Technical Analysis
'Santa Claus' Rally in Jeopardy
By Jim Wyckoff
Street.com contributor
12/7/2006 7:22 AM EST
The U.S. stock market bulls are heading into the end of the year with a swagger. The major stock indices (Dow and S&P 500) have hit fresh multiyear highs, as it appears the Federal Reserve has dialed in a monetary policy that's not too hawkish to squelch U.S. economic growth. And for the icing on the cake, traders now await the seasonal "Santa Claus" rally that tends to occur near the very end of the year or very early in the next.
There's little argument that U.S. stock indices are in a solidly bullish technical phase at present, as uptrends are firmly in place on the charts. However, there are a few compelling clues that suggest a healthy downside "correction" may be just over the horizon.
Veteran stock market watchers have realized the U.S. stock indices have been trading in a contrary fashion for several months. The "sell in May and go away" trading adage went awry this year, as stock indices began solid uptrends in mid-June that remain firmly in place into December.
Stock market bears who awaited what they assumed would be summertime doldrums and a sideways trading range instead saw a solid rally during July and August. Bears then looked to the months of September and October, which have been historically unkind to the bulls. Again, they were disappointed. Stock indices marched steadily higher through September and October, with nary a decent downside "correction."
If the recent contrary trading action in the stock indices continues, those stock market bulls expecting still more upside from the seasonal Santa Claus rally are going to instead receive a lump of coal.
There are also technical signals suggesting the stock indices are due for corrective pullbacks soon. The Relative Strength Index (RSI) overlaid on the weekly charts for the S&P 500 futures and the Dow Jones Industrial Average shows readings that are into technically overbought territory (above 70.00). An examination of recent price history does show that when RSI does move above 70.00 on the weekly charts for these indices, they do experience, at the least, a significant downside price "correction" shortly thereafter.
'Santa Claus' Rally in Jeopardy
By Jim Wyckoff
Street.com contributor
12/7/2006 7:22 AM EST
The U.S. stock market bulls are heading into the end of the year with a swagger. The major stock indices (Dow and S&P 500) have hit fresh multiyear highs, as it appears the Federal Reserve has dialed in a monetary policy that's not too hawkish to squelch U.S. economic growth. And for the icing on the cake, traders now await the seasonal "Santa Claus" rally that tends to occur near the very end of the year or very early in the next.
There's little argument that U.S. stock indices are in a solidly bullish technical phase at present, as uptrends are firmly in place on the charts. However, there are a few compelling clues that suggest a healthy downside "correction" may be just over the horizon.
Veteran stock market watchers have realized the U.S. stock indices have been trading in a contrary fashion for several months. The "sell in May and go away" trading adage went awry this year, as stock indices began solid uptrends in mid-June that remain firmly in place into December.
Stock market bears who awaited what they assumed would be summertime doldrums and a sideways trading range instead saw a solid rally during July and August. Bears then looked to the months of September and October, which have been historically unkind to the bulls. Again, they were disappointed. Stock indices marched steadily higher through September and October, with nary a decent downside "correction."
If the recent contrary trading action in the stock indices continues, those stock market bulls expecting still more upside from the seasonal Santa Claus rally are going to instead receive a lump of coal.
There are also technical signals suggesting the stock indices are due for corrective pullbacks soon. The Relative Strength Index (RSI) overlaid on the weekly charts for the S&P 500 futures and the Dow Jones Industrial Average shows readings that are into technically overbought territory (above 70.00). An examination of recent price history does show that when RSI does move above 70.00 on the weekly charts for these indices, they do experience, at the least, a significant downside price "correction" shortly thereafter.