As we go into the close of 2020 and come into the holidays, the market historically looks to the sky for the Santa Rally. What is the Santa Rally? The Santa Rally is when the market typically trades higher going into the final few weeks of the year.
What’s the reason for the Santa Rally? There are a few different reasons this could be occurring. One of the main reasons: this time of year is typically when institutional traders are setting their books for the year before going on vacation around the market holidays. Market holidays in turn usually see lighter trading volume and will typically trade sideways to higher, especially if the trend prior to the holiday is bullish. Another reason of course is hinted at by the name “Santa Rally”, tis the season for gifts and gift shopping. The increased holiday shopping can have a positive effect for the market. In most years, all of this leads to the bullish move going into the end of the year. However, 2020 has been anything but normal. So the question remains, Santa, Where Are You? And have we been good enough to receive that Bull or should we anticipate coal?
One clue that could tell us the answers to these questions is what happened last month. This November has been one of the strongest months in years for the markets, and the Black Friday and Cyber Monday Sales seemed to be at all time highs. With this November having such strong moves when compared to Novembers in the past, Santa might have shown up a little early and this was the move we typically see for the end of the year. What technicals would potentially aid in this theory? Momentum on the Awesome Oscillator is getting back up towards the top of the axis on the Weekly and Monthly time frames and we are getting close to a Monthly Resistance level.
This doesn’t mean the price cannot break above and continue higher, especially with the rest of the indicators still favoring the upside, but it may cause the markets to take a bit of a pause before continuing the Bullish trend. That pause could come in December.
So what does this mean for us traders? It doesn’t mean that we have to throw in the towel and not trade in December (though staying in cash is also a valid trade idea) but it does mean that you may be more mindful of your capital risk when taking trade setups. Instead of jumping into Long Calls or Puts when playing a symbol directionally, consider doing Credit or Debit Vertical Spreads. Both of these strategies can greatly reduce your overall risk and don’t necessarily need as strong of an underlying point move to get towards their max profit potentials.
It also means that you may look at symbols that have a better probability of finding Santa to show up. ETSY and AMZN are both companies that benefit from the holiday shopping season. Both of their charts are also in nice bullish trend with long term signals that could show higher strength going into the start of next year.
By sticking with companies that find strength this time of year, waiting for the right setups, and doing a lower risk strategy, you can still find yourself taking profits for your account this month, even if Santa decided to take his own holiday.