The stock market's momentum is waning. The S&P 500 index ended a three-week rally with a bearish reversal on Wednesday. Many market participants were expecting some sort of fiscal cliff deal to be reached ahead of Christmas but hopes seem to be fading. Of course I warned readers last week that "I would expect another week of posturing and debate without any results." The market peaked following the FOMC announcement on Wednesday afternoon and stocks have been fading since then. A tragic school shooting in Connecticut on Friday morning added to the lackluster market environment.

The main issue remains the fiscal cliff talks in Washington and the countdown to January 1st, 2013. This last Tuesday the Senate Majority Leader Harry Reid (democrat) admitted that the democrats did not plan on proposing any spending cuts, which is a key sticking point with the republicans. Reid said that trying to reach some sort of agreement before Christmas may not happen. Two days later it was House Speaker John Boehner (republican) who further depressed investor hopes for a deal when Boehner said President Obama was willing to go over the cliff instead of reaching a deal. I have been warning readers not to expect any deal thus far but now we're down to the last two weeks of the year. Nobody in Washington wants to be working Christmas week so that means if there is going to be a deal it needs to happen now - this week. If we don't see some improvement by Wednesday or Thursday we could see stocks accelerate lower.

Speaking of lower, the market spiked higher following the FOMC rate decision this past Wednesday only to reverse and head lower the rest of the week. The Fed left rates unchanged in the 0.0-0.25% zone. Federal Reserve Chairman Ben Bernanke said that "Operation Twist" would be replaced with another QE program to buy treasuries at $45 billion a month. This was expected by the market so no surprise here. What is somewhat surprising is that the Fed said they would keep rates low until unemployment fell to 6.5%. This is the first time we've been Bernanke assign an unemployment target to their policy. Meanwhile further depressing investor sentiment was the Fed slightly lowering their 2012 and 2013 growth projections.

Overall the weekly economic data was benign. The wholesale inventory data for October came in at +0.6%. The retail sales data for November rose +0.3%. The Producer Price Index (PPI) reading on wholesale inflation fell -0.8% in November. The Consumer Price Index (CPI) dropped -0.3%. Inflation is currently dead and not an issue for the U.S. but there are analysts warning us that we could see inflation surge in 2013. Elsewhere the weekly initial jobless claims dipped to 343,000 versus 372,000 the prior week.

Major Indices:

The S&P 500 index had rallied up to resistance at 1440 and reversed on Wednesday afternoon. Now it's back under support near 1420. The next level of support should be the 1400 level. If that level fails then we're probably looking at a drop toward 1380. I am concerned that this looks like a new lower high on the S&P 500's weekly chart.

chart of the S&P 500 index:

The NASDAQ continues to look vulnerable. Once again weakness in Apple (AAPL) is having an influence. The NASDAQ composite managed to rally to new multi-week highs on Tuesday and Wednesday only to reverse on Wednesday afternoon. Now the NASDAQ is back below what should have been support near the 3,00 level, the 50-dma, and the 200-dma. Technical traders will also note that simple 50-dma is about to produce a "death cross" below the simple 200-dma, which is another bearish signal. There is still support near 2950 but if this level fails then the NASDAQ will likely fall toward 2900 or the November lows.

You'll want to keep an eye on shares of AAPL. The stock has plunged from $593 on December 3rd to $509 on Friday. AAPL's November low was $505.75. The level to watch is probably the $500.00 mark. A close under $500 could spark a wave of selling as investors rush to lock in profits.

chart of the NASDAQ Composite index:

The small cap Russell 2000 index managed to eke out a small gain for the week (+0.1%) but the action still looks bearish. The $RUT produced a bearish engulfing candlestick reversal pattern on Wednesday. This reversal just happened to occur near its prior trend line of support, now new resistance. Thus far the reversal hasn't been that bad but it may not be over yet. There is short-term support near 820. If that level fails then the 805-800 area could be support.

Daily chart of the Russell 2000 index

The economic and event calendar has a couple of fed surveys on it. The New York area (Empire State) survey and Philly Fed survey will provide a look at manufacturing and business activity for those two key regional areas. The NAHB will provide a look at sentiment among the homebuilders. On Thursday we'll get another estimate on U.S. Q3 GDP growth.

The most unusual item on our calendar is the winter solstice on December 21st, 2012. What makes this particular winter solstice different is that the Mayan calendar rolls over into a new "long-count" period. Just as our calendar rolls over again from December 31st to January 1st, the Mayan calendar starts anew. Yet this has been twisted into another end of the world doomsday scenario.

If you're curious, the scientists at NASA have answers for you. You can check out their answers regarding the December 21st, 2012 phenomenon here:
http://www.nasa.gov/2012/

Or you can watch a short little video here:
Why the World Didn't End Yesterday

Economic and Event Calendar

- Monday, December 17 -
New York State Empire manufacturing survey

- Tuesday, December 18 -
NAHB housing market index

- Wednesday, December 19 -
housing starts and building permits for November

- Thursday, December 20 -
Weekly Initial Jobless Claims
U.S. Q3 GDP estimate
existing home sales
Philadelphia Fed survey
Eurozone inflation data

- Friday, December 21 -
Personal income and spending
durable goods orders
University of Michigan consumer sentiment (final December reading)
Mayan End of the World prophecy?

Additional Events to be aware of:

Dec 24th - U.S. markets close early for Christmas eve.
Dec. 25th - U.S. markets are closed for Christmas

The Week Ahead:

Looking ahead I suspect odds are good we could see more profit taking in stocks. Washington is currently at a stalemate on the fiscal cliff talks. This would be the week to expect some sort of deal yet it looks like there is no deal in the near future. That could sour investor sentiment. Capital gains taxes go up in 2013 so investors could choose to sell now and re-evaluate their investment strategy again in 2013. If, perchance, Santa were to somehow deliver a fiscal cliff deal then stocks would likely resume their up trend and rally throughout yearend.

James