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?
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