Lessons from the Pros


I Spent $6 Billion and All I Got Was the Same Government

Sounds like a great T-shirt logo. Except it is the sad truth. Now that the election is over, America begins its next chapter with many of the same problems looming.  First and foremost is the “Fiscal Cliff” we are facing as a nation.

For those of you wondering what the term “Fiscal Cliff” means, it is the pending expiration of tax exemptions and also cuts in spending for many government sponsored programs. Many of this will occur on December 31st, 2012.

So what does this mean for us as traders?  The day after the election the initial knee jerk reaction was just as expected.  We saw a large gap down on many stocks and the markets themselves.  But as I mentioned in last week’s article, we may see a shallower drop in the equity markets with the reelection of the President.

Looking at the daily chart of the S&P 500, we can see price was testing a weakened demand zone after the elections.

bwendell 20121113 - spx 2012 trend

The short term daily downtrend we are currently experiencing has not caused a drop below 40 on the RSI and is therefore only a correction, not an impulse down yet.  The weekly chart confirms this as we are trying to make the third touch of the uptrend line.

bwendell 20121113 - spx 2012 weekly

This is critical as there are no fresh, untested, strong demand zones below this weekly trend line until approximately 900 on the S&P 500.  The risk off trade or flight to safety has been on hold but may be poised to continue should the equity markets start to fail.  Looking at the ETF, TLT which tracks US Treasuries is in a consolidation pattern.

bwendell 20121113 - tlt consolidation

With the reelection of Barak Obama, we are likely to see a Federal Reserve monetary policy that continues to be dovish.  A dovish policy favors low interest rates as a way to allow business to expand from borrowing and stimulate the economy.  There was talk that a Romney appointment to the post would have been more hawkish and that the era of low interest rates and free money would likely end.  With the government remaining status quo, we are going to see the current policy of Quantitative Easing (QE) continue for the foreseeable future.

This should continue to inflate the bond bubble we have been experiencing.  As I wrote about in previous articles, QE has been largely responsible for the optimism and climbs in the equity markets.  Now that traders and investors have seen this for four funding rounds, it is having a smaller impact on those markets.  I would not be surprised to see a return to gold as a safe haven as it was in 2009.

GLD, the ETF that tracks gold has been holding in a weekly range for some time.  The slightly higher lows of early and mid-2012 suggest a potential for upward breakout.  I and other gold bulls will be watching for this development as gold has already diverged from the equity markets.
So once again we need to trust our technical analysis skills to navigate through these tumultuous markets.  With your skills and the excellent instructors at Online Trading Academy, you should fare just fine.

DISCLAIMER This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.

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