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Santa Claus/Year-End Rally?

The fears of the spread of the Omicron variant leading to another lock-down continue to dominate headline news. Concerns about inflation and the Fed tapering program/rate hikes also weigh in the mindsets of investors. The fate of the Build Back Better spending bill is up in the air as it remains stalled in Congress.


Although the past year has been anything but usual, the U.S. stock market has been resilient. The S&P 500 Index (4,649.23) has gained 82.23 points or 1.8% for the month, surpassing the 0.8% average gains of the past twenty December. SPX has also appreciated an astonishing 893.16 points or 23.78% so far this year.


With less than a week and a half left before the end of the year, is Tuesday's price action the start of the widely anticipated but late Santa Claus rally?


Trading will be abbreviated this week ahead of the Christmas holiday. Expect liquidity to dry up toward the end of the week as traders leave for the long weekend. Lack of liquidity will increase market volatility, leading to either the next rally or selling. Major stock indexes must hold up through Thursday to signal a year-end rally.


As painful as trading was, many stocks, sectors, and major markets may be putting in near-term panic bottoms. In addition to maintaining pivotal supports over the past week, bullish daily island reversals are visible across stock indexes and sectors. An island reversal is a short-term reversal that consists of two overlapping gaps, namely an exhaustion gap followed by a breakaway gap. The pattern implies a change from a bearish to a bullish trend, at least from a near-term perspective.


Major markets with bullish reversal patterns include SPY, DIA, and MDY. S&P sectors with daily bullish reversals are XLB, XLE, XLF, and XLI.


If the reversal patterns hold up by the end of the week, this can lead to professional money managers deploying funds as part of their year-end window dressing strategies leading to another year-end rally. On the other hand, below the island reversal low can also trigger a correction, deep correction, or worst, a bear market decline.


Source: Courtesy of StockCharts.com

Source: Courtesy of StockCharts.com

Source: Courtesy of StockCharts.com


Source: Courtesy of StockCharts.com

Source: Courtesy of StockCharts.com

Source: Courtesy of StockCharts.com

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