This past Wednesday we held an Options Class sharing 3 Reasons why the market rally post-fed comments, and I was right!  

The market rallied 100+ points!

Many of our Options members took advantage of this call, like Magnus who purchased short term options on the $QQQ (Nasdaq) and was able to profit 300% in one day.

“Purchased QQQ $395 calls FOR $1.70. Sold them for $5.10.” –  Magnus shared with our Options community.

There are many reasons for this bullish opinion but I need to make one thing clear, I don’t have a crystal ball, I use the same tools that we build for clients of Masters in Trading, the same tools that most of our clients use.  

I do have experience, and through years of service-to-the-market I have become adept at noticing repeatable patterns that allow us to take advantage of big market moves.

Below is a chart from a tool available in our Futures Membership called Equity EDGE.  This same tool is available for Bonds, Metals, and Equities as well.

For simplicity, I labeled each talking point with a corresponding number in the chart below.

The chart is broken down into weekly cycles, which means that at the start of each week a new cycle begins and the previous week's cycle ends. The EDGE tools have the ability to study market behavior in cycles that include:  Weekly, Monthly, Annual and Options Expiration Cycles.  The chart above shows weekly cycles.

• The purple line shows the Russell 2000 Futures contract, symbol /RTY
• The red line represents the S&P 500 Futures contract, symbol /ES.
• The thicker lines above and below the markets are Implied Volatility bands.  Implied Volatility bands represent how much volatility there is in the market.  The wider the band, the more volatility there is in the two charted instruments.

1. Before the Fed announcement this past Wednesday, both the red and purple lines traded down to the Implied Volatility Bands.
2. Right after the Fed announcement, the S&P 500 Futures along with all Indicy Futures exploded higher. For instance, the /ES Futures went from $4610 to a high of $4734 Thursday morning.
3. Notice I added two of the number ‘3’s” in the chart. I could have added more but two tells the story.  When the market trades down to the Implied Volatility bands they usually bounce off support or fail off resistance.  This doesn’t always happen, but because of the dynamics of the options market there’s a plethora of hedging that goes on at these levels that consistently prove to be support (or resistance).
4. There’s 2 numbers “4’s” in the chart as well. I labeled these two spots to show the reader the difference in volatility levels.  The first “4” (the one to the left) shows much higher volatility than the 2nd “4” (the one to the right).  When volatility is high, there’s a higher probability of the overall market trading lower because volatility is another way of expressing uncertainty.  When volatility goes lower (like it was pre-fed release) the market most likely finds support and trades higher.
5. MIT EDGE tools chart markets in “Profit and Loss” and not in the level of the asset.  The /ES Futures are not labeled using the last of $4700, instead, we label based on the value of a 1-lot.  If a trader purchased 1-lot of /ES Futures at the supportive Implied Volatility band and covered after the Fed release the profit would be roughly $6,000.

WATCH VIDEO: 3 REASONS WHY THE MARKET RALLYS