Market Insights: Monday, December 23rd, 2024

Market Overview

Stocks surged on Monday as the technology sector led a rally, reflecting investor optimism for 2025 despite concerns over Federal Reserve policy. The Nasdaq climbed nearly 1%, propelled by semiconductor giants like Nvidia, which rose more than 3%, and Broadcom, up over 5%. The S&P 500 added 0.7%, buoyed by robust performances in tech and social media, including gains in Meta and Tesla. The Dow Jones Industrial Average, which spent most of the session in negative territory, managed a 0.2% gain by the close. Treasury yields ticked higher, with the 10-year yield climbing 7 basis points to 4.6%, reflecting persistent caution around interest rates. Consumer confidence data revealed a sharp decline, the largest since November 2020, signaling uncertainty over economic conditions for the year ahead. The shortened trading week ahead, capped by the Christmas holiday, suggests reduced volume and a chance for markets to consolidate recent movements.

SPY Performance

SPY closed at $594.69, up 0.60%, after hitting a high of $595.30 and a low of $587.66 during the session. The ETF reflected a continuation of Friday’s recovery, trading near key resistance levels. Despite lower volume typical of the holiday week, SPY showed resilience, maintaining gains even as macroeconomic concerns lingered.

Major Indices Performance

The Nasdaq led Monday's gains with a 0.95% increase, driven by strong performances from tech and semiconductor stocks. The S&P 500 followed, rising 0.7% as a mix of growth and defensive sectors contributed to gains. The Dow edged up by 0.16%, overcoming earlier losses, while the Russell 2000 dipped 0.23%, highlighting the divergence in market sentiment across different market caps. The tech rally showcased resilience even as economic data and rate policy continued to weigh on broader market sentiment.

Notable Stock Movements

Nvidia and Broadcom were standout performers in the semiconductor sector, gaining over 3% and 5%, respectively, as optimism around AI-related growth bolstered sentiment. Meta and Tesla also posted strong gains, adding to Monday’s tech-driven rally. Microsoft was the sole laggard among the Magnificent Seven, declining slightly. The mixed performances within this group underscore the sector-specific nature of the day’s market action.

Commodity and Cryptocurrency Updates

Crude oil prices nudged higher by 0.16% to close at $69.57, reflecting subdued holiday trading conditions. Gold fell 0.69%, closing at $2,626, as rising Treasury yields dampened demand for safe-haven assets. Bitcoin retreated 1.63%, closing just above $94,000, as regulatory concerns and thin trading volumes kept the cryptocurrency under pressure.

Treasury Yield Information

The 10-year Treasury yield rose by 1.39% to 4.586%, maintaining levels that challenge equity valuations, particularly for high-growth sectors. The increase in yields reflects ongoing concerns about inflation and the Federal Reserve’s higher-for-longer rate policy, keeping market participants cautious despite the recent rally.

Previous Day’s Forecast Analysis

Friday’s forecast anticipated a range of $586 to $600 for SPY, with $595 as a significant resistance level. We stated failed “breakdowns near $586 may offer long opportunities.” The market adhered closely to this projection, with SPY trading within the expected range and encountering resistance at $595. The forecasted preference for long trades near $586 and short trades around $595 proved actionable, as price movements aligned with key levels highlighted in the analysis.

Market Performance vs. Forecast

Monday’s SPY performance validated Friday’s forecast. Opening near $590.95, SPY tested and briefly surpassed resistance at $595 before closing slightly below it at $594.69. The forecasted range of $586 to $600 captured the day’s trading activity, and the bias toward resistance levels provided actionable insights. At 10 am ET the market set up a textbook failed breakdown trade at major resistance at $587.65 which provided solid opportunity for a long to major resistance at $595. While $595 held as well, price did not reach this level until the end of the day and as such, the only trade today was the morning session long. Both long and short opportunities did in fact materialize, reinforcing the utility of the prior day’s analysis.

Premarket Analysis Summary

Monday’s premarket analysis, posted at 7:50 AM, identified $593 as a critical resistance level and projected a potential upside target of $597 if breached. The analysis highlighted $589 as initial support, with a downside stretch target at $585. Market activity validated this outlook, as SPY tested $589 which saw a bounce on a failed breakdown long. SPY also tested $593 before climbing to $595 and provided an additional long opportunity from this level. Premarket insights effectively guided trading strategies, favoring trades at the identified edges of the range.

Validation of the Analysis

The premarket analysis accurately captured Monday’s trading dynamics, including key support and resistance levels. SPY respected $589 as a pivotal support level early in the session, and the identified resistance at $593 provided for an additional long trade in the afternoon session to the day’s highs. The market’s movement toward the upper range of $595 and beyond aligned with the analysis, providing actionable opportunities for traders who followed the key levels.

Looking Ahead

This week’s primary focus shifts to Thursday’s unemployment claims report, which could influence year-end market sentiment. With the holiday-shortened schedule, trading volumes are expected to taper off, potentially leading to range-bound price action. Tuesday is a half day, the markets are closed Wednesday and Thursday and Friday are regular trading sessions. Traders should remain vigilant, as light liquidity can amplify market moves.

Market Sentiment and Key Levels

SPY’s close at $594.69 positions resistance at $597 and $600 as critical levels for bulls, while $593 and $590 serve as major support zones. Sentiment remains cautiously optimistic, but higher Treasury yields and holiday-related liquidity constraints could dampen upward momentum. A sustained move above $595 could set the stage for a test of $600, while a break below $593 may lead to retests of lower support levels.

Expected Price Action

Our AI model projects a range of $590 to $598 for Tuesday, suggesting a narrowing range and choppy price action. Resistance at $597 will likely cap gains, with $593 providing significant support. The market appears poised for sideways trading in a half day session, with sentiment leaning slightly bullish.

Trading Strategy

Traders are advised to consider not trading on Tuesday given the shortened hours and holiday schedule. Those who do wish to trade should focus on long trades from support at $593, targeting $597 with tight stop-losses. Short trades are preferred near resistance at $597, aiming for a downside target of $593. Elevated VIX levels suggest smaller position sizes and disciplined risk management, particularly in a holiday-shortened week. Flexibility remains essential as market sentiment evolves.

Model’s Projected Range

The model anticipates SPY trading in a maximum range of between $590.50 and $598.75 in a Call-dominated environment, indicating a slight bullish bias. The range continues to narrow implying a very choppy and listless market on Tuesday. Resistance at $597 and $600 will test the bulls, while $593 serves as pivotal support. The bull trend channel from the September lows has been redrawn to a bear trend channel which suggests limited upside potential, with broader sentiment likely dictating moves within this range. The channel is shallow so price may trade within this channel testing the lower channel from the September bull trend channel. A move back into this bull channel will resume the bull trend while price remaining in the bear channel will lead to lower prices.

Market State Indicator (MSI) Forecast:

Current Market State Overview:
The MSI is currently in a narrow Bullish Trending Market State with price closing above support. There are extended targets printing above indicating the herd is participating in the Santa Rally. SPY spent the morning session with the MSI in a bearish state which switched quickly to a bullish state before noon EST. The MSI rescaled higher quickly several times while also printing extended targets above indicating a fairly strong bull trend. The size of MSI’s range is narrow indicating a weakening bull trend, but with extended targets printing, there is enough conviction by the herd to likely push prices higher. MSI support is $593.92 and lower at $592.35.
Key Levels and Market Movements:
With SPY opening in a bearish MSI state, price quickly moved lower and tested major support near $596. While price didn’t quite reach this level, it was close enough to support a bounce on a textbook failed breakdown at 10 am. This trade was also supported by a move back above $589 as indicated in the premarket analysis. A solid long trade with plenty of time to enter set up the best trade of the day to the day’s highs at $595. While price approached MSI resistance at $592.35, the MSI quickly rescaled higher and printed extended targets giving us the information we needed to stay long to the day’s highs. With first profits at $594, a brief pullback to MSI support at $592.35 at 3 pm and we added to our position, closing at the day’s highs and the extended targets at $595. Another two for two day (or one and a half!) and our streak of winning trades continued. Once again, the MSI gave us the confidence to enter our trades and kept us trading on the right side of the market. MSI levels provide levels to enter trades and levels to take profits. This information is highly actionable, allowing traders to capture all that the market provides. We 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 bullish market for Tuesday. But with a narrow range, should extended targets stop printing above, there is a high probability price retests $595 and perhaps even $597 and mean reverts to $593. Should this transpire, this will provide both long and short trade opportunities for Tuesday. That said, Tuesday is a half day and one where we don’t favor trading. $595 will likely become the pivot between highs and lower prices and given price closed at this level, we favor starting the holiday a bit early and picking up on Thursday. For those who trade, we favor shorts from $597 and higher as long as the MSI is not printing a strong bull trend or extended targets. We will also look for longs from a retest of $593 but only in a failed breakdown to trap shorts. Above $595 the bulls will assume more control and push prices higher but it’s unlikely they breach $600. Be sure 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. Having the MSI update in real time is a major advantage and a key to long term trading success.   

Dealer Positioning Analysis:

Summary of Current Dealer Positioning:
Dealers are selling $597 to $600 strike and higher Calls while buying $595 and $596 strike Calls implying the Dealers desire to participate in any move higher on Tuesday. Should price move higher, it’s likely to stall at $600. To the downside, Dealers are also buying $594 to $565 and lower strike Puts in a 2:1 ratio to the Calls they are selling/buying implying a neutral view of the market for Tuesday. This stance has changed from bullish to neutral. Dealers continue to be positioned for higher prices but have added substantially to their downside protection.     
Looking Ahead to Friday:
Dealers are selling $602 to $610 and higher strike Calls while also buying $595 to $601 Calls implying Dealers wish to participate in any upside. This appears to be limited to $605. To the downside, Dealers are buying $593 to $570 and lower strike Puts in a 1:1 ratio to the Calls they are selling/buying, implying neutral to slightly bullish view of the market for the rest of the week. This is unchanged from today. Dealers appear to be certain the Santa rally will push prices higher into Friday. This positioning can change quickly so we advise continuing to watch Dealer positioning for clues of what is likely to develop in the near term. Dealers change their positioning on a dime, so stay tuned for daily updates.

Recommendation for Traders

Traders should focus on identifying trading opportunities at key support and resistance levels. Long trades are advisable from $593 with upside targets of $597 and beyond, provided SPY sustains momentum above this level. Short trades are favorable near resistance at $597, targeting $593 and $590. VIX is back to 16.78 as market participants take a break over the holiday and focus on family and not the markets. We advise our readers to do the same and enjoy the holiday cheer, to be ready to trade in more size and with more conviction on Thursday. Flexibility remains crucial, as holiday trading can amplify market volatility. For real-time updates and adjustments, review the premarket analysis before 9 AM ET.

Good luck and good trading!