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Taking Stock of a Global Financial Inflection Point


Crosscurrents collide as policymakers take center stage.


Editor's Note: Todd posts his vibes in real time each day on our Buzz & Banter.

Caught up in a whirlwind can't catch my breath; knee-deep in hot water, broke out in a cold sweat.
-- Stevie Ray Vaughan

The Chinese have a curse: "May you live in interesting times." And so it is, we're now importing proverbs from the Far East.

In what's shaping up to be the most important Wednesday in the history of days that end in "Y," we're set to receive guidance tomorrow from the Federal Reserve and G-20 regarding what exactly they plan to do to combat the sovereign sequel to the first phase of the financial crisis.

The fact that our once-free markets are dependent on a steady fix of drugs from global policymakers, while sad, isn't the point. We must trade the market we have, not the market we want, and odds are that, without tens of trillions of dollars in synthetic stimuli, we probably wouldn't want that market either.

There are several sides to the current ride and we would be wise to see them all.

The Good
  • S&P 1335 -- the level of lore in a reverse Head & Shoulders formation that works (through a pure technical lens) to S&P 1400 -- remains underfoot.
  • BKX 44 -- the 'stealth tell' we've been monitoring in Minyanville that has worked like a charm -- is below current levels as well.
  • The momentum monkeys -- Apple (AAPL), Google (GOOG), LinkedIn (LNKD), Amazon (AMZN), Baidu (BIDU), and Priceline (PCLN) – traded great yesterday, which implies an underlying "risk-on" mentality.
  • Quarter-end is approaching next week, which may be why the 'bang-for-the-buck' plays mentioned above traded with a better bid.
  • The Greek elections passed without the global financial infrastructure imploding. As a result of the uncertainty surrounding this event, many market participants moved to the sidelines/are sitting in cash and may be vulnerable to a "long squeeze" (the buyers are higher).
The Bad
  • Europe isn't fixed, as evidenced by Spanish yields trading at crisis highs.
  • Greece, while seemingly moving toward a coalition government, has yet to arrive at an agreement for further monies to stave off default.
  • Politics and policies take time while markets are dynamic and move in real-time.
  • When is the last time anyone solved a problem (too much debt) by engaging in the same behavior that caused the problem (more debt)?
  • The banks, while above BKX 44, traded heavy yesterday and no sustainable lift can occur without healthy participation by the financials.
The Unknown
  • What, if anything, can global leaders say that will placate investors hoping for them to do something?
  • How will quarter-end influences impact high-profile stocks (such as Facebook (FB)) and will that present an opportunity to 'take the other side' once that posturing is finished?
  • Will policymakers stateside and abroad have the political will to make unpopular -- yet prudent -- decisions?
  • What will the fiscal cliff bring, other than the specter of yet another debt downgrade, and when does that begin to price into risk assets?
  • Can Kevin Durant and the Oklahoma City Thunder man-up and win game four in Miami?
Putting One Foot in Front of the Other

Yesterday morning, in real-time on the Buzz & Banter (click here for a free two-week trial), I offered the following observation:

The more the futures melt pre-open (they were 16 handles lower than where they were Sunday night), the more inclined I am to fade (read: buy) the tape for a trade.

A back-test of S&P 1335 cash (the reverse dandruff shoulder) is an intuitive spot to take a shot, with a tight stop on the other side of S&P 1330. Nothing ventured nothing gained; I'm willing to risk five handles for an opportunity to capture 70 points on the upside if the reverse dandruff plays through.

Additionally, I spied another opportunity:

Check out the reverse dandruff in JPMorgan (JPM) following the 34% "London Whale" decline. This pattern works to $38 in a technical vacuum (and there's an open gap that works to $40). This stock is a potential vehicle as well, for those so inclined.

And finally, at the risk of redundancy, we shared the following fare:

Lest you missed it, the pattern we discussed in the S&P -- the reverse dandruff -- is also large and in charge in the NDX, as evidenced in the chart below. This particular pattern, in a technical vacuum, works to roughly NDX 2710.

While the tape traded constructively yesterday -- the mainstay indices opened in the hole before buyers stepped in and drove them into positive territory -- the fly in the upside try yesterday was the financials. Be that as it may, I bought the S&P and JPMorgan into that weakness and maintained that exposure overnight, albeit with tight stops on both positions.

Additionally, for those monitoring my long Apple - short Google trade, I legged out of that risk yesterday, covering Google in the morning (while it was a deep hue of crimson) and parceling out of the Apple long into the subsequent strength. I still like the pairs trade but trades are made to be taken and I'll revisit those puppies as a function of time and price.

Finally, in what can only be chalked up as a simple twist of fate, I'll be on my final "shoot" tomorrow for an alliance that will be shared soon for all to see. This, of course, will be the only "outside" shoot into the teeth of a heat wave that will drive East Coast temperatures toward triple-digits but I'm not complaining. It's all very exciting; I'll simply have to manage my risk accordingly.

Good luck today, and as always, I hope this finds you well.


Twitter: @todd_harrison

Follow Todd and over 30 professional traders as they share their ideas in real-time with a FREE 14 day trial to Buzz & Banter.
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Position in SPX, JPM.
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