Friday, December 21, 2012
Congress Tries to Push Santa Off the Fiscal Cliff
Last night was an interesting night to be a futures trader. Congress announced they didn't have enough votes for "Plan B" to avert the Fiscal Cliff, and the E-mini S&P futures (ES) promptly dove 50 points into limit down. As of the time of this writing, ES is trading about 20 points in the red.
Congress has announced they're now going to do some work on Plan C, which stands for Christmas, and are thus headed home for a much-deserved holiday break after yet another grueling week of endless yapping.
Last night, even though Congress people were fleeing the hill like ants, I managed to corner one on his way out the door. He agreed to a brief interview, on the condition that I allowed him to remain anonymous. I acquiesced, and asked what the next plan was.
He replied, "A year ago, we coordinated with the White House and worked out a fool-proof fallback plan to avert the Fiscal Cliff. We'll be implementing that plan immediately." Excited, I followed up and asked for more detail. "It's really quite simple," he replied, "According to the Mayans, the world is supposed to end today -- so we figured, why bother with budgets? We're only sad that we didn't spend more." When I asked what the plan was in the event that the world didn't end, the Congressman smiled vacantly and edged rapidly out of the room.
I plan to follow up on this if we're all still here tomorrow.
The question now is whether this Fiscal Cliff plan failure will this preclude the Santa rally I've been expecting, and the answer is: I don't know yet. I do know that the cash charts can tolerate a drop in the ballpark of the current futures levels, and still maintain their bullish bias. In fact, a move such as that would be completely reasonable, as shown on the S&P 500 (SPX) chart below:
I am, in fact, still inclined to give bulls a slight edge, but the real questions won't be answered until we see how the cash market reacts to this news. I will add that it's a little bit bothersome that this happened right after my November target zone was reached, as target zones are also higher-probability reversal zones.
The SPX bearish wave count is still alive and well, even though I began discounting it back in November. The SPX structure appears to pivot on the 1411 price point. (continued, next page)
The Dow Jones Industrials (INDU) is in a slightly different position than SPX, and has recently completed a 3-wave rally. This is likely a tipping point here, and bulls do need a new high to turn this into an impulsive five-wave rally (to indicate the larger trend is up). Trade below the wave 1 high would suggest a completed ABC corrective rally (thus suggesting new lows beneath the November print lows).
I'm not ready to capitulate the bull case based on a news item, even one of this magnitude; I'm simply alert to the reality that the bear case could very well gain traction in the coming sessions. It's going to be up to the market to point the way, but there are charts such as the Philadelphia Bank Index (BKX), which will continue to look quite bullish, even with a decent drop at the open.
In conclusion, the Fiscal Cliff may very well end up wrecking the bulls hopes here, but that's not a given yet. We're simply going to have to see how the cash market responds. From a chart perspective, the 13,010 level on INDU and the 1411 level on SPX are the first levels where things start shifting into the bears' favor. This market has been, and remains, a treacherous environment for both bulls and bears: trade safe.
Posted by PretzelLogic at 4:05 AM