Fiscal Cliff Decision Before December 31?

George Brooks  |

The Geithner rally was short-lived yesterday, but then we are in a news sensitive market.
There are usually a lot of cross currents in the market in December – institutions selling losers, and buying what it thinks will be big winners in 2013 in light of what it expects from a resolution for the fiscal cliff.

Nevertheless, expect the market to respond to the latest fiscal cliff headline.

Near-term Resistance is now DJIA 13,048 (S&P 500: 1419).
Near-term Support is DJIA 12,889 (S&P 500: 1401)
DJIA: 12,965.60
S&P 500: 1409.46
Nasdaq Comp.: 3002.19
Russell 2000: 820.80
(Tuesday, December 4, 2012 (8:58a.m.)

What a field day for the media! Should we fear the fiscal cliff? Who will give in first? Will the economy sink into a recession if an agreement is not reached before December 31?

All things considered, the market has held up quite well in face of all this sensationalism,

But that may change as we get closer to Christmas, if Congress and the administration haven’t made any progress toward a resolution. I expect a framework for a resolution to be agreed on by the lame duck Congress, with details to be worked out in 2013, but am open to the possibility sequestration (automatic spending cuts and tax increases) will be intentionally and temporarily allowed for technical reasons to facilitate an agreement.

The market will become more volatile the closer we get to December 31 without a resolution. As I understand it, Congress has wiggle room, meaning it can delay the deadline, but that would roil global markets.

My guess is Congress will be called back into session and reach an agreement on enough basics before Midnight, December 31. If the market has declined sharply before then, I would expect a rally. If it has risen sharply, I would expect a brief rally on January 2 followed by a correction.

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The good news is that both parties have submitted preliminary plans that differ enough to allow a compromise closer to the middle without anyone losing face.
FACEBOOK (FB - $27.04): While FB broke through a resistance area Friday that should have stopped its rise, sellers did show up Monday. The $27 - $28 area represented a longer term resistance than those in the last 3 months, since the stock has risen to an area where it broke down sharply in July.

Yesterday’s action was what technicians call a one-day reversal, (stock closes at the low for the day), and it could signal a drop to $35.35, or so.

At some point, FB’s stock will need to consolidate its gains over the last 12 days. It’s possible some of the hurried buying is short covering, How much of the 773 million shares coming out of IPO lock-up in early November have been sold is uncertain at this time. At the time, the stock was trading between $20 and $21. If there is a large chunk of stock unsold, these higher prices may flush them out, putting a lid on the stock’s rise, even trigger a sharp correction.

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.

George Brooks
“Investor’s first read – an edge before the open”

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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