Traders: "Lock and Load"

George Brooks |

Stocks Fade in Late Trading to End LowerExpect 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. 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.

TODAY: As expected, my old support level of DJIA 12,735 (S&P 500: 1376) referred to on November 5 was broken yesterday.
Breaking that, I warned of a drop to DJIA 12,580 (S&P 500: 1335) in coming weeks. It did that in one day, yesterday, as investors’ fears of the fiscal cliff and an Israeli air strike in Gaza escalated.

We have entered the “flush” phase, an acceleration of selling driven by uncertainty that is fast turning to “FEAR.”
We aren’t close to the “I can’t stand it anymore” phase when investors hit the panic button, but fruit is beginning to ripen, a trading opportunity looms.

The DJIA encounters resistance between 12,630 and 12,695; the S&P 500 between 1361 and 1366.

Investor’s first read - an edge before the market opens
DJIA: 12,570.95
S&P 500: 1355.49
Nasdaq Comp.: 2846.81
Russell 2000: 773.20
(Thursday, November 15, 2012 (9:07 a.m.)

The momentum from yesterday’s plunge of 185 Dow points stands to carry over into today’s early trading. 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.

That’s a stretch in light of the steepness of the plunge in the last 6 days. Without big news on the fiscal cliff, rallies are limited.
Look for a dangerous whipsaw of volatility in coming weeks – the market’s version of good cop – bad cop.
Traders: “Lock and Load”

FISCAL CLIFF:
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 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%).

IS THERE A MESSAGE HERE?

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 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.

FACEBOOK (FB - $22.32): Yesterday, marked a big test of FB’s ability to hold above support at $18.85, when 773 million shares came out of lock-up. 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.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Companies

Symbol Name Price Change % Volume
SPDC Speed Commerce Inc 0.05 0.00 0.00 2,152

Comments

Emerging Growth

International Western Petroleum Inc

International Western Petroleum Inc is an exploration-stage oil and natural gas company. The Company is engaged in the acquisition, development, and exploration of crude oil and natural gas properties in…

Private Markets

Snapchat

Snapchat is the fastest way to share a moment with friends. The mobile app, allows users to not only share photos with friends but also control how long they can…

Uber

Uber connects riders with safe, reliable, convenient transportation providers at a variety of price-points in cities around the world. Uber makes money from charging their drivers 20% of the fare…