Market Insights: Friday, December 27th, 2024

Market Overview

U.S. stocks ended the day lower, snapping a streak of weekly gains, as major indices faced a pullback amid profit-taking and cautious trading. The S&P 500 dropped 1.1%, while the Nasdaq Composite fell 1.5%, reflecting broad losses in Big Tech. The Dow Jones shed 0.8%, rounding out a session marked by investor repositioning at the tail end of a successful year. Tesla led the tech declines with a 5% drop, joined by Nvidia and Amazon, which fell 2% and 1%, respectively. Despite the daily downturn, weekly performances remained positive, with the S&P and Nasdaq each gaining 1.8% and the Dow adding 1.5%. The 10-year Treasury yield hovered near a seven-month high of 4.6%, contributing to equity market headwinds as traders considered the Fed's upcoming policy moves and the implications of political developments, including Donald Trump's return to the White House.

SPY Performance

SPY fell 1.07%, closing at $594.92, after trading in a volatile session with a high of $597.78 and a low of $590.76. Volume surged to 54.28 million shares, significantly above average for the holiday season, as traders repositioned ahead of year-end. The ETF faced selling pressure near $600, underscoring resistance in this range, while the failure to hold key support levels hinted at broader uncertainty heading into the new year.

Major Indices Performance

Small caps underperformed as the Russell 2000 fell 1.49%, leading losses among major indices. The tech-heavy Nasdaq Composite was next, shedding 1.31% amid Big Tech weakness. The S&P 500 followed, declining 1.1%, while the Dow Jones recorded a 0.8% drop. Defensive sectors like utilities and healthcare fared better, limiting declines, while growth sectors bore the brunt of profit-taking. The day’s performance reflected cautious sentiment as investors weighed the impact of rising yields and end-of-year portfolio adjustments.

Notable Stock Movements

Tesla posted the largest decline among the Magnificent Seven, falling nearly 5%, as concerns about valuation weighed on the stock. Nvidia and Amazon also struggled, dropping 2% and 1%, respectively, alongside broader tech weakness. Other major players in the group saw smaller declines, with no significant exceptions to the negative trend. The pronounced sell-off in Big Tech underscored the sector's vulnerability to profit-taking as the year winds down.

Commodity and Cryptocurrency Updates

Crude oil bucked the trend, climbing 0.92% to close at $70.26, as optimism about future demand outweighed concerns about current economic conditions. Gold, however, fell 0.66% to $2,636, reflecting reduced appetite for safe-haven assets amid mixed economic data. Bitcoin continued its downward trajectory, dropping 1.4% to close just above $94,300. The cryptocurrency market’s struggles mirrored broader risk-off sentiment as speculative assets faced renewed selling pressure.

Treasury Yield Information

The 10-year Treasury yield rose 1.05%, ending the session at 4.627%. Yields remaining above 4.3% pose challenges for equity valuations, with levels above 4.5% historically pressuring risk assets. The upward move in yields signaled persistent caution in the bond market, reflecting lingering concerns about inflation and Federal Reserve policy. While interest rates continue to rise and could easily reach 5% before retracing, our model suggests the possibility of rates declining by mid next year, not due to Fed policy but due to capital inflows from struggling economies of Europe and Asia. As money flows into the US, longer term rates should decline, giving the US economy a boost in the process. While our models suggests this is only a possibility, we mention it for our readers to watch capital inflows from foreign countries as an early indication of lower US interest rates.

Previous Day’s Forecast Analysis

Yesterday's forecast projected SPY to trade within a range of $598 to $604, with a slight bullish bias contingent on holding above $600. Resistance at $604 and support at $598 were expected to guide price action, with the possibility of testing $605 on an upside breakout. While the market's bearish turn defied expectations of a bullish continuation, the identified levels served as pivotal points, as SPY tested $598 before closing below this range.

Market Performance vs. Forecast

SPY underperformed relative to the prior forecast, breaking below the anticipated range as it failed to hold support at $598 and slid to a low of $590.76. The breach of critical levels highlighted the market's susceptibility to downside risks, though the forecasted resistance at $600 held firm during early trading. Our model did not anticipate the day’s sell off which is why we often state to trade what you see. There is no model which is accurate 100% of the time. Our model is accurate 70% of the time and today was one of the 30% days. It happens. Yet the day's performance validated the importance of monitoring key levels, even as broader sentiment shifted unexpectedly.

Premarket Analysis Summary

Today's premarket analysis predicted a trading range of $597 to $602, with $601 and $602 identified as key resistance levels. Bias leaned cautiously bullish, contingent on breaking above $602. However, a failure at these levels would signal downside risks toward $597. Actual market action confirmed this bearish scenario, as resistance held firm and SPY descended below $597, aligning with the lower target levels outlined in the analysis.

Validation of the Analysis

The premarket analysis accurately flagged $601 and $602 as critical resistance points, which SPY failed to surpass. The subsequent slide below $597 validated the cautionary stance on downside risks, with the forecast effectively guiding traders to key levels for action. Once again the model did not anticipate today’s decline. But the analysis proved reliable in highlighting resistance and support dynamics, providing actionable insights for navigating the session.

Looking Ahead

Next week's economic releases, including Thursday's unemployment claims and Friday's ISM data, will play a pivotal role in shaping market sentiment as 2024 concludes. Anticipate heightened volatility in thinly traded sessions, with major indices reacting sharply to macroeconomic cues. Traders should prepare for potential market shifts driven by these updates.

Market Sentiment and Key Levels

SPY’s close at $594.92 highlights $590 and $589 as critical support, with $599 and $600 presenting formidable resistance. The market's bearish tone suggests challenges for bulls, but a recovery above $595 could reignite upward momentum. Conversely, sustained pressure below $589 would likely lead to further declines, targeting $585 as the next support.

Expected Price Action

Our AI model projects a trading range of $590 to $598 for Monday, with a bullish bias dominating should SPY hold above $595. A break below $595 will lead to a retest of today’s lows while a break below $589 will see price drop to $585. A move above $595 could set the stage for a recovery to $599 and $600, above which the bulls will find major resistance all the way to $610. Traders should remain vigilant, balancing caution with opportunities around key levels.

Trading Strategy

Long entries from $590 to $593 are favorable on a failed breakdown, targeting $595 with stops below $588. Shorts may be considered should $595 fail to hold, targeting $590 while a move to $599 also opens the door to potential shorts. Given increased volatility, traders should prioritize smaller positions and disciplined risk management. The VIX at 15.95 combined with today’s decline on volume indicates a shift toward a more cautious market environment, requiring heightened vigilance.

Model’s Projected Range

The model forecasts a maximum range of $589 to $601 in a Call-dominated environment, with resistance at $599 and $600 with support at $590 and $589. An expanding yet narrow range suggests choppy, two-way trading with breakout potential. Above $600 there is an extremely strong wall of resistance all the way to $610. Price is trading below the bull trend channel in place from the September lows and in the new bear trend channel. Price was unable to renter the bull channel and without a sizable rally, price will resume its move lower. Continued rejection at resistance could reaffirm the bear trend, with risks escalating below $589.

Market State Indicator (MSI) Forecast

Current Market State Overview:
The MSI is currently in a narrow, Bullish Trending Market State, with prices closing above support. There are no extended targets printing. At the open the MSI rescaled lower and spent much of the session flip flopping from bullish to bearish with the MSI printing very narrow bands indicating no real institutional conviction pushing price either way. In an environment where the smart money is on the sidelines, the market tends to swing violently with ease as was witnessed today. After opening down as much as 2%, SPY found a base at MSI support at $592.38, a level which had not changed since Tuesday. While in a Bearish Trending Market State midday, extended targets printed consistently below price before noon and continuing until 1:30 pm when they stopped printing. That allowed the market to reverse course and move toward major resistance at $595. Price then fell to retest support at $593 before closing back at $595. In its current state, the MSI is implying a possible continuation of the Santa rally in spite of today’s sell off. While the “herd” is not participating given there are no extended targets above, through next Friday the market on average gains over 1.3% and our model suggests this will likely transpire this year as well. MSI support remains at $593.92 and lower at $592.36, MSI levels established three days ago and unchanged at today’s close.  
Key Levels and Market Movements:
With SPY selling off at the open, the MSI once again did its job and showed us where major support was likely to at least slow, if not stop the ETF’s overnight decline. We stated yesterday we “remain in artificial, low volume holiday trading which will last until next Thursday. These are not normal conditions since most institutional money is out of the market enjoying the holiday”. This condition remains valid even after a better than 1% sell off. We continue to trade in the Santa rally window until the end of next week and the bull case is simply that the market will trend higher. We also stated yesterday “the $600 to $601 level is setting up to be the new battleground between the bulls and the bears. Above $600 price moves higher while below, price moves lower”. We recommended those “with long books should consider buying some end of January Puts to protect your portfolio”. Today is just a taste of what is likely to develop in January and therefore this advice is still valid. Protection to the downside is recommended for January. After the open, bouncing off our premarket level of $597 and without extended targets above, we were short on a less than perfect failed breakout and held until price reached MSI support. And true to form once price reached MSI support, SPY did stop its rapid decline and bounced between MSI support and resistance until the MSI finally rescaled lower to a Bearish Trending Market State and printed extended targets below, indicating the herd was participating in the move to lower prices. This pushed SPY to the lows of the day where a double bottom at major support of $590 tempted us to going long. But we instead closed our short and waited for extended targets to stop printing, going long at $593, another major level identified in yesterday’s post market report, riding this trade back to $595 which has been a major pivot between higher and lower prices. A failed breakout at this level and we were short once again given there were no extended targets above. We held this to MSI support and decided to call it a day after the MSI rescaled lower to a very narrow Ranging Market State with at $593.06 acting as support. Three for three on the day with a fabulous end to what was an otherwise a slow and boring week…as it should be. Trading should not cause stress or anxiety but should be extremely boring while you wait for setups to develop at major levels. Using the MSI to confirm entries and exist makes trading quite simple. The MSI continues to provide actionable levels for entries and exits, helping traders remain on the right side of the market. We highly recommend integrating the MSI into your trading toolbox to maximize long-term success.
Trading Strategy Based on MSI:
The MSI suggests a continuation of the Santa rally on Monday. That said the MSI range is extremely narrow and there are no extended targets above implying the market is deciding between moving higher or moving lower. Given the market is in a seasonally strong period, our model favors higher prices on Monday. With price closing at $595 there is a better than even chance SPY attempts to retest today’s lows premarket before finding its footing above $590 and moving back to $595. As such we favor long trades from any move lower and favor a failed breakdown pattern as a trigger to entry. We do expect $595 to break and a short squeeze to ensue which will push price back toward $600. As long as price remains above $590, the Santa rally is in tack so your focus should be on identifying long setups to capitalize on further upside. Should the MSI rescale and expand its range, follow the trend identified by the MSI and trade accordingly. Again in a market where institutional traders are enjoying the holiday, our advice is to make use of the MSI to identify the trend and key levels to trade to ensure alignment with prevailing market conditions. Monday and Tuesday next week will be filled with choppy, narrow range trading so our advice is to trade small, take quick profits and preserve capital for January, which will likely provide much more action, including two way trend trading.

Dealer Positioning Analysis

Summary of Current Dealer Positioning:
Dealers are selling $602 to $605 and higher strike Calls while also buying $596 to $601 Calls indicating a desire by the Dealers to participate in any Santa rally that develops on Monday. Given today’s decline, Dealers were certainly correct when they stopped selling Puts yesterday. Upside for Monday appears limited to $605. To the downside, Dealers are buying $595 to $585 and lower strike Puts in a 2:3 ratio to the Calls they are selling, implying a bullish outlook for Monday. This shift in positioning from slightly bullish to bullish reflects what Dealers see as a possible short squeeze developing on Monday. They correctly anticipated the top yesterday and now are telling us a bottom may be in for Monday.   
Looking Ahead to Next Friday:
Dealers are selling $600 to $610 and higher strike Calls while buying $596 to $599 Calls for next week indicating their desire to participate in any market rally to as high as $610. $605 has reemerged as significant resistance and looks to be a ceiling for next week. To the downside, Dealers are buying $595 to $577 and lower strike Puts in a 3:2 ratio to the Calls they are selling/buying, reflecting a neutral to slightly bullish view for next week. This positioning has changed from slightly bearish to slightly bullish, reinforcing the shorter term outlook for Monday. While Dealers have been flipflopping from slightly bullish to slightly bearish, as of today, Dealers appear convinced the market will experience at least a partial Santa rally. Whether or not the Dealers see prices unravelling later in the week will become clearer early next week. Positioning can change quickly, so it’s essential to monitor daily updates for shifts in sentiment.

Recommendation for Traders

Traders should focus on trading around $590 as key support and $599 as key resistance. Long trades are recommended from $590 to $593 with targets at $595 and $599, using tight stops below $588 to manage downside risk. Shorts may be considered at $599 and $600, targeting retracements to $595 or lower. As volatility increases into year-end, disciplined risk management is crucial, and traders should use smaller position sizes to navigate potential whipsaws. Review the premarket analysis before 9 AM ET for updates.

Good luck and good trading!