Market Direction Outlook For Dec 31 2012 – Santa Is Gone

Only one event dominates the stock market direction now. I believe the fiscal cliff has ended the chance of a market direction Santa Claus Rally. Even if a last minute deal is reached, the chance that this matter is completely resolved is slim at best. The fiscal cliff mess is composed of both tax increases and spending cuts. Both of these are not simple black and white matters but instead are filled with shades of grey. Everything from unemployment benefits to health care, prescriptions, military, agriculture and schools to infrastructure will be affected along with tax increases. To think that a last minute deal will resolve all the areas of contention is I believe, foolhardy.

Technical Market Direction Breakout Of December 11

On December 11 a technical market direction breakout occurred. Here is my article from that day. But whereas that technical breakout pointed to the market consolidating and moving forward, the fiscal cliff infighting among politicians of both political parties has effectively ended that technical breakout several days ago.

Even if a resolution of some sort is worked out that tries to cover off some of the fiscal cliff issues, any rally off of such a resolution has to be suspect and I will not be buying stocks. In my market direction comments yesterday I indicated that the lows of Dec 27 would be revisited. I did not expect those lows to be taken out today.

Market Direction and VIX Index

When investors worry, they sell. It’s that simple and the VIX Index is showing the growing concern among investors, as it rose over 16% today closing at $22.72. The VIX Index is reaching back to levels not seen since the early summer. When you look at the VIX Index chart below you can see that volatility this year has been reasonably low. That is rapidly changing.

Market Direction and VIX Index

Market Direction and VIX Index

It it volatility that drives up option premiums and for that reason it is important to take advantage of these spikes in volatility. The problem is avoiding holding stock at overvalued prices if by chance the markets fall further.

There are some trade strategies that can be implemented to take advantage of the heightened volatility while working to protect capital from overvalued prices, which I will focus on this weekend.

Market Direction Chart Of S&P 500

Below is today’s market direction chart for the S&P 500. At the open stocks fell. By Point A the rumor or news that President Obama was coming out with a scaled back proposal helped lift stocks, but the rally did not recover stocks to the opening high. Instead it created a technical barrier for stocks to try to move through.

Point B shows a late day rally attempt but it failed and set a new lower higher. Selling intensified within a couple of minutes which is shown by point C.

Point D shows a small rally attempt which was simply a bounce back and then more selling into the close.

Market Direction Dec 28 2012

Market Direction 5 minute Chart of S&P 500 at close of Dec 28 2012

Investors hate to hold positions over a weekend when there is even the hint of trouble over a weekend. The close today was bearish for stocks. Therefore while there may be a resolution of some sort this weekend, a sustained recovery to stocks in the short-term will need a solid budget announcement.

Let’s look at the market direction technical indicators at the close today.

Market Direction Technical Indicators of Dec 28 2012

Market Direction Technical Indicators for Dec 28 2012

Market Direction Technical Indicators for Dec 28 2012

For Momentum I am using the 10 period. Momentum is continuing to decline into negative territory. As the VIX Index is rising, momentum is falling.

For MACD Histogram I am using the Fast Points set at 13, Slow Points at 26 and Smoothing at 9. MACD (Moving Averages Convergence / Divergence) issued a sell signal yesterday as reported in yesterday’s market direction outlook article. MACD has been very accurate this entire year. The sell signal from yesterday was very clear and today MACD has turned more negative, confirming the down signal.

The Ultimate Oscillator settings are Period 1 is 5, Period 2 is 10, Period 3 is 15, Factor 1 is 4, Factor 2 is 2 and Factor 3 is 1. These are not the default settings but are the settings I use with the S&P 500 chart set for 1 to 3 months.

The Ultimate Oscillator is negative and indicating that more downside should be expected next week.

Rate Of Change is set for a 21 period. Rate Of Change took a big drop today and is now negative.

For the Slow Stochastic I use the K period of 14 and D period of 3. The Slow Stochastic is oversold but is not pointing to any bounce at this point. Lower market direction should be expected next week.

For the Fast Stochastic I use the K period of 20 and D period of 5. These are not default settings but settings I set for the 1 to 3 month S&P 500 chart when it is set for daily. The Fast Stochastic is extremely oversold but is warning that more downside, including possibly significant down action should be expected next week.

The consensus among all the market direction technical indicators is for the market direction to head lower.

Market Direction Outlook For The End of 2012 and Start of 2013

The market direction outlook is for more downside action. If no resolution is found, the Fast Stochastic is indicating that significant downside movement could be seen by investors.

The fiscal cliff has overshadowed all recent economic news. There have been bright spots reported within the US economy including pending home sales that climbed for a third month in November, with its index up 1.7% to the highest level since April 2010. But investors now are completely focused on the fiscal cliff debacle. It should be pointed out that no economist can predict with any strong degree of certainty that the fiscal cliff issue if not resolved will result in a severe recession. Everything from the “countdown” timers on CNBC and dozens of media sites, to dire predictions of economic calamity should the fiscal cliff issue not be resolved has unnerved investors, both retail and institutional.

Significant Profits From Market Direction Swings

This is the kind of environment where significant profits can be made, both on downturns and upswings. It is expressly for these types of events that I hold my cash back and prepare to put it to work should investors decide to dump shares.

Market Direction then for the start of the final week of 2012 and first week of 2013 is for volatility to continue and markets to push lower. A significant rally on any type of resolution to the fiscal cliff issue should be anticipated by all investors, That said, any rally from a fiscal cliff resolution will need to be monitored daily to determine whether it has any lasting power since technically, the market direction up, has been damaged over this past week. I am not expecting much in the way of a market direction Santa Claus Rally at this point.

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