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The last trading day of the year ended up being the exact opposite of the second to the last day of the year: a big dip on Friday and a big rip on Monday. So what's next?

Traders beware: Total volume during last Friday's selloff  (down 27 handles) was only 1mil ESH traded, and that included Globex.  Despite it being a holiday week, that is extremely low for the size of the moves. Monday’s 1.47 mil ESH volume was higher, but that had to do with something called the year-end rebalance. A 36-handle rally that included 140k ESH traded in Globex means only 1.33mil ESH traded.  There literally was no volume. From Friday’s 1383.50 low to Monday’s 1425 high, the S&P rallied 41.5 handles. From last Friday’s 1384 settlement to Friday’s high, the S&P rallied 39 handles, and from Friday’s 1392 low to Friday’s 1425 high, the S&P rallied 33 handles. No matter how you do the math, it was a giant rip to the upside.

Picture by Shutterstock

Overall tone: There have been a lot of reasons to sell the markets in December, but many of those reasons no longer prevail, or not to the same extent. Unlike Friday’s sharp afternoon drop, Monday's rally was very well orchestrated. While the seasonalities have been overpowered by the lack of a fiscal cliff deal, the markets showed their true direction going into the final trading day of the year with the S&P posting its best New Year’s Eve gain since 1974, and despite the first lower close in the fourth quarter since 2008, the Dow enjoyed its biggest gain ever on a New Year’s Eve.

The last trading day of December and the first trading day of the new year: According to the Trader’s Almanac, the last trading day of the year had the NASDAQ down 10 of the last 11. On the first trading day of the year the almanac has the Russell down 14 of the last 22 but up the last 3 in a row. The Pit Bull said Monday that there is a tendency to see selling on the first trading day of the year. The second trading day of the New Year has the Dow up 13 of the last 18 years. It’s a little mixed up, but we do feel that the markets have gotten over a barrier.

Let’s face it, neither the Democrats or the Republicans wanted to be responsible for pushing things over the cliff. If things continue as they have been over the last few years, we should see the S&P continue to do as it’s been doing. Sell off, back and fill and then move higher again. Does it happen right away in 2012? That’s the million-dollar question, and the only way to get it answered is to get back to trading. Despite all the ups and down in 2012 the Dow finished up 7.3%. The Dow has been up four years in a row is and up over 100% since the March 2009 lows. As for the S&P and NASDAQ, both have been up 8 out of the last 10 years. The S&P is up 111% and the NASDAQ is up a whopping 138% from their March 2009 lows. If we have learned anything out of the credit crisis, it is that it has been a lifetime buying opportunity.

Our view: The S&P futures have gone from being down 5 days in a row or down 57 handles to down 5 out of the last 6 and down only 20 handles. In one day the complexion of the markets has gone from an extremely negative tone to a breakout on the upside. At 4 a.m. the ESH was up 3 handles and at 5:30 a.m. it was up 26.5 handles at 1446.50. The big concern is have the S&P’s gone up too fast? It’s our guess with the S&P up 66 handles in less than 3 days we could see people sell the open. I want to get to the floor, get on the MrTopStep chat and figure it out. As always, keep an eye on the 10 handle rule and please use stops when trading.

Danny Riley is a 34-year veteran of the trading floor. He has helped run one of the largest S&P desks on the floor of the CME Group since 1985. 

  • It’s 7:30 a.m. and the ESH is trading 1445, up 25 handles; crude is up 1.54 at 93.36; and the euro is up 63 pips at 1.3271.
  • In Asia, 9 out of 11 markets closed higher (Shanghai Comp. +1.16%, Hang Seng +2.89%).
  • In Europe, 11 out of 12 markets are trading sharply higher (CAC +2/22%, DAX +2.01%).
  • Today’s headline: “U.S. Shares Seen Sharply Higher, Buoyed Up by 'Fiscal Cliff' Deal”
  • Economic calendar: Today: WEDNESDAY: Weekly mortgage applications, PMI manufacturing index, ISM mfg index, construction spending. THURSDAY: Challenger job-cut report, ADP employment report, jobless claims, FOMC minutes, Fed balance sheet/money supply, chain store sales, auto sales; Earnings from Family Dollar. FRIDAY: Employment situation, factory orders, ISM non-mfg index, oil inventories, Fed's Yellen speaks; Earnings from Mosaic
  • Total volume: 1.47mil ESH and 10k SPH traded
  • Fair value: S&P +24.25, NASDAQ +51.25

MrTopStep Closing Print Video: http://www.mrtopstep.com/videos/?id=37051


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