Talking Numbers

Here’s what it would take to get a ‘Santa Claus’ rally: market technician

Talking Numbers

John Kosar, director of research as Asbury Research, discusses what it will take to get a year-end rally in the markets.

The markets are at a critical inflection point, according to one well-respected technical analyst.

John Kosar, director of research as Asbury Research, says that if the markets are able to maintain its current levels over the next couple of days, we can expect a "Santa Claus" rally – a run-up in stock prices by the end by New Year's Eve. However, if the markets fail between now and the end of the week, Kosar sees a market fading into January and even February, threatening a fall to levels 8% below where they are today.

(Watch: FTSE 100 set for all-time highs in 2014: analysts)

According to Kosar, there are three things to be aware of:

1. The benchmark S&P 500 index needs to hold support between 1,775 and 1,762. If it breaks below that, it heads to 1,730.

"The S&P has really fallen into its first support level at 1775 to 1762," says Kosar. "We've got the FOMC meeting this week, so this marks a place where if the market still thinks that we're going higher – [that] we're going to have a 'Santa Claus' bounce into the new year – this is where you should see some buying pressure come in. And, so far this morning, we have."

2. Keep an eye on the VIX. It has to come down to 14 for a rally to be good.

The CBOE's Market Volatility Index – referred to as the VIX – is a measure of the implied volatility in the S&P 500 index. Kosar says its levels are saying something about Monday's gains. "The VIX is elevated and it indicates that even though we [were] rising pretty hard [Monday], the market's still a little apprehensive," says Kosar.

3. If the S&P 500 breaks below 1,730, it heads towards 1,654 to 1,647 by February.

"The medium- to longer-term, I still think we probably get a pullback here between now and the end of the first quarter [of 2014]," says Kosar, who is ultimately optimistic. "However, we have unmet targets in a lot of correlated markets we follow that suggest we still have another 7% to 10% on the upside to go at least in the S&P 500 before this is over."

(Watch: Fed taper expected sooner: CNBC survey)

Though the markets were up Monday, Kosar says he's apprehensive before the Federal Reserve Bank's Open Market Committee meeting on Wednesday and with the VIX continuing to trade above 15.

"The VIX needs to come down over the next couple of days," says Kosar. "If it does, everything looks great. We're probably going to get the 'Santa Claus' [rally]. If the VIX stays elevated up here, this rally is going to have a hard time sustain itself over the next week or two."

To see the rest of Kosar's interview and for his charts on key support levels in the market, watch the video above.

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