 52-week high of 18,351.36 to its present trading level at 16,379.94. Binary options traders who went short on the DJIA following Black Monday were handsomely rewarded. That's the beauty of binary options trading; the size of the movement is irrelevant – it's the direction that matters. Now that we have seen a degree of calm return to the markets it becomes a little bit more complicated to forecast future movements with any degree of accuracy.

What the Economic Crystal Ball is Saying

However my crystal ball is telling me that the September 16-17 meeting of the FOMC is one of the most crucial dates on the short-term economic calendar. Should the Fed chairperson Janet Yellen announce a rate hike, you can rest assured that the DJIA will move lower. This is typically what happens in the event of a rate hike which causes a contraction to the long-term profitability of companies, thereby reducing profits and shareholder dividends. A Fed rate hike also has the effect of boosting dollar demand, which in the short term would warrant the placement of call options on the USD, but in the long-term may indeed hinder the country’s overall economic growth. A stronger US dollar has the effect of making US exports relatively more expensive, and it results in capital flight from emerging market economies, disinvestment in poorly performing economies. More importantly, a strong US dollar is a disincentive to countries that by dollar-denominated commodities.

The trick is being able to gauge precisely how the Fed decision is going to go. Fortunately one doesn't have to wait until the last moment to place a call or a put option on the DJIA. Various economic announcements will lead up to the meeting on Wednesday and Thursday next week. These include the following:

• The JOLTS report at 10 AM EST on Wednesday, 9 September
• The Jobless Claims Report at 8:30 AM EST on Thursday, 10 September
• Import and Export Prices at 8:30 AM EST on Thursday, 10 September
• Producer Price Index (PPI-FD) on Friday, 11 September at 8:30 AM EST
• Consumer Sentiment Report at 10 AM EST on Friday, 11 September
• Treasury Budget at 2 PM EST on Friday, 11 September

These reports are important in the sense that they give an indication as to how strong US economic growth is in terms of prices, employment, manufacturing, consumer sentiment and budget-related issues. If the reports come in below forecast expectations, the economy is performing sub optimally and this would temper the likelihood of a rate hike next week. However if the overall consensus is that actual results meet forecast results or exceed them, a rate hike increase is even more likely. Even though the Fed is not supposed to take global economic conditions intercut with it determines domestic interest rates, at this particular point in time that is precisely what will happen. The global economy is precariously balanced with China teetering on the edge. Any further shocks to the Chinese economy have the capacity to reverberate through Paris, London and New York at a moment’s notice.

As a trader, your job is to watch these economic announcements as they take place, because each result that becomes available is an indicator as to where the Fed is likely to go. A 0.25 point short-term interest-rate hike is a portend of a declining Dow Jones. Therefore if your gut feeling tells you that Janet Yellen and Stanley Fischer are going to hike rates, you may wish to place put options on the Dow Jones. The one-year return for this bourse is -2.04%, and the top performers are Apple, Boeing company, Cisco Systems, Walt Disney Co., United technologies Corporation and Johnson & Johnson. The worst performers in the Dow Jones include the Chevron group, Verizon Communications, El du Pont de Nemours & Co, JP Morgan Chase & Co and Merck & Co. Inc.

Here is a tip for the rest of this week however: since the Labor Day weekend is over, you have a trading advantage in the Dow Jones – it's going to go higher. This is typically what happens following every Labor Day weekend in the US. Today, Thursday and Friday are likely to be days of moderate to strong gains for the Dow, following the loss of trading on Monday.

What factors are driving traders this week?

Of course everybody knows that China has burned through $93.9 billion in an attempt to prop up its embattled currency. This is the effect of convincing traders that the Chinese currency is overvalued, and the only direction is down. This provides further impetus for investment on the Dow. Bullish sentiment on the Dow is also attributed to potential monetary policy stimulus measures being adopted by the People's Bank of China – thereby injecting further liquidity into the market. Other economic data from China reflects that exports dropped by 6.1% last month and imports dropped by 14.3%. On the plus side, the gross domestic product in the Eurozone increased by 0.4% in the 3-month period ending in June 2015.