The market continues to walk a tightrope between another leg up and a very significant tumble. We’ve been here many times before in the past year, and it isn’t getting any more fun. To recap…
Note that 1423 was very close to the .618 retracement (1424.41 on the white grid below) of the 1474 – 1343 decline. Prices reversed there as we expected, shedding 25 points to 1398 in its first wave down (in line with our forecast of 1400.)
That .618 retracement of the 1474-1343 wave down portends one of three outcomes:
- the bearish case: a corrective wave 2 which sets up a more powerful wave 3 down
- the bullish case: the first of a series of impulsive waves to new highs
- the middle case: the “A” subwave in an A-B-C corrective wave that points higher before wave 3 down.
The first case is pretty clear cut, and has been detailed in prior posts.
The big imponderable is case #2. The top question I’ve received over the past week is whether a fiscal cliff deal would result in such a move. It’s pretty easy to imagine that sort of a market reaction, even though — like last year’s debt ceiling compromise — it would hardly be justified.
One thing is indisputable: deal or no deal, we’ll get higher taxes and lower government spending. Any combination of the two will negatively impact GDP. By the same token, though, any deal would almost certainly mean a bump in prices.
UPDATE: 11:50 AM
Last Friday, SPX came within 48 cents of retracing .886 (1420.82) of its 1423.73-1398.23 decline. This morning, it sealed the deal, reaching 1421.64 and completing the Bat Pattern.
In the process, though, it tagged the neckline of the potential Inverted Head & Shoulder pattern we discussed Friday. The pattern, if it plays out, targets 1507ish. For the pattern to play out, we’d (at least) want to see a close above the shoulder line at 1420.80.
But, it’s important to point out that not every IH&S pattern plays out. Sometimes, it’s just market makers trying to shake things up a little bit. Here’s one that didn’t play out last year, for example.
Suppose we went up and tagged the actual .618 at 1424.41 for instance. It’d be easy to see it as the bullish case playing out, what with a higher high and all.
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