Time to Take Stock – US SPX 500

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

AND

Buy 100 US SPX 500 at 1,348, stop loss at 1,338

About michaelmccarthycmc

Chief Market Strategist - CMC Markets and Stockbroking Regular on ABC, BBC, Bloomberg, Channel TEN, CNBC, SBS and SKY
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5 Responses to Time to Take Stock – US SPX 500

  1. Few appreciate the true implications of the fiscal cliff. I find it bizarre that if the spending cuts and tax increases do actually take place, the US deficit will still be many hundreds of billions of dollars and this is seen as a ‘bad’ thing. More to the point people are starting to realise is the value of assets are being artificially support by unsustainable fiscal largesse. What the implications are is the fact that the asset prices need to correct to reflect the dire state of demand in the West. If technical levels are broken here, it will confirm the great experiment that has been undertaken for the last 2 generations is coming to an end and a new respect for market forces is at hand.

    • dv34 says:

      Although I totally agree with you, a correction of that magnitude would be catastrophic to say the least… and every time there is a crash and pain of that magnitude often it is followed by wars which is no good for anybody – I believe the more likely scenario is many years of large sideways choppy price action and private sector debt repayment (despite the deficits) – similar to the malaise 10-20years after the depression into the 1950’s

  2. Tim stannard says:

    I have also taken this trade, whats your profit target at this stage

  3. Tim stannard says:

    Thanks Mike,
    so far so good.

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