Trading The Technicals: Buy The “December Triple Witching” Dip

By | December 16, 2013

The S&P 500 is set to resume higher, according to BofAML’s Macneil Curry pointing to the week of December Triple Witching as historically one strongest of the year for the S&P500. With fundamentals a thing-of-the-past, paying attention to the technicals in a world of one driver of stocks (Fed balance sheet), for short-term trading signals may have some value. Of course, with an ‘event’ as potentially huge as the FOMC meeting this week, adding risk on an already good year (when the world already believes a taper is “priced in”) may be more greatest fool than momo monkey.

 

Via BofAML,

S&P500 set to resume higher

The week ahead should take its cue from US equities. This Friday is December Triple Witching (the term used for the quarterly expiry of US equity index futures, options on equity index futures and equity options). Consistently the week of December Triple Witching is one strongest of the year for the S&P500. In the 31 years since the creation of equity index futures, the S&P500 has risen 74% of the time during this week. More recently, it has risen in ten of the past 12 years. With equity volatility fast approaching a buy signal, the conditions are growing ripe for an end to the month long range trade and resumption of the larger bull trend (we target 1840/1850 into year-end). This should be bearish for US Treasuries with 10s targeting 2.95%/3.00% and 5s targeting 1.67%/1.69% (we are short TYH4). From an FX perspective, this environment should be bullish for the US $. We continue to look for a €/$ top and recommend sticking with $/¥ longs for 104.60/105.00.

Chart of the week: The week of December Triple Witching 

 

The S&P500 historically performs very well during the week of December Triple Witching. Since 1982, it has averaged a rise of .63% and risen 74% percent of the time. To put this in perspective, the average weekly return since 1982 is .19% and the index has risen 57% percent of the time. This is a bullish setup

S&P500 volatility says the correction is drawing to an end

In addition to positive seasonals; equity volatility says that the range trade/correction of the past month is drawing to a conclusion. Specifically, the VXV/VIX ratio (VXV is the BBG ticker for 3m SP500 Volatility) is about to reach levels that have repeatedly coincided with a resumption of the larger bull trend. While allowing for one last dip into 1775/1745 support, the bull trend is about to resume.

Stay bearish US Treasuries. TYH4 is resuming its bear trend

 

A resumption of the larger bull trend in US equities should put added weight on the US Treasury market. We remain bearish and short TYH4. We look for 10s to test 2.95%/3.00% in the weeks ahead, while 5s remain on track for 1.67%/1.69%. TYH4 targets 122-06+ following the completion of a 2m Head and Shoulders Top.

The US $ should do well. Stay bullish $/¥

 

The combination of bullish US equities and bearish US Treasuries should be supportive for the US $, particularly against the Japanese ¥. We continue to target 104.60/105.00 (and potentially beyond) into year-end. Pullbacks should hold 101.62, but $/¥ bears don’t gain control UNTIL A BREAK OF 100.62.

 

Source:Research Report of BOFA

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