Santa Gave The Russell A Lump Of Coal

The post below originally appeared on SeeItMarket 

Do you really count last couple weeks of 2015 as a successful Santa Claus rally?

The Russell 2000 has returned around 2.5% over the last two weeks in December as the markets head into the last trading day of the year. 30 day Implied Volatility via the RVX came in slightly, but there’s not a legitimate reason to get bullish.  Even if we see a little rally on the last trading day of 2015, the Russell is leaving 2015 with a whimper.

The reality is that when a market starts from a beaten down level and musters a little strength to move higher, it’s hardly a successful rally of any sort.  Since the little tumble lower in late August, the Russell has been trapped in a range from 1100 to 1200.  The Auction Market guys would call this an area of value.  The point is that the market has found a short term equilibrium and, until something changes, we can expect the equilibrium to persist.

The 2015 Santa Claus rally was just a move from the bottom of the range into the lower third, which is hardly a reason to jump up and down.  The market remains trapped below a sideways 50 day simple moving average and a declining 200 day simple moving average.

Are you feeling bullish yet?  The chart below illustrates the areas of interest.


If we ignore the slight decline in August, the last few months of 2015 have been great for options income traders.  At some point that will change.  Until it does, the value area on Russell is a great support and resistance area for selling premium.

The market has made several failed attempts to break out of the value area over the past few months.  In a couple of those attempts, the failure has been followed by a fast move to the other side of the range.  The longer the market stays trapped, the more energy it builds and we can expect a fast market once the breakout holds.  In the meantime, using the lower end of the range as a support area for positioning Butterfly trades has worked well.  Regardless of how you’re trading the range, recognizing the area of opportunity and when it has the potential to change will keep you from getting run over when the Russell breaks out.

Which way will the market go?

Short of a move above the 1200 level, the evidence we see is pretty bearish.  That being said, we just don’t know.  A failed move out of the value area is likely to be followed by a fast move to the other side.  It’s possible that the recent bounce off the lower part of the range (aka the “Santa Claus” rally that wasn’t) could fail and we’ll see the Russell below the bottom of the range in early 2016.  Until then, trade the range.