Will December Bring A 'Santa Claus Rally' For The SPY? Here's What The Chart Says

The SPDR S&P 500 SPY was in need of a pullback after a massive 11% rally between Oct. 4 and Nov. 22 brought the ETF to a new all-time high of $473.54. The decline began to take place as mostly sideways consolidation on Nov. 23 and Nov. 24, but on Nov. 26 news of a new COVID-19 variant, omicron, dropped the SPY over 2% off the previous day’s close.

The SPY then began to recover on Monday, rallying 1.1% but on Tuesday Federal Reserve chairman Jerome Powell spooked the markets while giving testimony in front of the U.S. Senate’s banking committee. Powell spoke about the Fed’s plans to accelerate the tapering of monthly asset purchases and its uncertainty surrounding inflation.

On Wednesday, the SPY opened higher after payroll processor ADP released a report showing private sector employment rose by 534,000 compared to the 525,000 economists had estimated. The better-than-expected report may not be enough to help the SPY buck the downtrend, however, which will be needed for the "Santa Claus rally" many traders expect going into the month of December.

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The SPY Chart: The price action since reaching its all-time high has settled the SPY into a consistent downtrend. The SPY has made a series of lower highs and lower lows with the most recent lower high printed on Monday at $466.56 and the most recent lower low set on Tuesday at the $455.56 mark.

On Tuesday, the SPY had a trading range of 1.88%, which demonstrated a high level of volatility in the markets. Due to the wide trading range, Wednesday’s price action could form an inside bar pattern to consolidate the large move lower. The inside bar pattern will be bearish in this case because the SPY was trading lower before forming the inside bar.

On the monthly chart, November’s candle is a shooting star, which may indicate December will be a bearish month. A shooting star candlestick is often found at the top of an uptrend and is a strong reversal indicator that can presage falling prices.

The last time the SPY printed a shooting star candlestick on the monthly chart was in January 2020 and over the following two months, the SPY fell more than 30% due to the onset of the pandemic, before bouncing back up beginning in April. It should be noted that the pattern will need to be confirmed by December’s candle, which makes it a lagging indicator and much could change throughout the month.

The SPY is trading below the eight-day and 21-day exponential moving averages (EMAs) but the eight-day EMA is trending above the 21-day, which indicates indecision. The ETF is trading above the 50-day simple moving average, however, which indicates longer-term sentiment is bullish.

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• Bulls want to see big bullish volume come in and break the SPY up from the inside bar pattern and then for continued momentum to drive the ETF up over Monday’s high-of-day, which would negate the downtrend. The SPY has resistance above at $463.75 and $467.15.
• Bears want to see big bearish volume come in and drop the SPY down from the inside bar pattern to confirm the downtrend is still intact. There is support below at $458.49 and $454.05.

Photo: Tima Miroshnichenko from Pexels