S amp P 500 Santa Rally still elusive as stocks oil tumble

After a positive start, European stocks and US index futures have given up their earlier gains, potentially setting the stage for another ugly day on Wall Street. Unsurprisingly, crude oil is also getting smashed once again after last week’s renewed selling that was triggered first and foremost by the OPEC removing its production quota and then a couple of bearish oil reports from the cartel itself and also the International Energy Agency, with the latter now expecting the excess supply surplus to be eliminated not before the end of 2016.  Both oil contracts are now not too far off their 2008 lows and closer to finding a base. For now, though, traders dislike energy and commodity stocks and prefer to hold defensives. As such, the major global indices could fall further before we see a potential bounce, which could happen if, for example, the Fed decides to surprise on Wednesday by keeping its policy unchanged: an unlikely event. Nevertheless, December is usually a positive month for the US stock markets, possibly because of the effect of ‘window dressing’. This is when money managers buy stocks that have been trending strongly in order to show off to their clients that they are holding the ‘correct’ type of stocks. Although this December is looking anything but strong, we are only at mid-way point. So there is still plenty of time, for the so-far elusive Santa Clause rally to start.

However, this time it could well be different. With junk bonds and oil, for example, plunging, these could have severe repercussions for the wider financial markets, but perhaps not akin to the sub-prime mortgage disaster which led to the great financial crisis of 2007-08. The markets, especially in the US, do appear fatigued anyway after a 6-year rally, so at the very least we could see a sizeable correction, though some would argue stocks have the momentum for one final leg up before topping out.

We last looked at the long-term chart of the S&P 500 on Thursday of last week and suggested a correction was on the way (for details see “S&P’s long-term chart points to potential correction”). Friday’s sell-off meant the index had endured its worst weekly performance since mid-August and took out some further key support levels, including the 2040-45 range, which could be the new resistance area going forward. But in overnight trading, the index future did manage to bounce back noticeably, finding good support from another key area between 2000 and 2008. As well as previous support, this area also corresponds with the 38.2% Fibonacci retracement against the August low.

Although the index has since given back most of the overnight gains, tracking an intra-day reversal in Europe, it was still holding above that 2000-8 support area at the time of this writing. Thus, there is still the small possibility we may see a firmer open on Wall Street later this afternoon.

However and in the more likely event if the S&P breaks through the 2000 support, things could get really ugly. The next potential stop for the index could be around 1942, which is the 61.8% Fibonacci retracement level of the rally from the August low. If we get below these levels, then we will need to zoom out a little and look at the weekly chart to find the next potential downside targets. On this time frame, there is a medium-term bullish trend line coming in somewhere around 1925/30 (depending on the speed of the potential drop). Then there is a horizontal support level around 1890, which comes in about 56 points above the August low at 1834. The central bullish trend, which has been established since the markets bottomed out in March 2009, is some distance below, around 1800.