Volume Checks Out for the Holidays

After last week’s volatile action, marked by aggressive selling pressure early in the week followed by a sharp rebound after Thursday’s favorable CPI report, the market finished Friday with a notable crush in the volatility complex heading into a holiday-shortened week. This outcome is not particularly surprising.

Seasonally, volatility tends to decline following December quarterly expiration as markets transition into lower-volume trading sessions and more compressed price action during the week of Christmas. Volatility has come in far and fast, but it may not be a reason to turn bearish heading into next week. Instead, it’s worth discussing the environment we are likely to experience and the “second-guessing” nature of technical analysis over the next couple of weeks.

Volume levels are typically subdued during holiday-shortened trading weeks. This is usually accompanied by thinner liquidity, meaning fewer market participants are active and book depth (bid/ask size) across futures and equities can be noticeably shallow. In these conditions, it does not take much order flow to generate outsized price moves in either direction. As a result, price swings can appear to come out of “nowhere,” often without a clear catalyst. This dynamic complicates technical analysis.

The foundation of technical analysis rests on three pillars: price, volume, and time. Every indicator relies on at least one of these inputs, and during the holiday period the volume pillar becomes far less reliable. This leaves traders questioning whether a given price move is truly meaningful or simply a byproduct of thin, low-liquidity markets: important observations when trading around the holidays. 

While the so-called Santa Claus rally, defined as the last five trading days of December and the first two trading days of January, is often discussed, it is not guaranteed and can fade just as easily as it appears. The key is not to overinterpret price action in a low-volume environment. Thin liquidity can exaggerate moves and distort technical signals, until normal participation and liquidity return in the new year. Happy holidays! 

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