The market is breaking down this morning on comments from Senator Harry Reid that a fiscal cliff deal is unlikely at this stage. After his comments, the S&P broke its 50-day moving average at 1413 and is now below its ascending channel. Ascending channels are, by definitions, uptrends, but when they break it can be significantly bearish.
Washington’s true dysfunction is taking its toll. A close below 1410ish would not be good technically (this was also the 38.2% Fibonacci retracement). Many traders were light as it is, this is giving guys another reason to take off risk. The bigger support area is 1395-1397, then there is the 50% Fibonacci retracement at 1383 to look at next. We held that type of support level last time we traded down into it in November. The November 16 low, if it comes into play, is around 1343.
We’ve had three intermediate trends that have been very tradable this year. The first came in the first quarter from S&P 1280 to 1422, and then the “risk off” signal came when we broke below 1340.
The second intermediate trend started June 4 at 1266 and hit a high of 1474. When we broke 1440, it signaled to me “risk off.”
The third intermediate trend is the one we are in right now that started on 11/16 at 1343 and recently hit 1448.
These were three tradable trends that a trader could have maneuvered with a short-term “tactical approach” or more committed “portfolio approach.”
Recently we’ve had some selling due to the Washington rhetoric surrounding the Fiscal Cliff, and now the Debt Ceiling is rearing its ugly head again. Short-term we need to hold the 50-day moving average around 1410-1413. A break and close below that level could trigger selling into the New Year, especially if Washington continues to show its dysfunction.
High beta tech is a bit faulty which active traders see as a negative sign.
The indices are holding up reasonably well considering the Apple’s (NASDAQ:AAPL) recent weakness, but a resurgence by the trusted market leader would provide a major boost. We need to see if AAPL holds $500 and how the market deals with a potential break and close below that level. A close below would be psychologically bad, and the next big support area would be $440-465.
The Nasdaq ETF (NYSE:QQQ) has lagged too—it’s hard to keep it together when your biggest component is showing major relative weakness. A break and close below $64ish could bring more pressure onto the tech sector.
Retail (NYSE:RTH) got hit hard yesterday on the weak holiday sales figures and technically is breaking down.
Banks have been strong and that needs to continue to help this market shrug off weakness in tech. Continued strength from the sector could help the market get some momentum in the New Year. Bank of America (NYSE:BAC) has been leading (Warren Buffet’s genius proven once again), while the likes of Goldman Sachs (NYSE:GS), JP Morgan (NYSE:JPM) and Wells Fargo (NYSE:WFC) are a bit more sluggish.
A break and close above 1450ish on the S&P in the first few weeks of January and I believe we can see a move back to 1474 pretty quickly. If we close above that level I believe 1520+ could be in the cards for first half of 2013.
Last year we had a clean break to the upside into the New Year, and great upside in the first quarter. A lot of people think that scenario is inevitable again, but when consensus starts to build is when I think you can get a “shake out” before the ultimate trend prevails. It will be important to measure the composure of the market in the first few days of the New Year, and the first days after we get a Fiscal Cliff deal.
Overall it is my opinion that if we get a fake out move to the downside to retest November lows of 1343, that area should be buyable. My general two-year target for the S&P in 2015 is in the neighborhood of 1700. I certainly do not agree with the bearish case some traders try to make of an S&P correction down to 1100.
*DISCLOSURES: Scott Redler is long BAC, FB, YHOO. Short SPY.