Last week the FOMC announced that it was going to start winding down or “tapering” back the stimulus program commonly referred to as Quantitative Easing 3 (QE3). First of all, what is the FOMC? And then, what is Quantitative Easing?

The FOMC is the Federal Open Market Committee and is a committee within the Federal Reserve System and is made up of 7 Board of Governors, who are appointed by the President of the United States and confirmed by the Senate for 14 year terms. The Chairman of the Board of Governors, who is currently Ben Bernanke, is appointed from within the board for terms of 4 years at a time. George W Bush first appointed Ben Bernanke and President Barak Obama reappointed him for another 4 year term. In addition to the 7 Board of Governors, the FOMC is made up of 5 additional members chosen from the 12 Federal Reserve Bank Presidents on an annual rotating basis. This Committee meets 6 times per year and this brings us to last week’s meeting which was held June 17-19, 2013. At the conclusion of the meeting there is a statement that is released which announces the current thinking of the FMOC and the current actions and potential future actions the FMOC is contemplating. Lately, most of the attention given to the Fed has been centered on the FOMC’s stimulus programs commonly referred to as Quantitative Easing.

Now for the second Question: What is Quantitative Easing? Quantitative easing (QE) is an unconventional monetary policy used by central banks (the FED in this case) to stimulate the national economy when standard monetary policy has become ineffective. The central bank implements quantitative easing by buying financial assets from commercial banks and other private institutions, thus increasing the monetary base. This is distinguished from the more usual policy of buying or selling government bonds in order to keep market interest rates at a specified target value. The FED and other central banks tend to use quantitative easing when interest rates have already been lowered to near 0% levels and have failed to produce the desired effect. The major risk of quantitative easing is that, although more money is floating around, there is still a fixed amount of goods for sale. Under normal conditions this will eventually lead to higher prices or inflation. Since the Financial Crisis of 2008 the FOMC has undertaken 3 separate asset buying programs referred to as QE1, QE2, and most recently QE3.

In September 2012, QE3 was instituted to buy up to $85 billion mortgage backed securities per month until which time the employment and the economy improved.

This brings us to last week’s FOMC announcement, that the Fed would begin “tapering” QE3 back. This created much nervousness in the market and some uncertainly concerning the Federal Reserve’s ongoing economic stimulus. What is the reason for the market’s concern? Well, the main purpose of the Quantitative Easing programs was to stimulate the economy by lowering interest rates. Lower interest rates also stimulate the stock market because stocks become more favorable than other investments such as fixed income bonds. As the Fed pulls back on the stimulus program, interest rates will naturally rise and this will negatively impact the stock market, which is why stock investors are obviously nervous.

We did see a fairly sharp sell-off in the Dow Jones 30 of over 500 points over a couple of days after the announcement. That is one reason why, I think, this week the Fed Governor’s are spending time trying to clarify the intent to have a slow and systematic unwinding of the program, to reassure the markets that were starting to panic. Now some analysts are questioning if it is too early to be talking about ending the program. That is the problem with any stimulus; over time it is more like an addiction and is always going to be painful for some when it stops. One thing for certain, the Fed has a tough job ahead unwinding QE3 while trying to keeping everybody happy!

As many of you know, the market likes to move in, what we call, cycles. The cyclical nature of the market is often times what makes it more predictable. One of the cycles that often occurs is when price is making swing highs and swing lows. A swing in the price is when a peak or valley has been created. A swing high is created when a certain number of high before it and after it are lower than the peak. A swing low is created when a certain number of lows before and after the valley are higher than the valley low. These swing highs and lows we are also helpful in identifying whether the price action is trending up or trending down.

A swing high is an area where the price has been moving up to form a peak and then moves back down forming what looks like an upside down “V”. The swing low is an area where the price has been moving down then forms a bottom that looks like a “V” and then begins to move back up.

In the picture above you can see the formation of a swing high and swing low as indicated by the lower highs on both sides of the peak and the swing low as indicated by the higher lows on both side of the valley.

In addition to identifying the highs and lows of a particular cycle, these swing highs and lows can help us better identify the trend. A series of higher swing highs would indicate an uptrend while a series of lower swing lows would indicate a down trend.

Looking at the chart of the USDJPY daily chart you can see areas of swing highs and swing lows as identified by the up and down arrows. Notice how these peaks are generally making higher swings which would indicate an uptrend. We can also connect these swing highs and swing lows to identify areas of support and resistance.

In the current daily chart of the USDJPY you can see that the price is coming up off of the most recent swing low area. As the price moves up we can begin to look for the formation of another swing high. This formation of the swing high would be confirmed once we have a series of lower candle highs put in place. This is another way we can determine that a specific trend has come to an end.

As the market goes through these cycles we can begin to see more clearly when we might be wanting to entering a long or short position.

As you look for opportunities to buy or sell a currency pair we will look for the times where the price is getting ready to move up off of an area of support or resistance as it forms new swing highs or swing lows. Regardless of what you are trading you can look at the charts to identify these areas visually by inspecting the high points and low points of the price movement.

Take some time to practice identifying these areas so they can help you with your entry points.