Powell crash over! Santa rally next?
SUMMARY: This is going to be a very short market outlook as we have a compressed trading week, and there are no earnings and market moving events lined up for next week.
Before we get into the charts, I want to summarize what I feel about the situation right now.
- Powell’s rug pull caused a 73% spike in VIX in a single day. VIX is getting crushed and rapidly dropping. We are looking for it drop below 16 to confirm continued bullish action. Unless that happens, there is always a chance of things turning ugly. So, if you are buying the dip, don’t get too aggressive yet.
- All indices have put in a nice bullish engulfing candle which usually marks the end of bearish action.
- The signs of a Santa Rally are all there as long as markets open green on Monday. But all is not roses and rainbows. TNX and $DXY are causing me some worry, because if they continue to rise, we could see a nasty January even if there is a santa rally next week.
Dow Jones analysis
Even though we saw a massive bullish engulfing candle on Dow Jones (and pretty much all other indices), the fact remains that Dow just ended with 3 straight losing weeks marking a 6.6% pullback.
Well, the good news is that Friday’s bullish engulfing candle could mark the end to this drop. Another area of confluence here is that the post election gap is now officially filled. i.e we have lost all post election gains and are at a nice support zone for Dow to start recovering here.
If markets open higher on Monday and are able to hold on to the gains, we will get the so called ‘Santa Rally’ next week. Santa rallies can usually last into the first week of January. Â
Dow Jones analysis – Fib Retracements and the Trump Gap Fill
1) Trump rally started at that $423 price level. That gap is now fully filled which provides a nice support zone for a bounce
2) Fib 61.8% retracement is considered a very strong level of support. But in this case, Powell’s hawkish rate cut caused DIA to blow past that and down to 78.6%.
3) The bullish engulfing candle has sent us back above 61.8% retracement and we need to hold that level for this rally to continue. If that level fails to hold next week, this rally is in BIG TROUBLE and things will get ugly pretty quick.
Are there any warning signs for late January/February?
Friday’s price action is very encouraging and so is the fact that VIX after spiking upto 28 is now getting crushed. Remember that 16 is the safe area that we use for going aggressively bullish. Although I did take 4 call spreads on Friday in an early attempt to ‘buy the dip’. But for me to keep building on my bullish position, I will have to wait for VIX to drop below that 16 level and stay there.Â
TNX and $DXY are not looking good
The bullish reversal candle and a dropping VIX are good indications, and may very well give us that end of the year rally. However, there are some troubling signs on the horizon. And they are TNX (10 year treasury yields) and DXY (U.S. Dollar Index). If you believe in seasonality, you must remember that February usually brings a lot of nasty corrections with it. But if TNX and $DXY keep rising like this, I will start getting worried about things turning ugly as soon as Jan 15th.
Watch these two monsters closely as we will need both of them to start pulling back for a nice healthy bull run. Also note that since I trade 30 days out, my expirations are almost about to touch February. I will start dropping trading volume for February and leave room for hedging in case we get that Feb correction.
Macro Events – Nice! Nothing at all.
Except the usual jobless claims, we really have nothing going on next week which bodes well for a Santa rally situation. Markets close early on Tuesday and remain closed on Wednesday.
