Light Holiday Trading Is Setting In. Use One Hour Range As Guide – Day Trade

December 19, 2012

Yesterday, stocks staged another strong rally. Global and domestic events have been “market friendly” and a fiscal cliff deal is priced in. If the market is on either side of its one-hour range, use that as a guide and day trade. If we are above the range – go long. If we are below it – go short.

Each day, stocks have not moved much from their closing price. Once the direction is established during the trading day, the momentum builds. This means you can get in and out the same day and still capture most of the move. Monday and Tuesday the SPY was virtually unchanged overnight and we had back-to-back 15 point rallies in the S&P 500.

The economic news out of China has been good and it has been better than feared in Europe. Domestic economic releases have also been decent. The Philly Fed, initial claims, GDP and durable goods should be in line this week.

Credit concerns in Europe have been subdued. The EU agreed to a centralized banking authority and that was a major accomplishment. Greece secured its next bailout payment and its credit rating was upgraded.

Oracle and FedEx posted decent numbers. The results were better than feared and both stocks are trading higher after the news.

Traders are encouraged by the pace of the fiscal cliff negotiations. Both sides are still miles apart and a deal is priced in. The expectations are too optimistic and any surprise favors the downside.

Boehner said that he is working on” Plan B”. Republicans would vote to increase taxes on Americans making more than $1 million a year and we would go over the cliff. Democrats already rejected this plan, but it shows that the GOP is considering a revenue only mini deal.

A more likely compromise is that Republicans will lower the bar to $400,000. To get that, Democrats will demand a 1 year extension of the debt ceiling. Democrats want the debt ceiling extended and I do not believe Republicans will give Obama a blank check without any spending cuts or entitlement reform. The GOP might need to come all the way down to $250,000 to get Democrats to agree without a debt ceiling extension.

If this mini deal goes through, the market will rally. Democrats will postpone the spending cuts as long as possible. The celebration will be brief and we might test the highs of the year. After a few weeks, that excitement will wear off.

The debt ceiling will be hit in two months and the “Battle Royale” will begin. This could get nasty and if it drags out, we could lose our credit rating.

From a trading standpoint, I would love to see the can get kicked way down the road. If we barely raise taxes, make minor spending cuts and extend the debt ceiling two years, the market would skyrocket. Unfortunately, our national debt would balloon to $22 trillion in the next four years.

From a fiscal standpoint, I would like to see Republicans agree to raise taxes for Americans making more than $250,000 per year. The Bush tax credits were intended to be temporary and revenues have to increase. Once the GOP agrees to these tax increases, they can take a hard-line on spending cuts and entitlement reform.

During the debt ceiling negotiations they should go through spending cuts line by line. If we do this, our economy will go through a recession and we will emerge even stronger after two years. Our economy has been on artificial life support for the last decade and stimulus has not increased economic activity.

Light holiday trading is starting to set in. Don’t take large positions and keep your overnight risk small.

There is nice rotation within the market and you can find nice day trading opportunities.

After a couple of big rallies, the market looks like it wants to take a breather today. If we don’t get any new statements from DC, I’m not expecting a big move in either direction.
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