Classic Selling Climax Taking Shape

George Brooks |

Bear Market Stock TraderThe “cauldron of fear” scenario:

Looks like we are approaching the “ouch” point where investors get fleeting pangs of fear throughout the day, regrets they didn’t bail out in October when the market failed for the third time to break out to new 2012 highs.

Worse yet, the “what if” question makes its rounds. How much further down can this market go? What if full scale war breaks out in the Mid-East, dwarfing what is happening in Syria? What if the nation plunges over the “cliff”?

Reasonable support levels lose credibility when new negatives emerge at the time a technical bounce is over due.

The stage is set for a real gut-wrencher, mounting fear stoked by a press (and political pundits) who jockey for the spotlight.
At some point, the cauldron of fear will begin to boil, and investors will begin to reach the “I can’t stand it anymore” state.

No way would anyone in their right mind, buy a stock. Clearly this market is headed lower, they feel.

By then, the “news whipsaw” has worked its black magic, sucking investors in on news of a prospective solution to the fiscal cliff, only to see the market tank when it is denied.

After this happens over and over, no one wants to buy.

No one except the BIG money. They’ll gladly take your stock from you at fire sale prices.

Investor’s first read - an edge before the market opens
DJIA: 12,542.38
S&P 500: 1353.33
Nasdaq Comp.: 2836.93
Russell 2000: 769.48
(Friday, November 16, 2012 (9:03 a.m.)

DO NOT GET DISCOURAGED. Expect reports of “a deal” on the fiscal cliff, followed to denials to first run stocks up, then take them even lower. It’s the “ news whipsaw,” it’s cruel and can chew a portfolio to bits if an investor gets on the wrong side of its many moves. Fully discouraged, an investor is then likely to miss the turn when it comes.

This stop-and-go action is typical of markets dominated by a single news issue. This time it is the fiscal cliff, though a Mid-East war may add to fears. Last year, it was the debt ceiling debate in mid-2011 ( my “Debt Ceiling Rally to be a Fake out” - July 29, 2011), prior to a 13%, nine-day plunge. This one will also be a cliff hanger. Some “grinding” is needed to size this one up – Buy when a solution appears hopeless, or avoid on an announcement. Opportunity either way, it’s a question of timing and price.

Expect, institutions to nibble at lower prices.
Mid-East hostilities between Israel and Palestine militants is a new negative and may be enough to pound the market lower to DJIA:12,435 (S&P 500: 1342) before the weekend.
Look for a dangerous whipsaw of volatility in coming weeks – the market’s version of good cop – bad cop.
Resistance starts at DJIA 12,633 (S&P 500: 1364). Without unexpected positive news, the market should bounce, then sell off late in the day, prior to the week-end when hostilities between Israel and the Palestinians.
Odds favor a drop of 100+ Dow points.

FISCAL CLIFF: Repeated from Thursday’s post for new readers
Overlooked by the Street was the possibility President Obama would be flexible on taxes on people earning more than $250,000. Not only did he not specify at his news conference how much more these people would be taxed, but he appeared to indicate that he was open to other ways to generate revenues for the U.S. government, so long as it didn’t impact those earning less than 250,000 which includes 97% of small businesses.
So, while the media headlines focus on higher income taxes on the big earners, Obama opened the door to someone presenting a creative way to raise revenues for the government, without raising the tax rate for these peoples to the Clinton-era level (39.5%).


I think so. My guess is he knows who has the idea and what it is. I suspect his repeated intention to raise the tax rate on big earners set the stage for a compromise, whereby he would accept a smaller increase in the tax rate for another concrete way to raise revenues.

He also met with a dozen business leaders from large companies to gain their input. He also said in his press conference it was possible it could be accomplished next week!!!

Not sure what he meant by that, I expected the hassle to go on for weeks, possibly prior to Christmas, or a day or two before the year-end deadline.
Did he misspeak? Should we be on alert in case he didn’t?

It could be, if someone introduces an attractive solution for this part of the fiscal cliff next week. That would be worth a 250 to 350-point pop in the DJIA.

The following week, someone with visibility would deny it could be done, triggering a plunge in the DJIA. (NEWS WHIPSAW !)

If December 31 passes without a solution, I believe it would be intentional and accompanied immediately by a plan to adjust the Bush-era tax cuts and get certain members of the House off the hook from their pledge to Grover Norquist, not to raise any taxes. Norquist heads up Americans for Tax Reform.

I see the framework of a deal decided on by the “lame duck” (outgoing) members of the House, with the final details worked out by the new membership.

You never start negotiations with your final position. What’s more, this is part negotiation and part selling process, selling a final position to the Republicans and selling it to your own party and America.

As I understand it now, at press-time today, the deadline does not go into effect as long as Congress is in session, only when they disband.

FACEBOOK (FB - $22.17): Yesterday was the second day FB survived the potential for the sale of all or some of the 773 million shares that came out of lock-up after FB’s IPO. Market action will be a test of FB’s ability to hold above support at $18.85. Two days ago, its shares soared on very heavy volume, suggesting big buyers may have used shares for sale from the lock up expiration to buy stock.
This is not the first time heavy volume buyers popped the stock. It had a 5-point, one-day surge on Oct 24. Yesterday’s surge can take FB up to $23.65 by Friday where it encounters resistance. “Market Watch” attributes recent strength to better-than- expected sales and earnings reported October 23 and three brokerage upgrades.

Will FB drop below $18.85?

The chart is telling me odds have improved it won’t, however overall market weakness could take it lower, along with a host of other stocks.
I don’t own, nor have I ever owned FB. Generally, I don’t recommend or comment on individual stocks. I started covering FB technically after its IPO because on May 21, I felt at $34 it was very vulnerable in face of all the misunderstanding and hype. I warned of a drop to $24-26, which it did shortly thereafter. Following a rally back into the 30s, FB dropped into the low 20s where on August 2, I forecast a low of $16.88. On September 4, it hit $17.55, its low since its IPO at $38. I’ll continue technical coverage for a while to accommodate readers, but think my objective here has been accomplished.

George Brooks

*Stock Trader’s Almanac: This is a “must own” publication, loaded with daily, weekly, monthly savvy. It is “the source” for strategies, seasonalities, recurring events, useful stats. Published annually, I have used it every year since 1968. Nothing compares !
The writer of Investor’s first read, George Brooks, is not registered as an investment advisor. Ideas expressed herein are the opinions of the writer, are for informational purposes, and are not to serve as the sole basis for any investment decision. Readers are expected to assume full responsibility for conducting their own research pursuant to investment decisions in keeping with their tolerance for risk.

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Symbol Name Price Change % Volume
MTSN Mattson Technology Inc. n/a n/a n/a 0


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