A Santa Claus Rally Is Technically Possible, But Only If This Happens First

A Santa Claus Rally Is Technically Possible, But Only If This Happens First
Jonathan Hobbs, CFA

over 1 year ago1 min

Mentioned in story

Technical traders care less about interest rates and economic data, and more about what the actual price of an investment is doing. So here’s what they’d want to see to turn bullish on US stocks going into the end of the year – and help give the market a “Santa Claus rally”.

Each red or green bar represents one week of movement in the S&P 500. As you can see, the index is trending downward (white line). But with each lower low on the S&P 500 since May, the relative strength index (RSI, blue line) – a technical indicator that measures the relative strength of buyers and sellers – is making higher lows. It’s an important signal: the weekly RSI is worked out using the average gains of up weeks over the average losses of down weeks for the past 14 weeks. And when the average gains start to outmuscle the average losses, it goes up. Basically, it’s saying that buyers are slowly getting stronger than sellers – even though the price is still trending down. Technical analysts call this a bullish divergence, and it can signal an upcoming rally.

But don’t deck the halls just yet: this bullish divergence is only a possibility right now. We’ll want to see the index actually finish a week above last week’s “spike” high – at around 3,713 points – to be able to confirm the signal. So do keep an eye on that level. But if we don’t see it this week: all’s not lost. Keep tracking the all-important 200-week moving average (yellow line): if the index can stay above it, Santa might still be comin’ to town.

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