A Prolonged December Correction Before Santa Rally

I was very busy with moving to my new house, focusing on my new job and taking care of my baby daughter the last 1-2 months. Refer to my article here if you do not know what i have been up to .

Finally, i have a bit of time to sit down, take stock of what has happened.

The one key word here which has ruled the market these past few weeks is UNCERTAINTY. Mr Market does not like Uncertainty and we are now seeing a 5% correction because of it.

Uncertainty came in a few forms

  1. Omicron – need I say more ?
  2. Jerome Powell’s surprisingly hawkish stance despite the rise of Omicron – certainly not what Mr Market anticipated which was a dovish stance instead.
    1. Powell’s confirmation that the transitory stance taken by the Fed for inflation is cancelled
    2. Powell’s stance that the bond purchase program halt by the Fed may be ACCELERATED

The two forms of uncertainty has now resulted in Mr Market starting a correction from last Tuesday onwards. The correction is across all indexes mainly due to

  1. revaluation of stock price with future earnings revision from inflationary pressures brought forward
  2. economic uncertainty due to omicron

Technically, the S&P 500 has now reach a strong support level of 4513 which is very near the 50% Fibonacci level. The correction which started last Tuesday was exacerbated by the latest news that Omicron has just reach US shores.


The important question now is : Will the correction recover from a 5% dip or will the plunge continue ?

My opinion is that the bear case is stronger than bull case this time and I foresee that the correction may stretch past 5% and test the next strong support level at 4456 . This is at the next major Fibonacci level of 38.2%. which also happens to be in the confluence of the 100 EMA support. This is a very strong support level which historically is where a rebound may occur.

However there is another major risk on event happening leading up to 15 December which is the debt limit expiry date set by the US Treasury


Depending on the outcome of the debt limit issue, I foresee a prolonged December correction which may go past 5% to hit 10% or even more

  1. Should the US government go into shutdown as a result of the debt limit expiry.
  2. Omicron variant poses a greater health risk than Delta

The Democrats and Republicans seem to be quite positive about this matter recently. However action speaks louder than words. We just have to monitor and react accordingly


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