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December 28, 2021

How To Trade The Santa Clause Rally

Frank Cabibi

Here is some very important information you should know during this time of year. As we are coming to the end of this year, it's important to be mindful during this volatile time. Check out what we have to say in this article about the best strategy going into the New Year.

The market tends to bring us heavy activity as banks and institutions begin to adjust their balance sheets and checkbooks for the New Year. Similar to the forex markets, money shifts in and out of positions, but in a much faster way. So, big swings are more likely to happen in a short period of time, and we should keep in mind the potential risks and opportunities that can come our way. Having said that, small lots and less risk tolerance are good traits to carry forward through the rally.

Our outlook

The market's meteoric rise of 6% in a matter of eight trading days would seem unprecedented at first glance, but euphoric upsides have happened before according to historical data mentioned in this MarketWatch article here. And they have usually ended with a January that gives back most of the gains made from the rally. However, that is not to say that there are no upside opportunities left. In fact, we may see another big run in the New Year even though historical trends say that the rally won't last for long. An bullish argument is that interest rates aren't necessarily the main drivers of monetary shifts from stocks to bonds, or stocks to gold, but earnings plays one of the key roles in looking where to put your money.

https://ycharts.com/indicators/sp_500_eps

This chart measures the overall EPS growth for the past 3 years for all the stocks in the S&P 500 index. Interest rates will definitely influence the market, but it won't necessarily cause an overall bear market that investors are concerned about. If we can get consistent, long term earnings growth to continue in the broader market like it has been since Q1 of 2020, then rising interest rates shouldn't be as big of an issue. This argument was made by Chief Investment Strategest, Michael Arone in this Yahoo article.

So, consider both factors of EPS performance and interest rates going into your trading plan.

Trade Setups

SPX500

The index is starting to pull back here on the 4H chart as a bearish signal is forming on the latest candle. There is no clear support on this timeframe until the previous all-time highs around $4751, so it would be highly speculative to trade the SPX off no real technical indicator at these current highs.

NAS100

The NASDAQ found resistance at the all-time highs and began to pull back as well. However, there is very strong support just below the current price around a multi-level top that was broken in yesterday's trading session around $16,427. Should price sink lower, it can find a very clean long entry setups at that level of support.

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