Common themes for year-end trading include low volume and Santa Claus Rally. It appears the former is delivering while the latter has yet to materialize. Perhaps I should be looking at the NOAA web site instead of my charts?

Before taking a look at current conditions, I thought I’d see just how prevalent a Santa Clause Rally is. This is answered by assuming the rally period is 1-1/2 trading days before the holiday and 3 trading days after it, and then determining how often the market is higher. Over the last 40 years (1968 – 2007) this is how the Santa Rally fared:

Now I’m a very short-term trader with a bearish view (and some puts) given SPY’s location in its regression channel and other factors discussed below. But come on Santa baby, what do ‘ya got for the traders in 2008? How about a little rally? Just in case Santa does rally, I did buy a few hundred shares of the ultra-QQQQ today (QLD) with a stop at 28.50 using QQQQ prices. I use the primary exchange traded fund [ETF] to identify support and resistance points for the ultra ETFs I trade.

Current Conditions

The first figure displays a weekly arithmetic chart of SPY, the S&P 500^TM Depository Receipt (SPDR) that serves as a broad market proxy for the US equity markets.

Chart Specifications:  The SPY weekly bar chart includes the 4-week (pink), 10-week (magenta) and 40-week (blue) Exponential Moving Averages [EMAs] which are lagging indicators that translate to a 20-day, 50-day and 200-day EMA on a daily chart. Two active linear regression channels are also included to assess trend conditions. These include extended channels drawn using the following dates: 1/4/02 – 1/2/04 (longer-term, aqua channel) and 10/6/08 – 12/5/08 (shorter-term, red channel … corrected).

Two momentum indicators on the chart include MACD (12, 26, 9 periods) and RSI (14-period), with its bullish range (green) and bearish range (red) (see Optionetics.com Analytical Toolbox article series on Andrew Cardwell for more information on these ranges).

All three EMAs are declining, which confirm a long-term, intermediate-term and short-term downward trend in price. As of Tuesday’s close (86.16), price was below the 4-week EMA. Bullish momentum has waned on the weekly chart with a flattening MACD and moderately declining RSI. It may use the simple moving average [SMA] added as support, or it might not. Given the price trend and momentum picture, a move to the middle regression line at approximately 84.46 is currently favored, but the week has yet to complete.

 

Figure 1: Weekly Arithmetic Bar Chart for SPY with Momentum

Take a look at volume on your charts and note the impact of lighter trading … this will be more pronounced after Friday’s close.

Shorter-Term View

Figure 2 provides a daily SPY chart with a 20-day, 50-day and 200-day EMA. Note the change in price position relative to the short-term regression channel with this view. The price trends are also down using the daily chart, with short-term momentum clearly more bearish. An initial support area at 80.58 appears here (middle regression line of long-term channel) and approximately 78.50 (middle regression channel of short-term channel). Consider monitoring momentum as SPY moves to either of these price levels.

 

Figure 2: Daily Arithmetic Bar Chart for SPY with Momentum

Switching over to a daily view of QQQQ, note the same chart specifications are in place with one difference; the long-term regression channel that is active (aqua) was drawn from 12/7/2001 – 1/16/2004. The short-term active regression channel is drawn using the same dates as SPY (10/6/08 – 12/5/08, note correction above).

QQQQ remains at its upper channel line, just below the 20-day EMA and slightly lower than the middle regression line of the long-term channel (29.92). Momentum is slightly less bearish when viewing RSI and the picture as a whole is slightly less clear. Unfortunately volume data will not provide a lot of help this week.

 

Figure 3: Daily Arithmetic Bar Chart for QQQQ with Momentum 

The market giveth and the market taketh away. May your traders skills lead to it giveth-ing more in 2009 through solid money management and taketh-ing less through solid risk management.

Happy Holidays.

To access other articles written by Clare White, please click here.

Clare White
Contributing Writer and Options Strategist
Optionetics.com ~ Your Options Education Site
Questions for Clare? Visit the Optionetics.com Discussion Board

Common themes for year-end trading include low volume and Santa Claus Rally. It appears the former is delivering while the latter has yet to materialize…