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Many of you will probably have heard of the Christmas Rally by now, but how many of you are ready to trade it? For those of you for whom this is a new term, the Christmas Rally tends to occur late in December to early January where we see a rise in the general market, often traded using the SPI Futures contract.
Thinking about how to trade this, I realized that many new clients who haven’t ventured into futures trading yet would need to be looking for CFD trade opportunities. Now many brokers offer SPI CFDs for a low risk, low cost position. Alternatively, you could be looking at your favourite stock to determine if it also has a Christmas Rally.
I decided to do a bit of research on CBA to illustrate. Since 1991 CBA has had a Christmas rally for 14 out of the 19 years. Of these 14, 7 started the rally early in the month and 7 started the rally in the middle of the month. This tells me that if we are to have a Christmas Rally in CBA then it may well already be started.
Please go and do some research and backtesting for yourself on your favourite market, or on CBA. I’d love to see the results on the Discussion Forum. I won’t give you everything but as a starter let’s have a look at three past rallies on CBA and see what they did. Chart 1 shows us last year’s Christmas Rally. Notice that we would have to use advanced entries to take this trade, and a study of time analysis would be helpful. The best entry for last year’s rally would have been using the Closer’s Rule on 18th December as it was a clear reversal day with strong volume, but how confident would you have been taking a long position on that alone? Chart 1: CBA Daily Bar Chart 2010
click chart to enlarge
The second rally I’d like to look at was the 2000 Christmas Rally in Chart 2. Notice that 15th December gave us a clear reversal day this time and this was followed by a nice long the opener’s entry opportunity the next trading day. Chart 2: Daily chart of CBA 2000
click chart to enlarge
Lastly, taking a look at 2005 we see that the rally started on 9th December but there was no easy entry until a 1-day ABC setup formed on December 20. This ABC traded nicely to 150%. If you look at the bigger picture, this also lined up with a weekly swing range repeating to 75%. Chart 3: CBA Daily Chart 2005
click chart to enlarge
So, what will this year bring? Have we missed the start of the run? Will there be a Christmas Rally at all? Remember 5 of those 19 years produced no rally. Recently we have seen a reversal day on 29th November followed by a couple of days of indecision. We then saw a small move up on low volume, but a 1-day ABC setup formed. This trade finally took off hitting 100% today. This takes us currently to about 50% of the run down from September to November. It will be interesting to see if the market pauses here and then takes off again – that might be the opportunity for a piece of the Christmas Rally we’re watching for.
Do your backtesting, stalk your market and Merry Christmas!
It’s the Journey
Lauren Jones
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