Republican Party Split to complicate Cliff Compromise

George Brooks  |

This market action is reminding me of the debt ceiling debate in July/August 2011. After a lot of brinkmanship, the announcement of a deal came on August 2, the market rallied briefly, then tanked with the DJIA dropping 15% in two months. (“Debt Ceiling Rally to Be a Fakeout” – July 29, 2011 – Investor’s first read).

It’s too early to tell, but be aware of the possibly of a repeat performance should we get the long-awaited announcement of the framework of a deal.

The early months of 2013 may be ugly, even with a deal on the fiscal cliff.
I am not forecasting that now, but give the possibility merit.

DJIA: 12,951.71
S&P 500:1407.05
Nasdaq Comp.: 2996.69
Russell 2000: 822.12
(Wednesday, December 5, 2012 (8:52a.m.)

TODAY: Two rally failures (market closes at low for the day) two days in a row in the Dow and S&P suggests a lack of conviction. The Nasdaq Comp. and Russell 2000 were stronger, reflecting year-end institutional portfolio adjustments.

There appears to be a growing split in the Republican Party between the Tea Party – no tax increase faction and the conservatives with the former criticizing Speaker Boehner’s recent proposal. If this signals an inability to compromise on a fiscal cliff solution, we are going over the cliff with all the uncertainties that accompany it.

Presently, I see Congress taking this down to late December 31 with a framework for a deal worked out pursuant to the details hammered out by the new Congress next year.

So far, the market is acting as if a deal will be reached before year-end. IF THE PERCEPTION CHANGES, THE MARKET IS GOING SOUTH SOON.
Yesterday’s action drops resistance to DJIA: 13,010 ( S&P 500: 1413).

Near-term support is DJIA: 12.889 (S&P 500: 1401)

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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 $25.35, 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”
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