The Santa Claus Rally takes place in the final week of December – and sometimes carries on for a few days after. It was first discovered by Yale Hirsch, author of Stock Traders Almanac. This rally caps the seasonal period of strength in the last half of December.
After December, we often get the small capped effect – where prior smaller capped losers rally from oversold conditions after tax loss selling. This year promises to spotlight energy and commodity based small caps in the small capped rally. It might even carry some of the larger capped energy plays with it. Trading oversold bounces can be appropriate for shorter termed traders and speculators.
As you will see on the daily S&P500 chart, there are a few signs to suggest a temporary pause before all of the seasonal fun begins. Note the diverging/ declining money flow oscillator (top pane) – its a short termed indicator suggesting potential profit taking by market players. Note also the diverging RSI indicator, marked by my notation on the chart. We also have a bearish crossover on the MACD indicator, circled.
Despite these short termed selloff signals – the bigger picture looks good. The S&P took out its prior high recently, and the cumulative money flow indicator (bottom pane) is pointing up and steady. Moving averages are pointing the right way, and the market isn’t too much over its 200 day line, suggesting it’s not at all crazy-overbought.
Any correction in the coming days might be a good opportunity to acquire stocks you’ve been eyeing for a while. I don’t expect much downside if we do get a pullback – so be prepared to act quickly if and when such an opportunity occurs.