Charts I’m Watching: Dec 20, 2012

The Fiscal Cliff

Apparently, Congress has secretly agreed on one key measure.  As their Motto of the Month, they adopted writer Douglas Adams’ pithy line:

“I love deadlines. I love the whooshing noise they make as they go by.

I don’t have a clue how the fiscal cliff measure will be resolved.  It’s not looking good, but most insiders and professional prognosticators say the pols will pull something out of their collective arses in time to avert a disaster.

Our forecast argues otherwise, but every analog breaks eventually.  And, presumably a deal would be bullish — goosing the markets by who knows how much.  For those who, like me, are short — it’s always smart to use stops.

If SPX exceeds 1448, Tuesday’s reversal at the Fib .786 of the 1474-1343 decline, then the .886 at 1459.56 is the next target.  If that’s taken out, the next upside would be the 1474 top itself.  If that’s taken out, there are a number of higher Fib targets over 1500.

Stops should be set according to your risk tolerance, your current position, and the type of trading you do (swing, day, long-term, etc.)   In my swing trading, I tend to choose stops that are just beyond the last Fib level that completed the primary pattern that’s currently directing prices.  So, a stop around 1450 would apply to a push through the 1448 level on the way to the .886 at 1459+.

I’ve written too much already on the FC, but it’s obvious that any agreement, regardless of when it comes, will involve some combination of lower government spending and higher taxes.  There can be no immediate economic upside in such an eventuality, though theoretically it could chip away at our longer-term problems — which in my estimation are virtually insurmountable.

In the Great Depression, prices across the board and around the world were generally allowed to reset.  Debt was written off, and those who survived picked up the pieces and started over. Bernanke, who fancies himself an expert on all things depressing, is running a grand experiment to see if propping up prices — particularly of financial assets — can avert a replay of the 30’s.

I suspect not; but, the truth is no one really knows.  Twenty years from now, it’ll be obvious (assuming the world doesn’t end tomorrow.)  But, for now, it’s a high-stakes crap shoot — a desperate measure in response to desperate times.

In the meantime, the market will react one way or the other — which might or might not be in concert with the perception of any deal.  Remember QE3, which was good for a whopping 40 points on SPX?  We have a (so far) very successful analog in place that’s racked up gains of about 40% in just the major moves it’s called since April.  I’ll stay with it until the market — not the talking heads — signals otherwise.

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Looks like a mixed opening.  The dollar and EURUSD have each retraced a Fib .886 of yesterday’s reversal candles.  Bat Patterns completed, they appear poised to pick up where they left off.

Focus should be on the fiscal cliff and Boehner’s terse announcement yesterday of the House’s plan to pass the so-called Plan B.  It will be rejected by the Senate and White House, of course, meaning it is a purely symbolic effort that won’t do much to ease fears that there will be no compromise.

UPDATE:  11:45 AM

The Philly Fed Business Outlook Survey is out, and shows decent improvement at the margins in both current conditions and optimism.  But, don’t read too much into the monthly figures with a diffusion index such as this.

Diffusion indices represent the percentage of respondents indicating an increase minus those indicating a decrease, so it largely ignores those reporting/expecting no change — which actually increased from last month’s negative report.

In November, the 53% who thought there was a change saw things swinging negative by a 3/2 margin.  This month a lesser amount (47% versus 53%)  see things swinging positive by the same 3/2 margin.

In October, it was 5:4 positive for the 53% who noticed a change — the first positive month in many.  The chart shows the general trend is a series of higher lows and lower highs — a triangle.  As we all know, these can break either way.

An interesting weekend project would be to download the data and look for harmonic patterns.

I’ll post something on the housing numbers later today if the markets remain quiet.  Bottom line, it’s another indicator of optimism.  The builders and buyers might be right, or they might be wrong.  Refer to yesterday’s post and the interview with Robert Shiller for a more meaningful take.

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