John Kosar, director of research as Asbury Research, says thatif the markets are able to maintain its current levels over the next couple ofdays, we can expect a "Santa Claus" rally – a run-up in stock pricesby the end by New Year's Eve. However, if the markets fail between now and theend of the week, Kosar sees a market fading into January and even February, threateninga fall to levels 8% below where they are today.
According to Kosar, there are three things to be aware of:
1. The benchmark S&P 500 index needs tohold support between 1,775 and 1,762. If it breaks below that, it heads to 1,730.
"The S&P has really fallen into its first support levelat 1775 to 1762," says Kosar. "We've got the FOMC meeting this week,so this marks a place where if the market still thinks that we're going higher –[that] we're going to have a 'Santa Claus' bounce into the new year – this iswhere you should see some buying pressure come in. And, so far this morning, wehave."
2. Keep an eye on the VIX. It has to come downto 14 for a rally to be good.
The CBOE's Market Volatility Index – referred to as the VIX –is a measure of the implied volatility in the S&P 500 index. Kosar says itslevels are saying something about Monday's gains. "The VIX is elevated andit indicates that even though we [were] rising pretty hard [Monday], themarket's still a little apprehensive," says Kosar.
3. If the S&P 500breaks below 1,730, it heads towards 1,654 to 1,647 by February.
"The medium- to longer-term, I still think we probablyget a pullback here between now and the end of the first quarter [of 2014],"says Kosar, who is ultimately optimistic. "However, we have unmet targetsin a lot of correlated markets we follow that suggest we still have another 7%to 10% on the upside to go at least in the S&P 500 before this isover."
Though the markets were up Monday, Kosar says he'sapprehensive before the Federal Reserve Bank's Open Market Committee meeting onWednesday and with the VIX continuing to trade above 15.
"The VIX needs to come down over the next couple ofdays," says Kosar. "If it does, everything looks great. We'reprobably going to get the 'Santa Claus' [rally]. If the VIX stays elevated uphere, this rally is going to have a hard time sustain itself over the next weekor two."
To see the rest ofKosar's interview and for his charts on key support levels in the market, watchthe video above.