We’re approaching the time of year where traders look for a Santa Claus rally, which is officially the last 5 trading days of the year and the first 2 of January, although most seem to consider it for all of December. As of now the major stock indices are down for the month.
Considering the extent of the prior rally and bullish sentiment, which has reached extreme levels, it’s quite possible that there will be no Santa rally this year, something that does not bode well for stocks in 2014 as historically bear markets follow years in which the Santa rally has failed to materialize. More importantly though than this popular seasonal indicator is the proximity to support that stock indices find themselves at, discussed in more detail below.
The focus for many this week though will be the 2 day FOMC meeting, and the seemingly endless debate about whether the FED will begin tapering its Bond purchases from this meeting or further out next year. Stocks will be looking for a delay in tapering, which if that happens may lead to a rally.
From last week on the S&P 500 “It is noticeable that the past two weeks’ gains have been extremely minimal so the rally is quite possibly tiring. There are also some momentum divergences; so how much upside the current run has remains to be seen.” As expected the S&P did continue with weakness sufficient to end the trend but has as yet not fallen too far, so a return back to new all time highs can as yet not be ruled out. RSI remains in the bull market support zone, as does the Dax discussed below, so the week ahead may be key to stock market direction, not just from the Fed decision and subsequent market reaction, but also from a technical perspective.
The Dax has fallen to a shelf of support around the 9000 level, which will likely be tested this week. Should there be weakness in other stock markets this level may well be broken with plenty of room for a decline below this support shelf. Last week we wrote that the RSI was still in the bull market support range of 40-50. This week it fell to 40.9. A break below 40 on the RSI will give further weight to a continued decline for the Dax. In summary the price action seen early next week will very likely be critical for this market.
As trend followers we are only interested in price action and not on news events and debates about what the Fed may or may not do, or trying to predict the markets’ subsequent reaction. Price action is king and the rest is commentary.
Crude oil appears to have run out of steam as expected with RSI remaining in the 50/60 bear market resistance range, which continues to suggest that $100 will not be seen yet. The trend is still down for crude.
Metals initially spiked higher this week but were unable to continue higher and have since turned lower once more, possibly heading once more to breakdowns to new lows. The lows of the year in both gold and silver are still in range and if they are not reached this year, will likely be in 2014.
The dollar index fell below 80 for the first time since late October mid-week but pushed back above 80 come Friday’s close. The trend is clearly down but as we wrote last week, whether we see a move lower to test the year’s low at 7906 will largely be dependent on EUR/USD and specifically whether it can get back to the late October high.
The dollar finally reached and slightly exceeded our target against the Yen, to reach its highest level since 2008. However there is a momentum/price divergence and also a doji printed on the weekly charts, so we may see the market take a pause at this level before resuming the rally further out. A close above last week’s high would be bullish.
Interest rate futures
Interest rate futures continue to drift sideways overall, presumably looking to take their cue from the FED meeting this week. Increased volatility can be expected in this sector during the coming week, but the trend remains down for the longer-term markets in the sector, but still up for the 5 year T note and 3 month Eurodollar and Euribor.