Christmas Cheer 🚨 January Fear: The Reversal Playbook

Summary

In this video, Josh discusses the current market trends, predicting a potential reversal in the near future as the S&P 500 is 23% above the 200-week EMA, a level that historically signals a pullback. He emphasizes the importance of low-volume trading periods, especially around holidays, and highlights the likelihood of a dip-buying opportunity in 2026. Josh shares insights on AI-driven stocks like Nvidia and Palantir, stressing the need for selective investment as the easy money phase ends. He concludes with holiday wishes, encouraging viewers to embrace family time while preparing for the next market phase.

Takeaways

• 😀 The Santa Claus rally is in full effect, with markets pushing higher in low-volume conditions.
• 📉 The markets have been moving upward during low-volume weeks, which may signal a weak rally and potential upcoming breakdown.
• 📅 Historically, low-volume movements leading to new highs have preceded significant market corrections, suggesting a flash crash could be near.
• 🗓️ The true Santa Claus rally is expected in the last days of December and the first days of January, potentially leading to further upward momentum.
• 🔍 The DSPX report indicates that the market is currently bullish, with options traders selling puts in anticipation of continued upward movement.
• 📈 While the current rally appears bullish, analysts predict that January 2026 could bring a market downturn, especially as midterm election year trends suggest a 19% pullback.
• 💡 Long-term investors should be looking ahead to 2026, a year where the market is expected to recover sharply, offering buying opportunities after a significant pullback.
• 📊 Stock picks for 2026 include SoFi and Disney, with the potential for these companies to be valuable investments at reduced prices after the market dip.
• 📉 The 200-week EMA is an important indicator, and recent market movement shows we are 23% above this line, which historically signals a coming pullback.
• ⚠️ Bearish divergence is visible in the RSI and MACD momentum indicators, showing weakening bullish momentum despite higher prices, suggesting a reversal may be imminent.
• 🎄 The holiday season is a time to focus on family, but traders should prepare for upcoming market conditions and be ready for volatility in 2026, particularly in AI stocks.

Q & A

What is the significance of the 'Santa Claus rally' mentioned in the video?

The Santa Claus rally refers to the tendency of the stock market to rise during the last week of December and the first few days of January. In the video, the speaker mentions that the market is currently experiencing this rally, which aligns with the typical market behavior of low volume and upward movement during the holiday season.

What is the main concern regarding the current market movement, as discussed in the video?

The speaker expresses concern about the market's upward movement occurring during periods of low volume, such as pre-market and holiday weeks. This raises doubts about the strength of the rally, with the potential for a future pullback or even a market breakdown. The speaker predicts a reversal soon, particularly around January.

How does the speaker interpret the market's behavior in relation to the 200-week EMA?

The speaker uses the 200-week EMA (Exponential Moving Average) as a key indicator for market reversals. Historically, whenever the market has moved 22-23% away from the 200-week EMA, it has pulled back toward it. Currently, the market is 23.31% away from this EMA, suggesting that a pullback or dip could be imminent.

What does the DSPX report indicate about the market's direction?

The DSPX report, which tracks the implied options prices and expected market dispersion for the S&P 500, indicates that the market is bullish in the short term. According to the speaker, this suggests that the market is expected to continue rising for the next 30 days, at least for the holiday season, based on the selling of puts to capture premium.

What is the speaker’s view on the potential for a market breakdown?

The speaker believes that while the current market is trending upward, especially during the Santa Claus rally, a breakdown could occur soon. He warns that this movement could be manipulated to push prices higher before a sharp sell-off, especially as the market approaches key levels like the 200-week EMA.

What role does 'bearish divergence' play in the analysis of the market?

Bearish divergence is observed when price continues to rise while momentum indicators like the RSI and MACD decline. The speaker highlights this as a critical signal of an impending reversal. Despite the upward price movement, the weakening momentum suggests that the market could soon face a correction.

What are the potential opportunities for 2026 according to the speaker?

The speaker identifies 2026 as a potential year for significant opportunities, especially after a predicted market pullback. He suggests that the market will likely experience a 19% correction, followed by a 34% recovery. The key to profiting in 2026 will be identifying good entry points during this dip and investing in valuable companies at reduced prices.

What stocks does the speaker like for 2026, and why?

The speaker mentions SoFi and Disney as his favorite stocks for 2026. He is looking for undervalued opportunities in these companies, expecting them to perform well in the coming years, particularly after any market dips in 2026.

How does the speaker view the AI rally in relation to the 2026 market?

The speaker notes that while the AI rally will continue into 2026, the easy gains of the past few years are behind us. He mentions that firms like Nvidia and Palantir will continue to thrive, but warns that the AI market will become more selective, requiring active portfolio management and caution during periods of market volatility.

How does the speaker suggest preparing for potential market shifts in 2026?

The speaker advises being prepared to rotate out of positions that are no longer performing well and into new opportunities. With the market expected to face corrections and volatility, he emphasizes the importance of being flexible, monitoring market indicators like the 200-week EMA, and using active management to optimize portfolio performance.