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Market’s Inability to Rally, Bad Omen for January: Grasso

On Monday traders on the floor were starting to doubt whether the highly touted chase for performance into end of year – was in fact going to happen at all.

Both the Dow and S&P slipped lower, calling into question predictions of a melt up over the next two weeks.

Top trader Steve Grasso tells us chatter on the floor hasn't been optimistic lately, not by any stretch. “If we can’t rally going into Christmas where will the market end up in the first quarter of 2012?” That's what Grasso is hearing.

And it's a problem for bulls because it reduces appetite for risk. “Right now nobody on the floor wants to take a flier,” he adds.

The unwillingness to buy may be due to recent comments made by ECB president Mario Draghi - he suggested the year ahead would be perilous for Europe. Despite hopes that overseas headlines and the S&P would de-couple, “The market continues to be focused on the Euro-Zone,” Grasso says.

Draghi also discussed the possibility of a euro breakup in an interview with The Financial Times, although he said the interview’s purpose was to dispel rumors. The Street, however didn’t take it that way. The Street took it to mean “The world is a scary place,” Grasso explains.

How should you position?

If you’re a trader Grasso says watch key levels.

“The top is probably the 50-day - around 1230. And on the downside watch the 100-day – call it 1200.” How the market behaves at these levels will be key.

If you’re an investor Grasso sees no reason to get involved in the market right here. Although his comments suggest he's a buyer above 1230, his bias is lower.

In fact, he thinks the market could sell-off as much as 5-10% in the first quarter of the year. "I think we’re going to test much lower levels," Grasso says.

Jeff Hirsch of Stock Trader's Almanac sees the situation a little differently. He thinks seasonal influences remain bullish and he continues to expect end of year gains. "The Santa Claus rally will be an important (thing to watch for,) he says. "That's the last 5 days of the year and the first 2 days of the new year. If we don't get a 1-2% gain as we normally do that week, only then will I start to become concerned."

What do you think? We want to know!

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Trader disclosure: On Dec. 19, 2011, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s "Fast Money" were owned by the "Fast Money" traders: Adami owns AGU; Adami owns MSFT; Adami owns NUE; Adami owns BTU; Adami owns C; Adami owns GS; Adami owns INTC; Grasso owns ASTM; Grasso owns AVAV; Grasso owns BA; Grasso owns D; Grasso owns LIT; Grasso owns MHY; Grasso owns PFE; Grasso owns PRST; Grasso owns S; Grasso owns XLU

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