(By Rich Bieglmeier) The indexes are about as low as they can go without turning the recent "fiscal cliff" selloff from a scratch to a stitches requiring cut. Any deeper than a cut, and a gash of selling could occur, covering the ticker tape with the blood of losses.
The NASDAQ, Dow, and S&P are tiptoeing on the edge of ascending, short-term trend lines connecting rising pivot bottoms. Since the end of November, the lower barrier has acted like the 3rd rail, putting enough juice in stocks to send the indexes higher. Initially, the major indexes will find a safety net at their 50-day, which are just a touch below Wednesday's closing levels.
Get underneath the 50-days and it could get real dicey as a bearish MACD cross-under is likely to accompany a fall below the key, technical benchmark. The drop dead prices for the S&P could be around 1,380, the Dow at 12,800ish, and the NASDAQ in the neighborhood of 2,875. If the indexes don't recover, and rally beyond mid-September's highs, investors could be reading about head-and-shoulder patterns for the three indexes to the point of nausea.
[Related -Thoughts on MetLife and AIG]
The equity markets hit a high in March, corrected, and rallied to newer, higher highs in September. There is your left shoulder and potential head. Should the current uptrend fail to regain its stroll and roll on by September's peak, there is your right shoulder. The levels iStock highlighted above are the potential necklines.
A head-and-shoulders breakdown could lead to a nasty selloff. We saw the same pattern develop in the summer of 2011. Not surprisingly, it was the last time the federal government hit an impasse over fiscal issues. Back then, the indexes rolled over the waterfall's edge and entered bear market territory, falling more than 20% from top to bottom.
[Related -A 2016 Recession Would Be Different]
Unfortunately for D.C., the more things don't change, the more they remain the same. Please secure your seatbelt tightly, make sure the harness is locked in place, and keep your arms inside the ride at all times. This fiscal rollercoaster could be one wild ride.
With or without cliff diving, investors might consider avoiding retail stocks in the coming days and weeks. It clear from our weekly sector performance review, the sector is already on the way down relative to the S&P 500.
For those who want to nibble just in case Washington works something out that pleases Wall Street. Industrials, Business Training, Telecom Equipment, Steel and Semiconductor sector charts are flashing signs that they could outperform the S&P in the near-term. In fact, Intel (INTC) might be a value worth considering.