We’ve had a decent push down so far, coming pretty close to the .618 mentioned yesterday (1413.65) for the first bounce.  Bulls will see this as the formation of another potential IHS right shoulder.  Personally, I prefer the glass-half-cracked view — another traditional H&S (purple neckline) as we discussed yesterday (3:45 update.)

I spoke with my local congressman last night, and apparently most of D.C. has already cleared out for the holidays (great gig, right?)  Some of that is posturing, of course, but clearly we are slipping closer to the point where a budget deal can’t/won’t be done — assuming the dem’s were ever willing in the first place.

Given the current political climate, going over the cliff might be the only way possible to reduce spending and raise taxes.  There are many in both parties who openly support the idea, and probably many more who secretly support it.

It makes sense.  Politicians know we need to balance the budget.  But, they also know their careers will be damaged if they vote for tax increases or spending cuts.  Could be that all the negotiating back and forth is for show, so neither party can be blamed for the hit to the economy that a balanced budget will necessitate (or both will be blamed, depending on your POV.)

I’m not advocating one side or the other, mind you.  Our fearless leaders (in both parties) threw us all under the bus years ago, spending much more than we could afford in order to curry favor with those who could ensure their continued employment (lobbyists, special interests, etc.)

Social Security, for instance, has been on an unsustainable path for decades.  When was the last time you saw a mainstream politician filibuster for a benefit cut or a tax increase?  Don’t hold your breath.

I merely point out the obvious — any potential debt reduction requires that revenues go up and/or spending come down.  Theoretically, the economy could grow its way into higher revenues as business conditions improve.  Some advocate lower taxes as a means of stimulating growth, the “trickle-down economics” advocated by Reagan in the 1980s.

But, it’s hard to discuss such things without the discussion devolving into politics — a subject I never touch on this blog.  There’s a decent, relatively non-partisan discussion on trickle-down economics on Wikipedia.  Suffice it to say that our system ain’t working so well, and something’s gotta give.

UPDATE:  12:00 PM

We just got the tag of the .618 mentioned above.  Normally, I’d look for a substantial bounce here.  But, the latest H&S pattern argues otherwise.  Bit of a quandary for traders.  To play the bounce, I’d be cautious and wait for a push through 1420, potential target up to 1429-1435, tight stops.

The bullish argument is an adjustment to the channel rather than a breakdown (yellow vs white).  It’s the same very steep slope as that formed from Nov 2011 to Feb 2012.

As discussed above, we’ve formed half the right shoulder of a slightly different IH&S pattern (above in purple) that targets 1544ish.  Could it play out?

continued for members…

The first step in the IHS pattern playing out would be a close above 1439.50 — a 100% retrace of the drop from the 12th.   We could easily get a 30-pt bump from a FC deal, right?

Call me stubborn, but I think the analog is still alive and well — merely delayed a bit by all the uncertainty about what will happen with the FC.

BTW, for anyone following the discussion below on social security and budgets, I have worked really hard to keep politics off this site.  We all have our opinions, but I’ve seen too many good blogs get bogged down in impassioned arguments over political ideology.  I don’t intend to let it happen here.

The point I was trying to make is that the U.S. (along with many developed nations) has bitten off more than it can chew.  Along with the $16.4 trillion in national and $2.8 trillion in state and local government debt, we face:

• $8 trillion (PV) in underfunded social security obligations [here]
• $38 trillion (PV) in underfunded medicare/medicaid obligations
• $1-4 trillion in underfunded public pension liabilities [here]
• $630 billion in unfunded federal retirement (FERS) liabilities [here]
• $355 billion in underfunded corporate retirement liabilities [summarized here]
• 11% of the $1 trillion in outstanding student loans that are delinquent [here]

There’s lots more (FNMA, FHLMC, VA, ESF, FDIC, etc.) not to mention the implicit back-stopping of TBTF financial institutions whose capital is a tiny fraction of the $700 trillion in derivatives for which no details need be disclosed.

However these issues are eventually resolved, it will involve pain for some, if not most, of us.  If the government tries to inflate it away through QEnfinity, it’s simply a different kind of pain.  So, while CNBC might gleefully announce that the fiscal cliff has been averted sometime in the next few days, our problems are just beginning.

Dollar, euro and AAPL charts coming up next.

UPDATE:  2:20 PM

EURUSD has shot up to retest its primary channel.  The pair is trading at the same level as its high on September 14, when SPX hit its 1474 high.  While I can’t rule out an extension to 1.3280 or so to fulfill a potential harmonic pattern, I think this has more to do with euro strength than dollar weakness.

The big picture…

There is negative divergence across the board, and daily RSI is retesting a significant channel line, with others just above if this one breaks.

DX declined to the bottom of the white channel yet again. But it’s still off its September 14 lows of 78.725 (about a 70% retracement.)

It’s been hard to slap a new rising channel on it because of the huge tails on some of the daily candles.  But, the original channel up from Sept 14 (in red) could be expanded (in yellow.)  This is a technique I often use, and basically plays off the fact that channels are very often repeated in both slope and size.

In this case, I would look for today’s bearish candle to resolve like Wednesday’s, a long tail that hangs below the white channel, but nothing else.

The other dollar pairs, BTW, don’t look anywhere near as bullish for equities.  I’ll post some later if I have time.

AAPL is only a hair from completing a very bearish H&S pattern we’ve been talking about (the yellow TL.) But, it’s also just about completed a small Crab Pattern (red, at 505.75.)

There’s positive divergence across the board, so a bounce would certainly make sense — especially given the stakes for the broader market if it should close below 503.30.

But, I don’t see any RSI channel support on any chart.  This one is a toss-up.  A close below 503 obviously means much more potential downside — first bounce and back-test from probably around 450-480, where a bunch of Fibs and channel lines — notably the bottom of the purple channel at 486 — lurk.

If I had to pick a side, I guess I’d go with a dip to 486 and bounce back to the neckline.  The 50/200 SMA cross supports it.  and, the daily RSI shows potential support a little lower than current prices (the yellow channel line) but greater potential downside.  But, I sure wouldn’t throw any money at it at this point, not without a close below 500.

UPDATE:  3:55 PM

I’m a bit torn about staying short over the weekend.  There’s a potential channel support on price and the 60-min RSI charts, so a small protective position wouldn’t be a terrible idea.

My gut feeling is a great big dump on Monday (though after a bounce.)

Another good week, IMHO.  I’ll post more later — hopefully tonight but more likely over the weekend.  Have a good one, everyone.

 

 

 

 

continuing…