No Debt Ceiling Deal By Year End – Tax Breaks For Middle Class. Market Will Not Challenge the Highs.

December 14, 2012

I have been getting a lot of questions on how to day trade the stocks that I am referring to in my comments. WATCH THIS 5 MINUTE VIDEO I recorded this Friday and it is a follow up to the video I shot on Wednesday. The Daily Report is 25% off today.

Yesterday, the market declined on fiscal cliff worries. Stocks were dropping quickly and they rebounded in the last hour on news that the Speaker of the House and the President were meeting.

The price action currently hangs on every word out of Washington DC. The hour is late and a grand bargain is out of the question. Republicans and Democrats are likely to extend Bush tax credits for middle-class Americans. Spending cuts and entitlement reform will be addressed when we hit the debt ceiling in a couple of months.

This scenario will not sit well with the market. A nasty battle lies ahead and the last time we went through this process, the US lost its credit rating. A debt ceiling deal before the end of the year is extremely unlikely and I don’t believe the SPY will challenge the highs even though the Bush tax credits are extended for most Americans.

In general, this has been a positive news week. Retail sales, industrial production, initial claims and the PPI came in better than expected. Europe approved a centralized banking plan and Greece secured its next bailout payment. Overnight, flash PMI’s in Europe and China were better-than-expected.

The economic news is fairly light next week. Holiday trading will set in and volumes will drop off.

Given my belief that tax cuts will be extended for middle-class Americans and that the rest of the fiscal cliff provisions will stay intact, I believe we will see the following price action. Seasonal strength will push the market higher and rumors of a deal will attract buyers. Asset Managers see the dark storm clouds ahead and many will sell into strength. This will keep a lid on the rally. At best, the market will challenge SPY $145.

Both parties will be disappointed that they couldn’t strike a better deal. The rhetoric will get ugly. Any relief rally after the news will be short-lived (sell the news).

Here is my strategy for the rest of the year. I will watch the first hour of trading and I will note the range. If the market is trading above the highs during the first hour I will day trade from the long side. If the market is trading below the first hour low, I will short stocks. If we swing back into the hour range, I will wait for the next breakout/breakdown. I will not carry any overnight positions unless major support is breached.

If the market trades below the 100-day moving average I will buy a handful of puts. I will add if I see follow-through and the VIX starts to move higher (fear increasing).

The price action this morning looks weak, but that can change in a heartbeat. All it takes is one optimistic statement from DC. This is exactly what we saw yesterday.

Keep your size small and focus on day trading. Use the Live Update table as your guide and focus on stocks at the top.
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