Choosing is not a choice

Friday night Standard & Poor's downgraded America's debt rating from AAA to AA+. The "bipartisan" budget deal worked out by US lawmakers last week apparently doesn't pass muster.

This should come as no surprise. The deal is the concoction of a government in gridlock and political parties without the will to make tough choices and risk alienating their most vocal and influential backers. Faced with the option of raising taxes or cutting spending--two very sacred cows--lawmakers chose none of the above.

The situation in the US is unsustainable because neither side of the debate is willing to concede anything, but now something has to give. Spending must be matched with revenue. When the two are out of sequence, the former must be cut or the latter raised--or better yet, both. A business can't survive without this careful balance and neither can a country.

In abandoning this basic principle, the US is now downgraded--and rightly so. Plans that appease everyone serve no one, and so it is with recent American fiscal policy. US lawmakers must prepare to make unpopular decisions or risk worsening an already grave budgetary tailspin.

Americans can either pay more for the services they receive or cut those services and pay less. Both options are valid, but a choice must be made as no combination of the two will work.

To be sure, the coming days and weeks will be crucial ones. Lawmakers and economists will be working hard to assess the damage that has been done and determine a way forward. Traders like myself will be looking to understand this changing dynamic of the global markets and identify opportunities therein.

As this situation unfolds, follow my latest thoughts both here and on Twitter @thetsxpert.

--Read the S&P's downgrade report here--

Wild trading leads to possible bottom on the SPY

Wednesday's trading was all over the map. The market opened flat and inched up before flushing dramtically lower, going from nearly 126 to 123.50. From there, the SPY staged an incredible rally pushing up to close near new highs on the day. This is an impressive move for a market that has seen seven powerful down days in a row.

A big flush followed by a huge rally on SPY 10 Min

The market was and is long overdue for a bounce. Financial turmoil in the EU and the US has created an enormous amount of fear and that tells me a short term bottom may be in place.

Technically, the daily SPX chart has a bottoming tail indicating the potential for higher prices in the days ahead. Until we close below this tail, I'll keep an upside bias on the markets. If I'm correct, expect a move back to a 50% or 61.8% fib level before ultimately trading back down.

A bottoming tail signals the potential for higher prices on the SPX

Because this is the first up day after several down, I'm keeping my analysis simple until a bottom is confirmed with a followthrough move higher. When and if that happens, I'll have more concrete support and resistance levels.

Going into the rest of the week I will be trading very carefully until I have a better handle on the direction of the market. Tomorrow's close will be telling.

TLT weekly resistance--possible bounce in stocks coming?

The iShares 20 Year Treasury Bond Fund (TLT) has run into major resistance on the weekly chart.

If you connect the last two pivot highs, you form a trendline that stretches all the way back to late 2008. The third hit of any trendline is usually a high probability short, especially when they're as nicely spaced as on the chart below. 

Treasuries often trade contrary to stocks as institutional investors look for refuge in seemingly safer assets. Note the vertical lines in the S&P 500 weekly chart below--this is where each pivot high on the TLT corresponds. You'll notice that each time the TLT makes a top, the SPX is either near or at a sharp up-side move.

It's unclear if this pattern will repeat itself again, but there are several reasons to believe that it might. The market is extremely oversold right now as well as extremely bearish. History shows that when sentiment hits an extreme, it's often a sign that a turnaround is near. This combined with a possible pivot high in the TLT leads me to believe that stocks may be due for some short term upside in the near future. 

If the market does bounce, I won't be expecting much--possibly a retest of the highs at 1350 or 1375. As you can see, the previous two pivot lows in the SPX were consecutively smaller declines leading to shallower bounces. 

I'll be watching this correlation closely in the days and weeks ahead. If Treasuries rally sharply higher from here, or if it pulls back while stocks continue to decline, I'll know the pattern has been negated.

Trade idea: SM long

SM has pulled back over the past week after an impressive up-trend that began in mid June. If it pulls back further, look for support between 70.50 and 71.14.

This range corresponds to three support factors: a 50% fib retrace at 71.14, a previous pivot high at 70.46 and the 50 moving average currently at 70.38.

I will look to take this trade long on a hit or break of the 50 moving average or the pivot high at 70.46--whichever comes first.

Trade idea: WFC long

WFC will hit good support at 26.88 if it continues down over the next few days.

This level corresponds to a gap fill and an important up-sloping trendline.

I will consider entering this trade on a hit of the gap fill at 26.88 and will be watching closely for it to close above the blue trendline. The closer the two levels are to each other , the better the odds of a successful bounce--this is why it's preferable for the trade to trigger in the near future.

As always, use a stop.

Trade idea: WAG long

Walgreen Co., (WAG) will have two important support levels coming up if it continues to decline.

The first level is at 36.68 and it corresponds to a gap fill and a 50% fib retrace. The second level at 34.71 corresponds to another gap fill and a 61.8% fib retrace.

As both of these levels have multiple support factors, both can be entered long for a short term swing trade. For either of these levels, be sure to use an appropriate stop and set it to trailing once in the money.

Trade idea: USB long

USB will have significant support at around 25 dollars if it continues to drop into this week. This level corresponds to a major daily gap fill as well as the 50 moving average.

I will look to enter USB long on a hit or break of 25, though 25.30 will also have good support as it corresponds to a 61.8% fib retrace. I'll keep a stop at a daily close below 25--higher risk traders can put their stop below 24.15.