Step 1 – Analysis of Macro Economic Condition

Our main goal in this first step is to develop a directional bias for the next several hours, and potentially all the way into expiration. Not only are we looking to develop a directional bias, but also the potential magnitude of that direction.  This is a critical skill, however we don’t always need to be 100% correct in this analysis. In fact we can be only partially correct and still profit very handsomely. But the more correct we are, the more consistent we are, the better.

This is what drives the world economies, and the S&P is reflective of the largest economy in the world. So, having a daily view of the global macro condition is absolutely imperative to the 0-DTE trader. We use this analysis for both longer timeframes as well as intra-day timeframes. In other words, it can help us determine and or confirm, long and short term trends. The factors we track include the following:

  • Interest rates (Fed Speak)
  • Economic Reports
  • Geo economic and political events
  • Domestic and foreign policies

The decisions we make with 0-DTE are finer grained than those made by hedge funds and mutual fund managers, but they are essentially the same. We simply are in tune to the knee jerk market reaction when these conditions become known to the market.

The way we do this is by following the. economic reports reported each morning in US markets, and throughout the day for worldwide markets. Our primary source of this information is Econoday and Forex Factory economic calendars. The most impactful economic reports usually come out each week day morning between 7 am and 10 am eastern time. The majority come out at 8:30 am. Some days Federal Reserve governors are scheduled to speak throughout the day. We are always on notice when they speak, as they can move markets with their words.

Over time you will become aware of the specific day of the week and the time these reports are released. There are a lot of them, so it’s a lot easier to scan the calendars the night before and note which reports are likely to have the greatest impact on market direction for the coming trading day.

Both Econoday and Forex Factory make it easy to determine potential impact by color coding, typically more red means more impactful. Economy focuses only on US based economic reports, while Forex Factory takes a world currency viewpoint. Both resources are worth watching as they don’t always capture every impact report and each has particular features that will aid in your daily analysis. And really that’s what we are doing, a daily impact analysis to determine the most likely direction and magnitude of direction the market will take after the reports are released. It is also important that you understand the nature of each report and the trends they have established and how they are intertwined with policy and politics.

Federal Reserve Context

The Federal reserve is the ultimate purveyor of the markets. Their job is to influence inflation rates and job growth through the manipulation of interest rates and printing money. Institutional and Retail Investors and Traders alike are keenly aware of the Federal Reserve’s strategy, as they telegraph it almost on a daily and periodic basis. Based on the Fed’s disposition, will largely determine the markets’ reaction to economic reports. What I mean by this is the market will react to reports in a way that is contrary to the result of reports. We call this Opposite Theory.

The basic premise of Opposite Theory is this…Bad Market reports normally send the market down…however in the current environment bad reports send the market up…because Wall Street and Main Street believe the Fed will continue pumping QE into the market to keep it propped up…and conversely if there are very good reports, the market will react by pushing the market down, fearing the Fed will start tapering because their economic tinkering seems to be working.

That is our world right now, due to the highly fragile condition and sensitivity our economy has to interest rates and inflation concerns. The Federal reserve used to have economic tools that they could employ to regulate the economy. However since they have pegged interest rates to zero, and flooded the market with dollars, which have increased inflation to absurd levels, they have painted the economy into a corner. You might think. that this is a horrible environment to trade, and you would be right if you were not armed with this knowledge. However this fragility helps us make clear cut decisions with our daily directional bias. And that is a good thing.

Timing of Reports

As a general condition, the most impactful economic reports are released Wednesday, Thursday and Friday mornings. Monday mornings are usually quiet. This is not the rule, just the reality. You can get impactful reports on Monday, and you can have quiet Fridays. Most reports are very regular (weekly) and some reports only come out once a month, like the Employment Situation Report, or even once a quarter, like the quarterly GDP report.

Some reports have alternate days depending on whether there’s a government holiday that week. A prominent example of this is the EIA Petroleum Status Report. You can find the holiday release schedule here. I mentioned this because this report can move markets, so while you might be expecting it on Wednesday at 10:30 am and it isn’t there, then it’s probably because there was a government holiday that week, pushing it to an alternate day. You should be aware of the regular and alternate schedules of the most impactful economic reports. The easiest way is to consult the Economy or Forex Factor economic calendars.

Some events are also on the calendar, that you may have ignored until now, but I’m telling you, that would be a mistake. One such event is bind auctions, particularly auctions for the 10 year and 30 year treasuries. They are not always impactful, but sometimes they can dramatically move markets, both futures and stocks. And big impactful auctions are usually accompanied by some geo political or macro economic event.

Most Impactful Economic Reports

It’s important that you know which reports can move the markets the most, but it is also important that you understand what these reports are, how they are compiled, and how to read them. Often the top. line numbers in the report don’t tell the whole story, and so if you understood the entirety of the report, market reactions to the release of the report may become more clear to you, allowing you to make better decisions with the strategy. So I encourage you to not only know which reports are most important, but also to research these reports to understand how they are conducted and why investors care about them. Here are the top 10 reports in no particular order…

  1. Employment Jobs & Claims
  2. Home Sales & Starts
  3. Energy Status (EIA)
  4. Construction Spending
  5. Inflation Consumer (CPI) & Producer (PPI) Prices
  6. Gross Domestic Product
  7. Consumer Spending
  8. Retail Sales
  9. Manufacturing Demand Reports
  10. Industrial Production

I know that this may be overwhelming, the magnitude of information and the level of understand that goes into it, translating that to actions you take in the market. But no one ever said this would be a cake walk. Trading is the hardest way to make an easy living. Check out this list of report definitions.

Conclusion

The analysis is ongoing, and sometimes we need to proceed to steps 2,3 & 4 before we have all the information at hand. We don’t want to squander or delay an opportunity, because time lost is premium lost. We must decide the most likely direction the market will take over the coming hours, and what the potential extent of that move might be.

Another piece of information we might add to that analysis is the current volatility in the market, and specifically the implied Volatility and the expected move for the coming day. You can calculate the expected move, or you can get it from most trading platforms.

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