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Wednesday, 16 October 2013

Elephants in the Room

Some weeks ago, when President Obama stated firmly that he would not negotiate with the Republicans over the budget or the debt ceiling, I remarked to somebody that it wasn't that encouraging for those wishing for a successful resolution of this crisis that the Republicans, particularly the Tea Party, were unlikely to pass a bill without concessions, and the Democrats were refusing to consider any concessions. After all, all that is required for default is a failure to agree anything to avoid it.

Fast forward to yesterday and it seemed that a deal had been agreed which the Republicans were going to vote for, and which had not required any concession of substance from the Democrats. I wasn't that surprised when this fell apart and it remains to be seen whether any agreement is possible today. As a general rule though, a bad outcome which only requires politicians to sleepwalk into it is higher probability than one that requires definite action.

Could the US default for the first time in the history of the Republic? Well ....... it wouldn't be the first time actually, and depending on your definition of default, it might not even be the fifth time. The last occasion was in 1979 after a very slow to complete debt ceiling negotiation. There's a good article listing these at Ritholz that you can see here.

We may or may not get an agreement today and it is possible that gridlock will last long enough to cause the US to default on some maturing bonds. This wouldn't be either unprecedented or the end of the world as we know it, though it could well cause a panic slide in world equity markets, which I'll be watching for in the event that US politicians fail to get their act together in time.

Despite all the news grenades, yesterday still went pretty well from a technical perspective. The SPX channel and ES rising wedge that I posted in the morning both broke down and there was a small retracement of the move from the 1646 SPX low. Even the sharp rally after hours that had bulls all excited was just a retest of broken rising wedge support as you can see on this chart that I posted on twitter last night. ES 60min chart:
Looking at the ES chart this morning, falling megaphone resistance is in the 1705 area and a break above that would most likely run through to 1710 and possibly higher. On another move down I have the 50 hour MA in the 1700 area, and I have support levels at 1692 and the weekly pivot at 1679.75. ES 60min chart:
On the SPX 15min chart I have the retracement low yesterday at the 23.6% fib retracement of the move from the 1646 low. That is a possible significant low though that would be unusually weak, and there is an open double target in the 1690.5 area below that has not yet been hit. My preferred retracement targets are the 38.2% fib retracement at 1686.5, which is a good fit with the ES weekly pivot at 1679.75, and the 50% fib retracement target at 1679, which is a good fit with the 50 DMA at 1678. After we hit one or the other of those targets I'm expecting the uptrend to resume, unless it has become clear that no agreement soon is likely, in which case I would expect the markets to react negatively in a hard to predict manner. SPX 15min chart:
On the SPX daily chart the two key support levels to watch here are the daily middle bollinger band (20 DMA), currently at 1693.59, and the 50 DMA, currently at 1678.24. If we see a break below 1693 I'll ideally be looking for a recovery back to the 20 DMA area by the close. SPX daily chart:
There will be plenty of news today, much of it including little or no information, but still moving markets based on the underlying sentiment of whatever is being announced. There is a risk of a big breakout in either direction if definite news of a deal or a collapse of negotiations is released, but in the event of collapse I think that news would be more likely to come tomorrow.

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