Will it be Santa’s rally or Satan’s rally for the Nasdaq in December?

Market chart
Matt Simpson financial analyst
By :  ,  Market Analyst

The Nasdaq’s Santa’s rally has diminished over time, according to seasonality

Traditionally, stock market indices are expected to rally in December – a seasonal tendency known as ‘Santa's rally’. And that was generally the case for the Nasdaq 100 if we look back at the past 30 years, as it generated an average return of 0.7% in the month of December. Yet that positive expectancy has diminished in recent years, dropping down to 0.3% over the past 15 years, -0.6% over the past 10 and -1.3% over the past 5. Over the past 30-years the index has also closed lower 53.3% of the time.

20221221NDXseasonalityFX

These number paint a bleak picture for December overall, and makes us question why there’s so much hype behind Santa’s rally. Yet with that said, these are also blunt numbers which look at the month overall. And context also matters.

 

However, the Nasdaq has already seen a strong pullback this month

At the time of writing, the Nasdaq has fallen ~35% since its record set 13-months ago, it’s down nearly -8% month to date, and fallen nearly -10% over the last 5 days alone. Shorting the index is not a new idea, and most importantly Wall Street held above key support levels yesterday despite extreme volatility in yesterday’s Asia session dye to the BOJ’s policy tightening. If markets can’t drop on bad news, it can be a prelude to a rally.

 

 

There are some technical clues that a bounce (at the minimum) could be due

If we look at some technical indicators for the Nasdaq, there are some reasons to be hopeful of a countertrend bounce.

20221221nasdaqindicators

 

  • RSI (2) is oversold: I use this indicator for near-term sentiment, with 10 or below marking oversold and 90 or above marking overbought. Currently sis at its most oversold level since September of 3.8.
  • A-D line is positive: This simply indicator subtracts the daily number of declining stocks for, advancing stocks, for the New York stock exchange. Not only did the exchange see 134 more advancing stocks than declining yesterday, but the index twice fell below 2x standard deviations – which is a form of oversold. Whilst it is not a perfect timing too, it can warn of over-extension to the downside.
  • Testing the lower Bollinger band: A small bullish candle (Doji) formed at the lower Bollinger band yesterday to warn of an oversold condition. We need to be a little careful here as such things happen during strong trends. Ut against the backdrop of a ‘bad news day’ following a steep decline, this candle could be more bullish than its size lets on.
  • Doji at a support zone: The pullback from this month’s high has stalled at trend support and the June and September lows (the weekly pivot point is also just beneath here.

 

20221221nasdaq100fx

  

If we put all the pieces together, we favour a corrective bounce from current levels over the near-term – even if only to the 11,430 lows. As we have year-end flows then it also increases the odds of some unpredictable price action, but with such a strong pullback already the path of least resistance could be higher as we head towards Christmas, with a break to new highs being a bonus.

 

  • Today’s bias is bullish above yesterday’s low and for a break above 11,200, with an initial target around 11,400.
  • A break beneath the weekly S1 pivot assumes bearish continuation and a mover towards 10,600.

 

 

 

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