The SPY Stages A Rebound: Is This Finally The Beginning Of The Santa Claus Rally?

The SPDR S&P 500 SPY staged a reversal to the upside beginning immediately after the European markets closed at 11:30 a.m. EST. Even though the SPY gapped up 0.80% over Monday’s close, the price action prior to the close of the European markets was shaky, which allowed the SPY to almost fill the lower gap.

The rapid spread of the omicron COVID-19 variant, the Federal Reserve’s Dec. 15 decision to double its taper of monthly bond purchases and the Dec. 17 monthly options expiry have so far prevented a substantial “Santa Claus rally” opportunity for bullish traders. Instead, the SPY has been highly volatile, often whipsawing from one direction to another from day-to-day.

In some years, the expected rally comes later than others and can run past Dec. 25 into the new year. If Tuesday’s bullish price action is recognized, the rally could be beginning now, although more conservative traders may want to wait for the SPY to recapture a key level.

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The SPY Chart: The SPY attempted to make a run into blue skies on Dec. 16 but instead came close to printing a bearish double top at the previous Nov. 22 all-time high of $473.54 and fell 4.6% between that date and Monday to hit a low of $451.14. There were dip buyers at that level, however, and the SPY closed Monday’s session by printing a reversal hammer candlestick on the daily chart.

On Tuesday, the SPY reacted to the pattern and by midafternoon was shooting up about 1.62% higher at one point to try to gain a key level at the eight-day exponential moving average. If the SPY is able to regain the level, it will give bullish traders more confidence the “Santa Claus rally’ is on this year.

If the SPY can close the trading day near its high-of-day price, it will print another large hammer candlestick, which could indicate higher prices may come again on Wednesday. Closing over the 50-day simple moving average near the $460 level would at least prove the longer-term sentiment has become bullish.

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• Bulls want to see big bullish volume come in late Tuesday or on Wednesday to push the SPY up over the eight-day EMA, which will give the ETF room to recapture a support and resistance level at $463.75. Above that level there is further resistance at $467.15.
• Bears want to see the SPY continue to reject the eight-day EMA, which could cause the price action on Tuesday to confirm the higher low of a potential downtrend. There is support below at $458.49 and $454.05.

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