2025 wrapped up with a premature Santa Rally which - in turn - deprived traders looking for the traditional Santa Rally which occurs in the last 5 trading days of the year and the first two trading days of the New Year. Specifically, ES put in a powerful 225 point rally from the December 17th low, into the Boxing Day 6993 high. After this, ES then spent the last 5 days selling off. As readers know though, we don’t trade seasonals because seasonals are loose averages that have no utility for timing intraday moves. We trade the technicals, and ES tends to move according to a series of set building blocks. These building blocks explained the last two weeks action.

The first of these building blocks is what I call the “two siblings”. Readers of this newsletter know that in ES, bears never get anything for free. Whenever there is what I call an elevator down sell (a vertical flush that cuts through every support - this is the first subling) bulls always get nearly every point of that type of action paid back in the form of a squeeze (the squeeze being the second sibling). In an uptrend, they will get every point back and often 1-10 additional points for every point lost. In a downtrend (which we have not been in for a year), they’ll get half a point to 3/4 of a point back. The trick however, is that the squeeze only occurs when a large institution gets long and when they do, they leave their footprint on the chart. That footprint is the Failed Breakdown.

It was exactly this that caused the 225 point December rally. On Wednesday December 17th ES sold the entire session from open to close. This would mean bulls will get paid back for this action, but only when a Failed Breakdown occurs. This happened Wednesday December 17th in the evening when ES flushed the Wednesday 6776 daily low down to 6771, trapped shorts, and we were off to the races. I wrote at 4pm Thursday December 18th: “ES started a relief bounce leg today…This keeps 6858 live. Dip, then onto 6877, 6910.” We ripped to 6910 by Sunday December 21st. This continued higher into 6993 Boxing Day high, from which we topped out.

Another building block in ES is that after a large rally/trend leg, ES typically needs to consolidate inside a range. The break up or down of that range then produced the next trend leg. We saw that last week and the range was mostly 6935-38 to 6963 and we were stuck in this Monday and Tuesday. The task for bulls would be to defend this range and for bears, to break it down which would lead to a trend lower. Right at 6pm Tuesday Evening, ES cracked this range finally, and we began a sell Wednesday. I wrote Tuesday at 4pm: “Bear case tomorrow: Begins under 6935-38.” We sold all day Wednesday to 6890.

The task for bulls today was simple: They’d need to recover 6938 to regain control, otherwise we keep selling and bears retain control. My lean was we could back-test it. I wrote on Wednesday at 4pm: “My general lean is ES can try some back-testing. Ideally, this occurs from around current prices and no lower than 6872-69. This would mean rallying to 6925/6938 to backtest. Bulls need to recover or the sell bounces sequence continues.” We saw literally exactly this off the futures open last night, running to 6938 by 10am this morning, then we continued lower to 6872 low of day from which point we bounced.

After 5 red days, is ES due for a bounce? In today’s newsletter I’ll talk this, I’ll do a deep dive into how my trailing stop/trade management methodology works, and then I’ll discuss the actionable trade plan for Monday.