Many stock market traders have at least heard of the “Santa Claus Rally,” or the historical tendency for indices to rally in late December.
Interestingly, many traders aren’t familiar with the origins or exact definition of the famed Santa Claus Rally (SCR): According to Jeffery Hirsch’s Stock Trader’s Almanac, the official Santa Claus Rally specifically covers the last five trading days in December and the first two trading days in January.
Over the last have century, the stock market has risen in roughly 75% of those periods, with an average gain of around 1.4%. Explanations for this seasonal tendency run the gamut from tax considerations to general optimism to pure coincidence, but it’s an interesting historical anomaly regardless.
The upshot of that long technical introduction is that Tuesday marked the last day of the SCR period, and as of writing, the Dow Jones Industrial Average was trading higher by 2.5% over the last seven trading days, marking a stronger-than-average holiday period and potentially setting the tone for a strong 2022 in the equity market.
In more traditional technical analysis parlance, Tuesday's rally also prompted a big breakout to record highs in the most widely-followed US index. As the chart below shows, the DJIA (Wall Street CFD) broke above its previous highs in the 36,600 area, a level which also represented the 161.8% Fibonacci extension of the COVID collapse from Q1 2020:
Source: Tradingview, StoneX
Of course, any breakout can ultimately fail, so more conservative bulls may want to wait for a confirmed close or two above the key 36,600 level, but the price action to start the year was undoubtedly bullish.
Looking ahead, the next level to watch will be near 37,200, which marks the confluence of 161.8% Fibonacci extensions (not shown) of the November and December dips, followed by round numbers like 38,000, 39,000, or even 40,000 if bulls can keep up the momentum through the first half of the year.