Some Consolidation Would Be Healthy

 | Nov 27, 2012 | 7:53 AM EST
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"Our intent will not be to create gridlock. Oh, except maybe from time to time." -- Bob Dole

Greece has been saved once again as the IMF finally cobbled together a deal for additional aid, but it isn't having much of an impact on the early action. The market focus is still on the fiscal cliff debate and, although there is much chatter about possible scenarios, there are no concrete deals or details at this time.

There is a high level of optimism that a fiscal cliff deal will be made, but the market may be overestimating how easy it will be. The nature of politicians is to go to the brink before actually making a deal and that is very likely to be the case once again.  There is movement by the Republicans to agree to raise tax rates, but there is still a large faction that will dig in their heels and resist. This debate is not likely to go quickly or easily, but ultimately I am looking for a deal and a market rally.

That makes for an interesting fundamental backdrop given our technical pattern.  We have enjoyed a good bounce on tepid volume for seven days now and the bears are starting to become a bit anxious now for some reversal action.

It looked like we had some downside coming yesterday, but the strength in Apple (AAPL), Facebook (FB) and a few other key stocks helped to keep the mood positive and, by the end of the day, the buyers were moving in and looking for some long exposure. We had a good setup for some backing-and-filling, but the bulls did a good job of holding us up. Breadth was rather weak, but there was plenty of positive action to be found.

The dilemma we always are presented with when the market bounces like it has recently is that the technical entry points become more difficult. Take AAPL, for example. It was a great trade if you picked it up a week or so ago, but it is a much more difficult buy now as it heads into key overhead resistance at the 200-day simple moving average around $600. Recent buyers have some nice gains to protect and you have to wonder how much the momentum chasers are willing to pay up at this point. The bulls will argue that the fundamentals are solid and that you should simply buy, but after the huge meltdown in October you can't help but wonder if AAPL is going to completely reverse itself yet again.

There are plenty of stocks similar to AAPL out there and if it corrects then the overall market is likely to correct as well. I always want to try to stay with the upside momentum as long as I can, but bounces like this produce fewer and fewer entries and I'm more and more inclined to take my gains when I have them.

The market can easily afford some downside without compromising its recovery.  In fact, It would be healthier if we had more consolidation now. Ideally the best scenario would be some pullbacks on worries that a fiscal cliff deal won't be made and then a break higher when a deal is finally done. That could give us some nice uptrending action at a time when seasonality tends to be positive.

Keep an eye on AAPL and watch the fiscal cliff debate. Those will establish our short-term direction. As I mentioned yesterday, there is some decent individual stock picking working, but we need to stay selective and manage trades tightly.

We have a flat open on the way, but some important economic reports are coming up. Stay vigilant and be ready to move quickly.

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