Is Santa Rally even real?

We have a short trading week ahead of us. Just 4 trading days and no binary events lined up either. If the markets want to pick a short-term direction, here is the chance. 

What about Santa Rally? There is no explanation for a Santa Rally, but if it happens, it starts in the last week of December going into the first 2 trading days of January. Here is my take on it. I can’t make my trading decisions on a rally that lasts 7 days and has an inconsistent coin flip type track record.

What I can tell you is that my 12/30 expiration is looking pretty good already with 2 bear puts already closed, and 1 projected winner, so it shouldn’t affect me much.   It will cause some grief for 1/6 expiry if we start rallying too much and I will have to manage 1/6 based on what happens next week. There are zero fundamental reasons for these markets to go up right now (and earnings are 2 weeks away anyway), so any bounce should be short-lived. 

SPY 3Y weekly – The 30K foot view looks horrible!

Let us zoom out to a 3Y weekly chart. Jan 1st marks the beginning of this bear market. After that, all we have seen is lower highs, and lower lows repeating every two months. We just got rejected on 11/28 at the last peak high. You are in a bear market until you are not, so I don’t know what happens next, but that chart doesn’t look too convincing to me. If we can’t get a Santa rally next week, I am expecting SPY to drop anywhere between 330-350 area before we get the next relief rally.

DOW 6M daily – Stuck in a sideways, chop-fest

When all the indices popped out of the “squeeze” on 12/15, I was expecting an explosive move to the downside. However, DOW stocks have shown a lot of resilience and DOW seems stuck in a sideways, Santa/No-Santa chop fest for now. 

Nasdaq 6M daily – Looking nasty!

QQQ is playing out a squeeze like it is supposed to. The squeeze fired in 12/15 and QQQ has been dumping ever since. Based on how squeezes fire, the downside target is 260 for QQQ before we see any signs of relief. It all depends on what next week brings. 

Market moving events next week

It is a short trading week as U.S. markets are closed on Monday. There are also no binary events scheduled for next week. What that means is if Santa has a chance, this is it. If Santa can’t pull it off next week, brace for impact as the downside targets I mentioned earlier will come into play. The targets are SPY 365, QQQ 260, DIA 315-320 range.

Earnings 

No earnings and no binary events next week. Earnings will start again on Friday, January 13th. So enjoy your downtime until then.

Macro Analysis (VIX)

VIX has been acting really weird. It has been crushed down to 20 which would indicate no fear in the markets. But we are not seeing any rally either. In fact, tech sector has been dumping hard and yet there is no reflection of that on VIX. I am disregarding VIX for now until it plays catch up. 

Spread Tracker 

  • 12/23 EXPIRY – Although my 12/23 expiry turned out pretty decent, I was disappointed by the chop fest that we have witnessed recently. I was forced to close out 3 full winners for partial profits. But hey! profit is a profit. No complaints about that.
  • 12/30 EXPIRY – 12/30 is looking pretty good so far and 2 bear puts out of 4 have already closed for full profit.  If markets continue to stay where they are or dump, I will walk away with some nice profits. BA has been a trouble spot so if we get a Santa Rally, that will be the first one to go OTM and I will have to close it out early.
  • 1/6 EXPIRY – So far looking great, but if we get a Santa Rally, this expiry will cause some pain as I am bear heavy. I have zero confidence in any rallies unless we get good news at the macro-economic(Inflation) or geopolitical level (Putin/Ukraine). I will continue to lean bearish until then.
  • 1/13 EXPIRY –I don’t have a lot of trades for this expiry, however, all of them are bearish. So, any Santa Rally will cause me grief. The expiry is too far to manage right now so I will revisit it at the end of the week.   

Key Takeaways

  • Santa Rally or BUST? Next week will tell
  • No binary events or earnings next week. Bad PCE numbers take us down to new yearly lows.
  • A short trading week.
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