Here’s What Causes the Santa Claus Rally

December 28, 2021

Posted 9:30 AM ET – This is a seller’s boycott and we often see this in the last trading week of the year. Asset Managers are riding the wave and they are not offering a lot of stock. With institutions on the sidelines, bullish speculators lean on seasonal strength and they drive prices higher on light volume. Wall Street gets paid based on performance and based on assets under management. When the market finishes on its high of the year, bonus checks are fat. There is a disincentive for Asset Managers to sell and I believe this explains the anomaly (Santa Claus Rally).

The Fed also joins the party and it is rare to see them tighten into year end. They want investors to be happy and they want them spending money.

Unfortunately, these light volume gains can easily be stripped away when normal trading resumes in the New Year and you should temper your excitement.

The virus is having less of a market impact than it did a year ago. Omnicron is less fatal and the self-quarantine time has been reduced from 10 days to 5 days in many countries. There is also evidence that people who have contracted Omnicron are more immune to the Delta variant.

Swing traders; manage your OTM bullish put spreads. This strategy was selected because it gives the trade breathing room (this came in handy two weeks ago). Time decay is working its magic and your positions should be well out of the money. Your next opportunity will come on the next market drop.

Day traders should take a deep breath. We want to make sure the opening gap holds. There is no reason to buy the open. Gaps up to an all-time high have been faded and we need to make sure this is not a gap reversal. If the gap fills easily in the first 30 minutes, that is a sign of heavy selling. If the market forms support (compressed candles, tails under body, bullish hammer, bullish engulf) before the gap is filled it will be a sign that buyers are engaged. Pick your entries carefully and error on the side of NOT trading. Use 1OP as your guide as I outlined in the video this morning.

Support is at SPY $473.50 and $477. Resistance is at $482
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