A Zak Mir Global markets festive trio – FTSE, DOW & S&P overview

Something that is fascinating to me in an age of “information overload” in which we are usually “treated” to every single possible angle on a major issue, is that it is possible for some scenarios / ideas to slip through the net – a bit like the proverbial “black swan”.

In the case of the US Presidential election, there was almost nobody that said that Mitt Romney should really have done everyone a favour (including himself) and given up the ghost well before the November vote took place (well, apart from me!). Similarly, it really should have been the case that the “fiscal cliff” was sorted out in the immediate aftermath of the November 6 election, with just a few days wrangling / haggling to sort out an issue that some way, somehow needs to be sorted.

To my mind, the parties concerned should be legally obliged not to delay or postpone talks any longer than is absolutely necessary. If this means locking President Obama and House Speaker John Boehner in a room until they strike a deal, then so be it. It beggars belief that in the 21st-century we are having to wait weeks for decision which after all, does not involve nuclear physics / require finding a cure for cancer. In the meantime, the shameless indulgence (time wasting) is leading to untold damage to the US economy, especially in terms of a lack of hiring and fresh investment. But, of course, if the people involved were able to put their ego, pride and vanity aside for the sake of others less fortunate than themselves, then of course they would not politicians in the first place1

As far as the stock market is concerned, going into the fiscal cliff discussions, it appeared earlier in the autumn that we had a straight binary trade on our hands – either a deal would be struck quickly and so ensure a stock market rally or, a failure to find a resolution and a significant decline. However, some six weeks henceforth, things are a little more complicated. This is because since mid-November, the stock market has gained quite sharply and so presumably the risks are now more to the downside, whatever happens on Capitol Hill. 

Dow Jones Industrial Outlook

Looking at the Dow’s daily chart, we have we have so far been treated to a double bull trap this month through the former November 13,290 intraday high. Clearly, this cannot be regarded as a positive technical development in any sense. The issue here is that while there is no end of day close back below the 50 day moving average at 13,091, we do not really have a backup trading trigger to go short in going with the aforementioned double bull trap.

Unfortunately, it may be that only the announcement of a significant delay/an upset on the fiscal cliff would cause the Dow to breakdown sufficiently to lose support. Therefore, it is the case that from a strategic perspective if one is to go short now on the back of the double bull trap sell signal, the hope is that there will be no break back above 13,290. The stop loss on such a trade is just above Friday’s 13,310 intraday high, with a target back to in the 12,500 zone.

S&P 500 Index

Moving onto the global index benchmark, the S&P 500. It is not surprising that we have a comparable set up here to the Dow in terms of a double bull trap sell signal. Once again, while one would ideally like to have more than one sell signal, we are obliged to take the view that if we went into trade this market on the short side ahead of any fundamental news breaking, the stop loss should be just above Friday’s 1443 intraday high. At least it helps the short stance that the close at the end of last week at 1430 was four points below the intraday high of November. For now, the longer that the S&P spends below the old November high, the more confident we are that there will be a test of support towards the 200 day moving average currently at 1389.

FTSE 100 Index 

It may be the case that with very similar setups on both the Dow and the S&P, traders would be relatively confident that we are looking at an opportunity to go short on almost any of the leading equity markets in the run-up to a possible (negative) conclusion to the US budget negotiations. But, it is interesting at the moment that the FTSE 100 is not quite singing from the same technical hymn book than its American counterparts… 

To my mind, the key level here in the near-term is the former September 5932 intraday high, which this market has been trading on either side of for the past few weeks. Friday’s action was curious in the sense that we had what appeared to be the final sell-off earlier in the session below 5900 and then there was a relatively sharp rebound towards the close at 5939. On this basis, the best sell signal would be an end of day close back below Friday’s support of 5896 and site of the 20 day moving average. Of course, aggressive traders could go short with a stop loss above December resistance at 5977. But this suggestion is purely a technical trade  and not derived from a high quality a sell signal. It would just be selling versus a high, something that can be done several times in a trending market and lead to a loss every time so be careful!

To sign off for the year now, in the wake of the latest fiscal cliff disappointment, the message from the leading indices on a technical basis is that while there are signals to going short, we do not really have the killer signals that we would like to make going short a high probability undertaking. I suppose that means a resolution will be found and we take out new highs in the New Year.

Merry Xmas & Prosperous New Year to one and all!

Zak