Late night review of Dow -295

Felt much better listening to some of the traders who were positioned correctly. Here are some the lessons they shared:

1) Always look for divergences to determine if the action prior to the FED decision is a false move.

There were two ways of determining this:
a) The Puts/Calls Ratio intraday on the CBOT was steadily rising from .85 to .95 prior to 2:15pm, indicating there was a little bit of net selling prior to the decision despite the averages being higher.

b) The international index ETFs (Ishares) such as the FXI in China, and the EWZ in Brazil were in the red the past few days despite the U.S. avgs continuing to climb. The international markets have solidly outperformed the U.S. in 2007 and should have continued their run unless they were being sold.

2) Do the opposite of what Jim Cramer does if he goes on air during a CNBC segment with a wild prediction. On Tuesday, Cramer mentioned something about the Dow should rise one thousand points if the Fed would cut by a half a point today. That comment alone, should have be a warning to sell.

3) The T2108 indicator on Tradestation does NOT warn you of potential reversals on FED decision days. The indicator is useless on Fed days because it was not reading overbought or oversold. Although the indicator was nearing the overbought side, around 52, it takes a reading either above 70 (overbought) or under 20 (oversold) to have a better predictive ability.

As mentioned last month, Livermore always watched out for the one-day reversal, where a stock reached a new high, BUT closed below the previous day's low on higher volume.

While a lot of stocks did have bearish engulfing patterns, the VOLUME was lower in many of the charts compared to their up days. Also the short term uptrend in most of these charts is still intact, so conceivably they could drop a lot farther and still be considered in an uptrend. So while the downmove was painful, its really about whether we are going to get stopped out first before the real move plays out. Our widest stop is 10% from the purchase price, and there's a fairly good chance, I'll get stopped out in at least one position.

Usually the next business day after a Fed decision is the real move. It will either partially reverse some of yesterday's losses or it could continue the downtrend on higher volume. One thing is usually certain, you can expect volatility to increase so having fairly tight stops will easily get you pushed out of a position before the real move is made.

Only two stocks, MA and WFR finished with 52 week highs in the green today.