Holding Pattern – 100-Day MA Holds. Buy Puts If We Close Below $141.

December 5, 2012
Author: Peter Stolcers, Founder of OneOption
Author
Pete

I will be hosting a FREE WEBINAR TONIGHT and I will showcase my automated Swing Trading system. it is a real-time system offered through my platform.

Yesterday, the market tested the downside and the 100-day moving average held. This morning, we have clearly broken below it and the price action looks weak.

ISM manufacturing was released earlier in the week and it missed expectations by a wide margin. Today, ISM services exceeded expectations and ADP came in slightly better-than-expected. I’ve been telling you that these major releases which normally drive the market will generate a muted reaction.

This is all about the debt ceiling and the posturing by both parties. The President is speaking at a business roundtable and his address contains more ultimatums. He said that if Republicans feel like they have an upper hand heading into debt ceiling negotiations in a couple of months, they are sadly mistaken. “He won’t play that game.”

The President is trying to change the rules so that he does not need Senate approval to exceed debt ceiling spending limits. Translation: he wants a blank check.

Senate Majority Leader Harry Reid is trying to change Senate rules to eliminate filibustering. Once again, Republicans are being stripped of power.

It is not wise to get into a heated argument with a talk show host. It is a no-win situation because you can’t control the mic. It feels like that is exactly what Republicans are up against. Every time I turn on the TV, the President is nailing home his talking points. He is campaigning around the country and if we go over the cliff, Republicans will take the blame.

I’m not trying to get political, these are my observations and these actions are antagonistic. Republicans should cave in on tax increases above $250,000 and they should also reduce tax loopholes. Throw in the kitchen sink and outline the exact spending cuts/entitlement reform that is commensurate with these tax hikes. They need to put the ball squarely in the Democrats court.

Politicians always push things through at the end of the year because they all want to spend time with their families during the holiday. The market is pricing in an agreement and I believe any surprise favors the downside.

The stakes are extremely high and we are talking about major decisions. This will not be solved easily and there are factions from both parties that seem willing to let us go over the cliff. In another month, we will hit the debt ceiling and that could be another ordeal.

All of these negotiations are not about balancing the budget. Even if all of the tax increases are made and spending is cut, we will still run $6 trillion further into debt over the next four years. Entitlement programs are killing us.

I can’t aggressively short this market until I see how all of this plays out. I believe other traders feel the same way. Politicians could still “pull a rabbit out of their hat” and we can’t risk getting caught in a short squeeze. I also don’t want to fight seasonal strength.

I own a handful of puts and I will add if the market convincingly closes below the 100-day moving average. Thanks to Apple, the QQQ is already below the 200-day moving average. I will add to put positions if the SPY closes below the 200-day moving average. Keep in mind; my positions are smaller than normal.

I’m not very interested in trading the upside. Stocks have reversed and we are in positive territory at this moment. If the move continues I might day trade a few stocks from the long side, but I will be out by the end of the day.

I still feel that with every passing day, the probability of a swift market decline increases. Many Asset Managers will be reducing risk into year-end.

Once a deal is reached, I will be looking for a sustained decline (sell the news). The terms of the deal will determine how aggressive I get. For now, keep your size small and favor the downside for overnight positions if we break major moving averages. Otherwise, day trade strong stocks and keep your overnight risk to a minimum.

I don’t believe Friday‚Äôs jobs report will have a major market impact.
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