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Santa Claus Rally, or a Grinch-like pinch\?

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According to The Stock Trader's Almanac, traders and investors look for the "Santa Claus Rally" to present itself around Wednesday, December 22.

Will Santa be showing up to the bull's pen this season? Or will the "Santa Claus Rally" be proved untrue, with a bearish carol being lead by Cindy Lou Who?

I think we'll have our answer on Wednesday at 3 (PM EST), if you've been checking your list, I think you'll agree. Here are the levels a trader should use, for if you don't, you may be singing the blues.

Santa should pack his sleigh and be on his way, with Wednesday's January Crude Oil (cl05f) $45.64 -1.38% settlement pointing the way. It's Rudolf in front that guides with his nose, so an equity bull needs January Crude Oil to settle below this past Friday's close ($46.28).

Once a trader sees oil's Wednesday settlement, then an SPX break of 1,205 is the only remaining bullish pediment, and if that is broken higher late Wednesday afternoon, then its SPX 1,124 by December 31 at noon.

But in the northeastern U.S. it has been frigid cold, which has given boost to heating oil, a derivation of "black gold." A Wednesday settlement much above $46.36, where a trader might still give or take an inch, will most likely give hint that it's the year of the Grinch. A higher trade in oil, should have a bear feeling fine, as the lower level is broken, that's SPX 1,189.

Bullish levels = Oil below $46.28, SPX above 1,205.

Bearish levels = Oil above $46.36, SPX below 1,189.

U.S. Market Watch - 12/20/04 Close

Both the SPX and BIX.X saw brief morning trade at their WEEKLY R1s, but I have got a feeling (based on observations) that buyers and sellers are waiting on something.

A lot of economic data to be released on Wednesday (final Q3 GDP) and Thursday (November durable orders, personal income, personal spending, new home sales; plus weekly jobless claims and revised Univ. Michigan sentiment).

Session lows for the NDX/QQQQ came close to WEEKLY S1s and give the observation that this is the index of weakness near-term, while the SOX.X takes on the look of a bystander, fluctuating on a lagging basis, both up and down relative to the NDX/QQQQ.

After trading its "neckline" of a reverse head/shoulder top at 545 on Tuesday of last week, the Biotechnology Index (BTK.X) 528.50 -0.35% has seen four-straight sessions of decline, with drugmakers Pfizer (NYSE:PFE) $24.29 -5.66% and Astrazeneca (NYSE:AZN) $37.29 +0.51% offsetting bullish investor enthusiasm that may have been sparked by OSI Pharmaceuticals (NASDAQ:OSIP) $69.41 +1.5% the past two sessions.

Market Snapshot / Internals - 12/20/04 Close

As I look at both the NYSE and NASDAQ NH/NL indications, I think of Santa's reindeer. I would analyze the current readings as being analogous to the reindeer being harnessed and ready to pull Santa's sleigh higher. Both the 10-day NH/NL ratios look to have stabilized for another pull higher, but it may just be the trade in oil that keeps Santa from shouting, "Now Dasher!, now, Dancer!, now Prancer and Vixen! On, Comet!, on, Cupid!, on Donner and Blitzen! To the top of the porch! To the top of the wall! Now dash away! Dash away! Dash away all!"

January Crude Oil futures (cl05f) - Daily Intervals

On Friday, CNBC's Rick Santelli noted the technical "resistance" of Friday's trade in oil at the 61.8% retracement of our conventional (blue) retracement of the August low to October high. I will also make note that the January Heating Oil futures (ho05f) traded a high of $1.468 on Friday, which would be that contract's 19.1% "fitted retracement" (pink) level, where its price action certainly suggests to me that heating oil inventories and weather forecasts for the northeast part of the U.S. are still driving crude oil prices.

In today's 01:00 PM EST update, I did make note that some heating oil traders thought today's decline in heating oil was due to updated weather forecasts for the northeast, which showed a "warming trend" being forecasted for the next couple of weeks. However, I think it will be trader's ACTIONS that speak louder than words, where I've defined a "level of trade" for Wednesday's settlement, for a bullish or bearish bias, which would come AFTER the weekly energy inventory figures, will most likely be weighed against the next couple of weeks weather forecasts.

January Heating Oil futures (ho05f) - Daily Intervals

One could argue that it is/was the 61.8% retracement level on Crude Oil's chart that kept heating oil from rising above $1.465 on Friday. However, a heating oil BEAR would also be utilizing a "fitted 38.2%" to pick out the $1.465 level as a level to short against with a tight stop. Traders can probably see where crude oil and heating oil, at Friday's highs may be the "line in the sand" between a Santa Clause rally, or a Grinch-like trade for the major averages into the end of the year.

March e-mini S&P 500 futures (es05h) - Daily Intervals

As January Crude Oil futures (cl05f) have risen to my "key level of resistance," we can perhaps visualize, or see how S&P futures traders now "care" what oil is doing as it may have risen to a "key level," which has bearish broader market implications.

Right now, as of tonight's settlements... Oil can't get a settlement above $46.36, while e-mini S&P futures (es05h) can't find a settlement below 1,192.75.

I think the e-mini S&P futures recent two settlements (including today) suggest a market that is waiting for something, perhaps jittery about oil prices again.

S&P 500 Index (SPX.X) Chart - Daily Intervals

The SPX.X looks like it wants to gravitate toward overlapping WEEKLY S1 and its WEEKLY 80.9% retracement at this point. Almost as if being "pulled lower" right now by NDX/QQQQ. A break of today's lows may well see such trade into Wednesday's oil inventory data, where traders wait for a response.

Pivot Matrix -

DAILY S1 would add another level of correlative support to the SPX at 1,190 level tomorrow, while OEX Daily R1 and MONTHLY R1 sets the upper-end of a daily range into Wednesday's EIA weekly energy statistics.

Yield curve action continues to flatten, and today's selling in Treasuries did have the 10-year YIELD ($TNX.X) rising from just above the WEEKLY Pivot. My thoughts here (pivot matrix and 10- year) is if equity bulls are going to get any possible help from a steepening yield curve, then perhaps WEEKLY Pivot yield support becomes a level that needs to hold.

Jeff Bailey

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