Well the time has come. The fiscal cliff is upon us and it doesn’t look like Washington is going to get a deal done. Myself, nor the market judging by the recent activity in the VIX, seems too surprised about this. To help form some of my thoughts moving forward, I went back and took a look at what I’ve been thinking throughout this month of December.
“We could be on the verge of a 200-300 point down day very very soon… with volatility elevated like this now is a good time to be placing bets that a pretty big move (100-200 point day) is coming in the next 1-3 trading days.”
-Stockhaven’s market take 12/20/12
“As long as the banks are trading like this, those looking for a serious correction are going to keep doing just that… waiting. What might signal the bank trade is off? Well XLF has only had one 3 day losing streak since the middle of October so keep an eye out for one of those.”
-Stockhaven’s market take 12/20/12
“Maybe the VIX is signaling an expectation of an agreement to avoid the fiscal cliff not being reached by year end.”
-Stockhaven’s market take 12/19/12
While I wasn’t very active trading last week due to Christmas and just some general recharging of my brain, I did obviously follow the bearish action in the market. We did indeed see that big move lower that I mentioned the VIX was starting to signal might be coming. Making matters worse for the bulls was the action in the banks. XLF, whose leadership I have been impressed with recently, has suffered a 5 day losing streak. That’s the worse such streak since September.
The good news is that even with the losing streak XLF remained above $16. $16 is a critical level to watch because it had acted as stiff resistance many times over the last 3 years so maybe now it can become support. Should the $16 level break though, I’d look for the move lower to accelerate which would have very bearish implications for the market.
Hey, speaking of bearish implications, that’s certainly what the market seems to be expecting. In reality though that might not be wise:
- December has been the least volatile month of the year as measured by overall monthly range (it was 50 points thru Friday)
- The VIX has risen more than 40% the month of December
- Between 8/1/11-8/8/11 (6 trading days) SPY lost 13% — this came on the heels of the U.S.A.’s credit downgrade
In my opinion, unless the market cracks support between 1,385-1,390 then the market doesn’t seem to think going over the cliff is going to have as severe an effect on stock prices as the media is leading you to believe. Should that support zone break though, then it will signal that the market is indeed very concerned about the implications of “going over the cliff,” and that is hasn’t yet accounted for such ramifications as it reflects them thru stock prices.
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