Coiled Spring Capital Macro Report Dec 26th, 2022

We want to first wish all of our readers Happy Holidays and continued good fortune as we head into '23. This weekend's report will be abbreviated as the upcoming trading week is shortened and liquidity is typically poor. 

The biggest question we will try to answer this week for our readers:

Will the Santa rally come to fruition?

Recall the phenomenon known as the "Santa Claus Rally" is the 5 days before the last trading day of the year and the first 2 of the new year. This period tends to see a nice lift as most market participants have closed shop for the year and it is easy to markup books with poor market liquidity. The first trading days of the year usually see positive fund flows that drive up prices. There is no guarantee this phenomenon will occur, and in fact, the probability increases for a poor '23 market performance if Santa doesn't show up.   

Here is more info if you would like to read up on it:

 Santa Claus Rally - Overview, Causes, Retrospective (corporatefinanceinstitute.com)

Over the last week, the market reacted fairly close to our prediction discussed in our last weekend report. We predicted a mild bump up to SPX 3920 resistance, a level where we discussed reloading the shorts that we had closed the previous week, for an eventual push lower. Unfortunately, the SPX did not hit our level, and only got has high as 3890. Directionally we were correct, as the market went on to make a new swing low. 

Here is the 5-day chart for the SPX:

A few weeks ago, we laid out some downside targets for the SPX should our first bounce zone fail (3820). That target was 3720-3750 and we bottomed last week at 3764.

Here is a small excerpt from that range discussion in our Dec 11th report: 

As discussed above, confluence zones typically get defended at first touch and was an area to consider closing tactical shorts. With that zone being defended, we now have a hammer candle at a key support zone. 

Is this enough to consider playing for a potential Santa Claus rally?

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