Ah the last two weeks of 2023. The Christmas to New Years holiday trading tends to be quiet in terms of economic data and corporate press releases. Most institutional traders are on holidays. Retail traders have nothing better to do.

Because of the lower liquidity, these few weeks tend to see either range bound price action, and/or major moves due to the lower liquidity. If you are one who trades currencies, commodities and CFDs, you are familiar with the type of price action I am talking about.

In Wall Street terms, December is when we see the Santa Claus Rally. And boy, it looks like Santa came early this year thanks to the Federal Reserve.

Here is how investopedia defines the Santa Claus Rally:

A Santa Claus rally is the sustained increase in the stock market that occurs around the Christmas holiday on Dec. 25. Most estimate these rallies happen in the week leading up to the Christmas holiday, while others see trends that begin Christmas Day through Jan. 2.

Theories that explain a Santa Claus rally include end-of-year tax considerations, a general feeling of optimism and seasonal happiness on Wall Street, and investing holiday bonuses. Some institutional investors settle their books and vacation during this time of year, leaving the market to retail investors, who tend to be more bullish toward the market.

The first two trading days in January are included in the rally. Investors may buy stocks in anticipation of the rise in stock prices during January, otherwise known as the January Effect.

Good points and I bolded the important bit about institutional traders on holiday and retail traders sticking around. Again, the lower liquidity provides major and sometimes, volatile, moves.

If you are a retail trader looking to trade the next few weeks, just be vigilant. Follow your trading plan even when you see random price jumps. Be sure to include stop-losses. And yes, it would suck to be stopped out by Christmas.

Let’s look at a bunch of charts and come up with some game plan for the next two weeks.

Equities

Stock Markets are on fire. The Santa Claus Rally came early.

US Stock Markets have seen 9 green days in a row. It will be 10 if today’s close also remains green. Truly rally mode.

The reason? The Federal Reserve and Fed Presidents penciling in three rate cuts next year, and more in 2025. The market sees this as the soft landing being successful and rates topping here. And money is running into stock markets.

The Dow Jones and the Nasdaq have printed new all time record highs. The S&P 500 has yet to join the party. The Dow Jones and the Nasdaq are in breakout technical mode. After multiple green days, I would not chase. Wait for a pullback and then wait for the lower high to be taken out on the intraday lower timeframes.

Or alternatively, and this is more likely, we will eventually see a retracement back to the breakout zone before continuing the uptrend. This is just typical breakout price action.

I am personally watching the small cap index, the Russell 2000. It has a lot of catching up to do if this index is going to print new all time record highs. Perhaps indicating the opportunity in American small caps if the major three US indexes are to rally hard in 2024.

The Russell is looking to confirm a major breakout by the end of the day. This could lead to further rallies during the Holiday period.

Here are a few other charts that are pointing to higher markets:

With the markets seeing the top of interest rates, bond yields have fallen and are in a new downtrend with multiple lower highs and lower lows. This will be stock market positive. If by any chance, yields reverse and move higher, then this could put a halt in market bullishness. But again, this would mean taking out the current lower high. Yields can pop without breaking the current lower high and this would just be a corrective move in a downtrend.

With a dovish Fed, the US Dollar is also falling. Perhaps a move to the 100 zone is on target for the medium term. The Dollar in tandem with bond yields falling is stock market positive.

…And there are some commodity bulls who are celebrating the falling Dollar.

Commodities

Gold and Silver have been on a move. Gold actually printed new all time record highs against the Dollar before pulling back. The bounce at the $1990 zone coincided with the Fed announcement. The takeaway here is simple: both gold and silver are in an uptrend with higher lows and higher highs.

The resistance zone for gold is $2075 and for silver it is $25. Both of these levels can be tested in the next few weeks. With lower liquidity, it is hard to say if a breakout can occur. But if they do, expect pretty volatile follow through given that every retail trader will play the breakout once confirmed.

And finally, oil.

Oil recently tested the key support zone around $66. Technically, oil has taken out the previous lower high just below $72. And one can argue has closed above current resistance. Things could be turning around for oil, especially if the markets expect the economy will be relatively strong as the Fed and other central banks accomplish their soft landing with success.

I will be watching the price action on oil given the wedge/triangle pattern I have drawn. Price is nicely contained between both of these trend lines. If we see a daily candle close above this trendline, then we have a breakout pattern. When you add the other two bullish confluences I mentioned, we could see oil pop up to $80. If so, this would be interesting when it comes to inflation and inflation expectations. Depending on the move in oil, market participants may have to reconsider what the Fed may do who are technically still data dependent and have adopted a pragmatic approach.

Happy Holidays and Happy Trading.