Market Feels Tired. DC tone Has Changed and Time Is Running Out. Wait For A Breakdown – Then Buy Put

December 3, 2012

In November, the market staged a swift decline after the election and it rebounded. We are back to the same level we were at a month ago. The snap-back rally has stalled and we are in a holding pattern.

Washington DC is dictating the price action. Friendly comments after the election soured last week. Republicans tabled tax increases and Democrats countered with a plan that Republicans called a joke.

Perhaps this is a power-play in the negotiation process, but I sense that both parties are willing to let us go over the cliff. One thing is for sure, if politicians don’t reach an agreement or make progress, the market will decline. When stocks plunge, politicians are forced to take action.

I believe that many Asset Managers are looking to reduce risk. That selling pressure will offset end of the year buying.

We know that taxes will go up and spending will be cut in 2013. Economic conditions are fragile and growth will slow. It’s the magnitude of the contraction that is unknown. If politicians reach a watered-down solution, stocks will rally and the economy will muddle along (best case scenario). Unfortunately, we will keep bumping up against the debt ceiling and the problem will keep resurfacing.

Last night, official PMI’s were released. Europe was weak, but in line. China’s activity was slightly better than expected, but their market still declined to mult-iyear lows after the news.

This morning, ISM manufacturing was released. It came in at 49.6 and that was much weaker than the 51 that was expected. Many major economic releases will hit this week. The jobs reports will be important. I believe the numbers will be soft, but traders will give them a free pass due to hurricane Sandy.

I have been day trading stocks from the long side. I don’t like the price action today and the market feels tired. I am waiting for a reversal and I want to buy puts when the SPY breaks below the 100-day moving average. I will add to put positions if we break below the 200-day moving average.

I don’t mind missing any upside from here. I believe the market might have another 2 to 3% left in the tank. The chance of a nasty decline increases every day that a deal does not get done. The market has discounted the fiscal cliff and any surprise favors the downside.

If you have been trading this rally, scale out of long positions. If you are on the sidelines, look for bullish day trading opportunities and keep your overnight risk to a minimum. If you are a swing trader without any positions, keep your powder dry. I believe we are set up for a swift decline and that is what I am waiting for.
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