Market Insights: Monday, December 16th, 2024

Market Overview:

The Nasdaq Composite soared to new record highs on Monday, propelled by gains in major tech stocks and optimism surrounding bitcoin’s continued rally. Tesla, Google, Amazon, and Apple all reached fresh highs, contributing to the Nasdaq's 1.24% increase. The S&P 500 edged closer to its own record with a 0.4% gain, reflecting strength in tech and consumer discretionary sectors. Meanwhile, the Dow Jones Industrial Average struggled, shedding 0.25% for its eighth straight loss, signaling weakness in defensive sectors. Investors are eyeing this week’s Federal Reserve meeting, with a final 2024 rate cut widely anticipated. The focus has now shifted to how the Fed might adjust its projections for 2025, given ongoing concerns about inflation. Notable developments also came from the healthcare sector, with stocks like CVS and UnitedHealth falling following comments from President-elect Donald Trump targeting pharmacy benefit managers. Bitcoin surged past $106,000, buoyed by expectations of a crypto-friendly administration, adding to the bullish sentiment for risk assets.

SPY Performance:

SPY closed the day at $606.76, reflecting a 0.42% gain after trading within a range of $605.21 to $607.78. Volume was slightly below average, indicating a day of cautious optimism among traders. Despite the modest increase, SPY continues to hover near key resistance at $608, with buyers actively supporting the $605 level.

Major Indices Performance:

The Nasdaq led the market with a stellar 1.24% gain, fueled by strength in big tech stocks and bitcoin’s rally. The Russell 2000 followed with a 0.61% rise, indicating improving sentiment for small-cap equities. The S&P 500 posted a modest 0.4% increase, continuing its upward momentum. In contrast, the Dow Jones declined by 0.25%, marking its eighth consecutive red session as defensive stocks remained under pressure. The Magnificent Seven stocks played a key role in driving gains, with the exception of Nvidia, which slid 1.6%.

Notable Stock Movements:

Tesla led the charge among the Magnificent Seven, surging over 6% to close at a fresh record high. Apple, Google, and Amazon all reached new peaks, reflecting robust investor confidence in tech giants. Broadcom continued its ascent, bolstered by optimism surrounding AI-driven growth. On the downside, Nvidia’s 1.6% drop highlighted lingering concerns about the semiconductor sector. These moves underscored the market’s ongoing focus on innovation and growth stocks.

Commodity and Cryptocurrency Updates:

Crude oil fell 1.6%, settling at $70.15 amid easing supply concerns and potential demand headwinds. Gold edged lower by 0.24%, closing at $2,669.51, as investors opted for riskier assets. Bitcoin saw an impressive 2.69% rally, closing just below $106,000, driven by heightened enthusiasm for digital assets and anticipation of favorable regulatory developments. We recommend caution at Bitcoin above $105K. While it could and will likely continue to rally long term, we stated a few weeks ago Bitcoin was likely to trade above $100K before finding resistance. At $106K Bitcoin is now testing the limits of this rally and therefore we advise caution.

Treasury Yield Information:

The 10-year Treasury yield dipped slightly, ending at 4.395%, reflecting a 0.10% decline. While yields remain above the critical 4.3% threshold, which has historically pressured equities, the modest pullback provided some relief for growth stocks. The market’s sensitivity to yield movements underscores the delicate balance between inflation concerns and optimism for economic resilience. Yields at 4.5%, which we believe are coming, pose material risks for the broader market rally.

Previous Day’s Forecast Analysis:

Friday’s forecast anticipated a choppy session with periods of trending price action in a range of $602 to $608, with key levels at $605 serving as a pivot. The bias leaned toward consolidation, with opportunities for short trades near $608 and long trades from support above $606. The analysis accurately highlighted $605 as a critical dividing line between bullish and bearish sentiment, setting the stage for today’s largely rangebound price action.

Market Performance vs. Forecast:

SPY’s actual performance closely aligned with Friday’s forecast. The ETF oscillated within the projected range, finding support near $605 and testing resistance at $608. Key levels outlined in the forecast guided trading opportunities, with long entries from $606 proving effective. A textbook failed breakdown set up at 10:20 am ET at major support of $605.50 which led to a rally until the last hour of the day. We stated we favor this pattern in sideways markets and today did not disappoint. The forecast’s emphasis on disciplined entries and exits allowed traders to navigate the day’s choppy conditions with confidence.

Premarket Analysis Summary:

Today’s premarket analysis, posted at 7:52 AM, predicted a bullish bias with a range between $604.90 and $608. It identified $605 as a key pivot, favoring long entries from support around $604.90 and upside targets of $607 and $608. This analysis concurred with the post market from Friday. Caution for potential churn and quick profit-taking was advised.

Validation of the Analysis:

Given the premarket and post market aligned closely, today was a day to trade heavier and with greater confidence given this confluence. As a result SPY’s trading adhered to the premarket and post market analysis, with price action respecting the outlined levels. The bullish bias materialized as SPY maintained support above $605 and approached resistance near $608. Traders who followed the guidance found opportunities for profitable long trades from support zones, validating the accuracy and utility of the analysis.

Looking Ahead:

The week ahead is packed with crucial economic data, including Wednesday’s FOMC statement and Thursday’s GDP report. These events are expected to drive market volatility and provide clarity on the Federal Reserve’s 2024 outlook. Traders should monitor Tuesday’s Core Retail Sales for early indications of economic momentum, as midweek releases are likely to drive significant price action. Today’s PMI indicated a surge in private sector growth but falling output in manufacturing. Higher prices were also noted, which is likely to stoke inflation in 2025.

Market Sentiment and Key Levels:

SPY remains in a cautiously bullish posture, trading around $606. Resistance levels at $608 and $610 are key hurdles, while support at $603 and $600 must hold to maintain upward momentum. Bulls maintain the upper hand above $605, but bears could seize control if SPY falls below $605 on volume. With the market poised for potential breakouts, traders should remain vigilant. Given the seasonally strong period we continue to forecast higher prices this week for SPY.

Expected Price Action:

Our model projects a range of $605 to $610 for Tuesday, reflecting a likely continuation of today’s bullish trend. A break above $608 could lead to a test of $610 or higher, while a fall below $605 might prompt a retest of $600. The market remains sensitive to economic news, so traders should brace for possible volatility. While volume was a bit light today, given the week before a holiday, it was strong enough to reinforce the strength of the bull trend.

Trading Strategy:

Long trades are favored from support near $605, targeting $608 and $610 with stops below $604. Short entries around $608 could aim for $605, with quick profit-taking recommended given the low probability of extended declines. We continue to favor failed breakout and failed breakdown patterns to trigger entries. This pattern in sideways, rangebound markets have a high probability of success. Typically a mean reversion trade has no better than 40% success rate, but with these patterns this increases to over 60%. In fact we have not had a losing trade with this pattern in as long as we can remember. Tight stop-losses and disciplined position sizing are essential in this environment, particularly ahead of key economic releases.

Model’s Projected Range:

The model anticipates a maximum trading range for Tuesday of $604 to $611, with Call dominance implying a bullish tilt. SPY continues to trade within its bull trend channel from September lows, with room to the upside for new highs. Key levels at $600, $605, $608, and $610 will likely dictate the next directional move, making them critical for traders to watch. The projected range is narrow therefore expect more consolidation and sideways price action with periods of trending behavior on Tuesday. As we stated last week, its likely the market breaks out of its $602 to $608 range this week. We expect one of this week’s economic releases to be the catalyst which alters the current market state.

Market State Indicator (MSI) Forecast:

Current Market State Overview:
The MSI is currently in a Bullish Trending Market State with price closing above MSI support. There are no extended targets printing above however extended targets did print above for much of the day indicating herd participation in today’s rally. Overnight rally the MSI rescaled higher several times in rapid succession which indicates a strong trend. Extended targets printed as well, further reinforcing the move higher. In the last 30 minutes of the session extended targets stopped printing and SPY sold off to MSI support at $606.15, where it bounced into the close. The MSI’s range is narrow and has not rescaled since 8:30 am, which indicates a weak bull trend.  Without extended targets above, the bull trend may be losing steam or simply waiting on an external catalyst to move prices to new highs. MSI support is $606.15 and lower at $605.62.
Key Levels and Market Movements:
A small green day after a week of minor selling SPY closing pretty much where it opened and above the critical $605 level. We stated last week’s pullback did “nothing to dissuade the bulls from believing the market will move higher next week”. Above $605 the bulls are in complete control while below the bears will have some influence which could lead to a test of a larger pivot at $600. Our model’s lean is to defer to the broader trend, which is long and as long as $605 holds, the market will work its way higher. Above $605, SPY will work toward $610. If $605 fails the market will test major support at $600. At the open supported by an overnight rally with the MSI rescaling several times, SPY pulled back briefly to MSI support at $605.61 which led to the perfect level to level trade to MSI resistance at $606.17. Price then fell once again and retested support with a textbook failed breakdown which had us long a second time from the same level. Again another level to level trade which continued virtually all day to just shy of our $608 resistance level. Extended targets kept us long and away from shorting. While there was a short late in the day, two solid trades and we need not risk profits on a trade with just thirty minutes left in the session. Protecting profit is as important as entering and exiting a trade at the right price so whenever you are solidly green on the day, unless the market provides the perfect set up, bank your profits and call it a day. Never let a green day turn red…protect those profits. Another great start to the week, supported by the MSI and our model’s price levels. Once again the MSI gave us the confidence to enter our long trades and kept us trading on the right side of the market, providing levels to enter and to take profits with actionable intelligence to capture all that the market provided. We highly recommend incorporating the MSI into your trading toolbox to achieve your best results.
Trading Strategy Based on MSI:
The MSI's current state suggests a weak bull trend without herd participation. We stated yesterday for “Monday we suggest longs on any retest of today’s lows on a failed breakdown pattern.” We got this pattern at major support at 10:20 am right on queue. For Tuesday with price closing near support at $606.15 we favor longs from support on failed breakdowns near $606 and $605. Depending on how the market reacts to tomorrows economic news, we also favor shorts from $608 as long as there are no extended targets printing above. It’s likely the market will move more violently on Wednesday after FOMC and Tuesday is likely to have more sideways price action on low volume where selling the high and buying the low makes sense. Once again we recommend doing what we ask you to do daily which is to use the MSI to identify the trend and levels to buy and sell to ensure you are on the right side of the market…the key to long term success.   

Dealer Positioning Analysis:

Summary of Current Dealer Positioning:
Dealers are selling $608 to $612 and higher strike Calls while selling $605 and $606 Puts indicating Dealers wish to participate in any move higher on Tuesday and seem to be certain this is going to materialize given Dealers sell Puts when they are virtually certain prices will rally. If price does move higher, it appears $612 is the ceiling. To the downside, Dealers are buying $604 to $591 and lower strike Puts in a 3:2 ratio to the Calls/Puts they are selling/buying implying a bullish view of the market for Tuesday. This stance has changed from neutral to bullish. As we stated Friday, Dealers continue to believe and are positioned for the Santa rally, which seems to be materializing.  
Looking Ahead to Friday:
Dealers are selling $607 to $615 and higher strike Calls while also buying $605 and $606 Puts. Dealers remain positioned for new all-time highs and appear assured the Santa rally will deliver higher prices. To the downside, Dealers are buying $604 to $595 and lower strike Puts in a 3:2 ratio to the Calls/Puts they are selling/buying, implying a bullish view of the market for this week. This has changed from slightly bearish to bullish. As we stated Friday Dealer positioning was odd given the holiday rally that all expected. Clearly this was a one off as Dealers are now positioned for higher prices both tomorrow and for the rest of the week. We advise continuing to watch Dealer positioning for clues of what is likely to develop in the near term as Dealers can change their positioning on a dime so stay tuned for daily updates.

Recommendation for Traders:

Traders should be prepared for more consolidation on Tuesday’s session, given the anticipated economic data later in the week. Long trades from $605 to $606 remain attractive, targeting $608 and $610 with stops below $604. Short positions near $608 could aim for $605, with stops above $610. We continue to favor longs over shorts and any shorts should take profits quickly. Tight risk management is crucial, particularly with low volume and potential for sharp reversals. Monitor premarket analysis for updated guidance and key levels before the market opens to adjust strategies as necessary.

Good luck and good trading!