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Greg Sommer
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Independent Stock/Options trader based in SF, CA.
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  • SPY showing signs of more downside? 0 comments
    Jul 28, 2011 5:37 PM | about stocks: SPY, LULU, GMCR, AMZN, AAPL, F
    It is safe to say everyone knows (or should know) about the impending deadline regarding the debt ceiling and political deadlock in Washington.  Some people and investors are shrugging off the possibility of default while others are waiting for the impending catastrophe.  I tend to agree with the latter.

    This problem has been in the making for a very long period of time.  Government spending has been on the rise for years with no regard for the gap in receipts.  It is a common theme now of only dealing with our problems when we are on the verge of catastrophe.  It happened with housing boom and bust and now with our ballooning national debt.  Unfortunately politicians in this country want their respective political parties to "win" instead of doing what is right for the American people.  The recession only worsened the financial situation in this country and now we need to take steps to correct and reverse the biggest problem our country is facing.  If the U.S. did not have the largest economy in the world we would be treated more like Greece or Ireland.  This is not a path we should go down and politicians are doing the American people a diservice by putting our AAA rating in jeopardy.  Not to mention the extra cost of servicing our debt if investors require a higher return on borrowed funds.  

    The smart move is to be very cautious in this market and for good reason.  Looking at the S&P 500 or the SPY there is a potential bearish head and shoulders pattern developing.  

    If the U.S. does default and we get more downside in the markets we could see this pattern materialize.  The neck line of the pattern is at approximately $126 with downside potential to $122 or even as far as $118 if things get real bad.  One thing to keep in mind is the 200-day moving average where we saw a bounce before. 

    The market has been in a range for months now and the only way to make money is to be a stock picker.  Long the stocks reporting outstanding earnings like LULU, AMZN, AAPL and GMCR and short the stocks that are struggling with the economy such as Ford or financial stocks.  If this pattern materializes and we do have more downside, it could be the opportunity to get into these high flyers.  

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
    Themes: S P 500, Debt Crisis Stocks: SPY, LULU, GMCR, AMZN, AAPL, F
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