Stay Optimistic

 | Nov 28, 2012 | 8:35 AM EST  | Comments
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Freedom is hammered out on the anvil of discussion, dissent, and debate. --Hubert H. Humphrey
Does the news drive the technical action or does the technical action drive the news?

Technicians will tell you that the way that news is perceived is a function of the level of prices. News that is viewed as positive when the market is at a low will often be viewed in the opposite manner when the market is at a high.

We have a good example of this tendency right now as we contemplate the fiscal cliff issue. A little over week ago it was good news that there was general agreement about trying to resolved the fiscal-cliff issue. The market was technically oversold and it was a great reason for a bounce to ensue.

Now that we've bounced and are heading into key overhead resistance levels, the discussion of the fiscal cliff is turning more negative with comments from Senator Harry Reid about there being little progress, causing some selling.

Technically, the market bounced nicely when it was oversold and now it is starting to falter as it becomes extended and hits resistance. In both cases, it was news about the fiscal cliff that was the fundamental catalyst for the action.

The problem now is that after the obvious bounce into resistance, things are quite muddled and this lack of clarity is reflected in the fiscal-cliff debate. There is still a high level of anticipation that a deal will be struck, but there is plenty of nervousness about it and a high level of distrust in our political leaders. It is hard to believe that they would fail to make a deal, but the ideological stubbornness can't be underestimated.

We are obviously going to be held hostage by this fiscal cliff debate for a while, but overall the technical pattern of the market isn't bad. The SPDR S&P 500 (SPY) has bounced right into resistance at its 50-day simple moving average and it's pulling back and consolidating, as some who caught the move are locking in gains and bears are reloading shorts.

The big technical issue is whether the market rolls back over and tests the recent lows, or does it churn and pull back a bit, build support and make another thrust higher? I'm inclined to believe the latter and will be watching for the market to find support. It would actually be a positive if there was basing action for a while that would allow charts to set up.

One thing we have often missed in this market the last few years are periods of flat action where the new crop of winners come to the fro. It too often goes straight down and straight up and never has a good transitional period. I blame that on the liquidity from quantitative easing, which may no longer be the factor it once was.

For now, we have little choice but to listen to this constant debate over the fiscal cliff. I am optimistic it will be resolved and will be a positive market catalyst, but I'm afraid it isn't going to happen until very close to the deadline. The market should start anticipating a resolution, but comments like those from Senator Reid yesterday are going to be landmines for traders.

My strategy is to be optimistic but to stick to very short-term trading until the cloud from the fiscal cliff lifts. We are going to be held hostage by this news and that means we can't carry munch inventory until there is greater clarity.

We have a little early pressure as the media obsesses over the fiscal cliff debate. Unfortunately, it isn't going away anytime soon.

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