The looming “fiscal cliff” in the US is capturing headlines and investor sentiment. IMO the sell off in shares is now fully pricing a failure to reach agreement – despite recent developments that make a deal more likely than not. Tonight in the US, President Obama will meet with the key Republican and Democrat leaders. And the trader’s friend Fibonacci is suggesting the US SPX 500 is at a turning point……
Despite the current focus, markets have known about this event since June. The re-election of the President, and the continuing lack of a majority in Congress has brought it into focus. Memories of the hard ball approach by extremist Republicans to lifting the “debt ceiling” earlier this year is spooking the markets. However, it is now obvious to both Democrats and Republicans that the political cost of being the party that slams the American economy would be very high.
A survey released earlier this week showed 51% of Americans thought no deal is doable – and the majority of them will blame the Republicans, and specifically its “Tea Party” members. This may be behind a softening public stance, exemplified by Republican Senator Corker, who reportedly said that agreement can be reached on revenue (taxes), and entitlements (spending) were the sticking point.
All this informs my view that a deal will be done, and the first steps towards it will be announced over the weekend. Given the 8% fall in the US share market from the October highs, I like the idea of buying the US SPX 500 today.
US SPX 500 – Daily
Source: CMC Tracker
Note the Fibonacci 61.8% retracement level at 1,345. While more cautious technical traders may wait for an up day to confirm this is a turning point, the combination of fundamental and technical factors meets my trade criteria.
I can take advantage of any pullbacks ahead of announcements by splitting my trade into two orders. Something like:
Buy 100 US SPX 500 at current market, stop loss at 1,341
Buy 100 US SPX 500 at 1,348, stop loss at 1,338