Market Insights: Monday, December 30th, 2024

Market Overview

Stocks continued their slide on Monday, with the S&P 500 dropping over 1%, the Nasdaq Composite falling 1.2%, and the Dow Jones Industrial Average declining 0.8%. This decline extended the final week of the year’s losses as the market showed little momentum to recover. Despite a stellar year for all three indices—up 25%, 30%, and 14% respectively in 2024—the anticipated "Santa Claus" rally has failed to materialize. Historically one of the most reliable seven-day stretches for gains, the S&P 500 has declined nearly 1% instead of achieving the typical 1.3% average increase. Meanwhile, the 10-year Treasury yield retreated to 4.535%, still pressuring equities. As 2024 nears its end, investors are left grappling with mixed signals on economic strength and market sentiment​​.

SPY Performance

SPY fell 1.14%, closing at $588.22 after trading in a volatile range between $584.41 and $591.74. Volume surged to 46.50 million shares, well above the holiday season average, as traders positioned ahead of January. The ETF’s inability to break resistance at $592 signals persistent selling pressure, while holding above $584 offered some support heading into the final sessions of the year​​.

Major Indices Performance

Among major indices, the Russell 2000 outperformed, posting a modest 0.75% decline, while the Dow Jones Industrial Average shed 0.97%. The Nasdaq Composite and S&P 500 fell 1.21% and 1.14%, respectively, as Big Tech led the losses. Defensive sectors such as utilities managed to limit broader declines, reflecting cautious market sentiment as growth sectors faced pressure. The broader market’s retreat highlighted the ongoing tug-of-war between year-end profit-taking and attempts to sustain the 2024 rally​​.

Notable Stock Movements

Tesla led the Magnificent Seven in losses, falling over 3%, while Nvidia rallied slightly. The rest of the group ended lower, reflecting the sector’s heightened sensitivity to rising yields and valuation concerns. Defensive positioning across tech heavyweights emphasized broader market caution as traders locked in gains and recalibrated risk for the new year​​.

Commodity and Cryptocurrency Updates

Crude oil climbed 0.76%, closing at $71.14 as optimism about future demand offset concerns about near-term economic conditions. Gold retreated 0.45%, finishing at $2,620, as safe-haven demand weakened amid thin holiday trading. Bitcoin dropped 1.16% to close just above $92,000, continuing its struggle to maintain traction amid broader risk-off sentiment​​. There could be a floor in Bitcoin at $83K which may provide a buying opportunity.

Treasury Yield Information

The 10-year Treasury yield fell 1.82%, closing at 4.535%. Although yields retreated from recent highs, levels above 4.5% remain a headwind for equities, reinforcing concerns about tighter financial conditions. The yield decline signaled persistent caution among bond investors, with many awaiting clarity on Federal Reserve policy and global economic stability in early 2025​​.

Previous Day’s Forecast Analysis

Friday’s forecast anticipated SPY trading within $590 to $598 with a cautiously bullish bias, contingent on breaking above $595. Resistance at $599 and $600 was highlighted as critical levels for the bulls. A break below $595 was forecast to test $589 and a break below $589 was forecast to test $585, invalidating the bullish scenario while validating concerns about further downside risks if $590 failed to hold​​.

Market Performance vs. Forecast

SPY’s movement undershot the forecast range closing at $588.22, as SPY failed to reclaim $590 or approach the anticipated resistance levels. Friday’s identified levels of $590 and $592 acted as pivots for price action, offering fleeting support and major resistance. However, the breach below $590 confirmed the bearish sentiment flagged as a risk in the previous analysis with SPY reaching each level identified. Once at the pivotal $585 level, SPY found major support to close the day higher at $588.22​​. The forecast accurately predicted the ETF’s path for the day once again reinforcing the accuracy of our model.

Premarket Analysis Summary

This morning’s premarket analysis projected a trading range of $590.75 to $596.75, with a bearish bias unless SPY could sustain above $594. Downside targets of $589 and $586.25 were highlighted as potential levels to test if bearish momentum persisted.

Validation of the Analysis

Today’s premarket analysis accurately identified $594 as a pivotal resistance level and anticipated downside risks to $589 and $586.25. SPY’s inability to hold above $590 confirmed the cautious outlook, with trading opportunities presenting at key levels identified in the forecast. Actual performance aligned closely with the lower projections, as SPY found resistance below $594 and retreated​​. This underscores the reliability of the premarket framework in volatile conditions​​.

Looking Ahead

This week’s key economic releases include Thursday’s unemployment claims and Friday’s ISM data. These updates will be critical in shaping early 2025 market sentiment, with thin trading likely amplifying price swings. Traders should monitor these events closely for directional cues​​.

Market Sentiment and Key Levels

SPY’s close at $588.22 highlights $588 and $585 as crucial support levels, with $590 and $592 serving as near-term resistance. The bearish tone dominates for now, but a recovery above $590 could reignite bullish sentiment. Failure to hold $585 would likely open the door to further declines toward $578 and lower​. While the market may wait until January to test these lower levels, the Santa Rally has not yet materialized but the odds still favor at least some reprieve from the last two day’s market decline​.

Expected Price Action

Our model projects a trading range of $584 to $592 for Tuesday, with a bearish bias unless SPY reclaims $592. Breaking below $585 would likely lead to a test of $578, while surpassing $592 could see a push toward $595. Traders should remain nimble, balancing short opportunities on resistance rejections with long entries near support​​. Note overnight price action which will likely include a move back toward today’s lows to test the bull strength at the $585 level. If this level holds again, its likely on Tuesday the market pushes back to $592.

Trading Strategy

Long trades are favorable from $584 to $586, targeting $590 and $592 with stops below $582. Short setups may be considered from $590 to $592, targeting $585. Given elevated volatility, smaller positions and disciplined risk management are essential. With the VIX at 17.4, traders should expect trending price action with periods of chop due to the holiday season. Be prepared for failed breakout and failed breakdowns to trigger entries and major resistance and major support.

Model’s Projected Range

The model forecasts a maximum range of $582 to $598.75, in a Put dominated market with resistance at $590 and support at $588. The market remains in a bear trend channel, with limited room for upside without a significant catalyst. A break above $592 could shift momentum, although there is a wall of resistance between $592 and $610 which will temper any long momentum. Below $585 there is little to keep price from falling to $578. Price has been unable to renter the bull channel from the September lows and as we stated Friday, “without a material rally, price will resume its move lower, most likely beginning in earnest in January”.

Market State Indicator (MSI) Forecast

Current Market State Overview:
The MSI is currently in a Bearish Trending Market State, with prices closing below support (now resistance) and very close to extended targets. Extended targets began printing just prior to the close. In the premarket after 7 am, the MSI rescaled lower several times as the market fell to major support at $585. Extended targets printed for much of the morning session but by 11 am had stopped printing and price retraced much of the day’s decline which saw the MSI switch to a Ranging Market State for most of the afternoon. The market moved sideways virtually all afternoon and in the last hour the MSI rescaled back to a bearish state and prices fell once again. We stated Friday in “an environment where the smart money is on the sidelines, the market tends to swing violently with ease” and once again, today, we witnessed this phenomenon. After being down as much as 1.7%, SPY found a base at a major support level at $585 before reversing. The MSI’s current Bearish Trending Market State is narrow and has not rescaled lower since before the open. As such the MSI, while implying the possibility of further declines tomorrow, is also telling us it’s very possible the market will find support overnight at $585 and attempts a Santa rally on Tuesday. This week on average does tend to deliver gains over 1.3% and with today being another 1% down day, with price at just below the 50 DMA will price fall further or rally from here? MSI resistance is $588.71 and higher at $590.01.  
Key Levels and Market Movements:
With SPY selling off prior to 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 decline. We stated yesterday protection “to the downside is recommended for January” and that advise is proving wise once again today. At the open with the MSI rescaling lower several times in rapid succession with extended targets below, our traders knew the market was moving lower. While MSI support at $588.71 held in the premarket, by the open, price had fallen below MSI support and was resting on the extended targets at $587.41. If you were not trading in the premarket, there was little to do but wait for the MSI to provide a signal that today’s decline had found a bottom. Long time readers of this newsletter know that $585 has been a major pivot between higher and lower prices. We talk a lot about who is in control of the market because knowing this one fact is critical to profitable trading. We stated just five days ago that above $585 the bulls still have control while below, the bears take over. It was no surprise to our readers that $585 would see a failed breakout develop which would lead to a solid mean reversion long back to another major level and MSI resistance at $590. We waited for extended targets to stop printing to take this trade and were long at $586.40, our premarket support level, and held to MSI resistance at $590 where we took first profits. When the MSI rescaled to a ranging state, our users of the MSI knew the odds of price reaching resistance in this state is less than 50%. So we exited our trailer at $591 and called it a day for a solid gain. Those who traded in the premarket had an even better day riding the MSI short to today’s lows. But for this newsletter, we focus on market hours and state all the time, one to two trades per day is all a trader needs to make a solid living. And once again the MSI did its’ job and told us when it was safe to get long and where to take profits. The MSI continues to showcase its value every day confirming entries and exits which makes trading quite simple. The MSI provides actionable information with levels to assist traders in staying 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 today’s decline is likely on Tuesday. That said the MSI range is narrow and has not rescaled lower since the open. Extended targets began printing at the close which implies lower prices. It would not surprise us to see prices attempt a retest of $585 before any move higher on Tuesday. The market is in a seasonally strong period and therefore our model favors higher prices for Tuesday. We stated Friday with “price closing at $595 there is a better than even chance SPY attempts to retest today’s lows premarket before finding its footing”. Well it did move lower premarket and did find its footing, but at a level last identified five days ago. That is why it’s important to make note of our major levels and plot them on a chart so you know where price is likely to find support or resistance. For Tuesday we continue to favor long trades on a failed breakdown from any move toward $585. We expected a short squeeze from Friday’s decline but the market had other ideas as the bears were able to push price to major support at $585. But once there, the bulls set a trap for late to the party shorts and the squeeze materialized, reversing much of the decline. Tomorrow we may experience a similar pattern of a retest of today’s lows or perhaps to $586 where a base will form and the short squeeze will ensue once again. But at the current levels, the bears have done some damage and are gaining confidence as we head into January. While we may not witness the full effect of this shift in control this week, certainly the bear influence is real which could set up a nasty January. The markets often reserve the real bear case for the start of January, and it will likely be the case this year as well. With today’s 1%+ drop the bulls have lost short term control but the bears won’t take over completely until $585 breaks on volume. Until then the bulls will do all they can to keep price above $585. Should the bulls have some success, price will move above $590 and the Santa rally will resume. At that level, the focus should be on identifying long setups to capitalize on further upside. The bulls take complete control from the bears above $595. Below $590 the bears are in charge to $585. And should $585 fail, watch for the MSI to rescale lower, expanding its range which could lead to much lower prices to $575. Should that transpire, jump on the short trend identified by the MSI and ride it to major support. Note however that $585 will not give way lightly. It’s likely the bears need to make a few more attempts to break this level before we see materially lower prices. Again this is surely possible in January, but not likely for Tuesday. 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. Tuesday could be like today or could be filled with choppy, narrow range trading so our advice is to trade small, take quick profits and preserve capital for January, which will provide much more action, including two way trend trading.

Dealer Positioning Analysis

Summary of Current Dealer Positioning:
Dealers are selling $599 to $605 and higher strike Calls while also buying $589 to $598 Calls indicating a desire by the Dealers to participate in any Santa Rally that develops on Tuesday. The upside for Tuesday appears limited to $600. To the downside, Dealers are buying $588 to $575 and lower strike Puts in a 3:2 ratio to the Calls they are selling/buying, implying a slightly bullish to neutral outlook for Tuesday. This shift in positioning from bullish to slightly bullish/neutral reflects what Dealers see once again as a possible short squeeze developing on Tuesday. Dealers remain convinced the Santa Rally will move price higher and for Tuesday, while a bit less bullish than today, are still anticipating higher prices.    
Looking Ahead to Friday:
Dealers are selling $595 to $600 and higher strike Calls while buying $589 to $594 Calls for this week indicating their desire to participate in any market rally to as high as $600. $600 and $605 have reemerged as significant resistance and looks to be a ceiling for this week. To the downside, Dealers are buying $594 to $577 and lower strike Puts in a 3:1 ratio to the Calls they are selling/buying, reflecting a slightly bearish view for the week. This positioning has changed from slightly bullish to slightly bearish, anticipating an early start to what may be a rough January for the market. Dealers have been flipflopping and were convinced the market would experience at least a partial Santa rally. This seems to have abated somewhat given today’s decline. Whether or not the Dealers see prices unravelling later in the week will become clearer tomorrow so given positioning can change quickly, it’s essential to monitor these daily updates for shifts in sentiment.

Recommendation for Traders

Traders should focus on trading between $585 and $592, leveraging short opportunities on rejections at resistance while targeting long entries near support. Tight stops are advised to manage risk. Friday and this week’s price action is more typical of a mid-January day than a holiday week. While the market is always setting traps for traders, we have been lulled into a false sense of security with prices simply moving higher with every dip being bought. While we are not forecasting a major change in 2025, we do not expect the market to continue to rally the way it did in 2024. 25%+ gains are atypical and it’s much more likely 2025 produces more muted gains where both the bulls and the bears have exert their influence. We suggest traders get used this higher volatility with more violent price swings. It will become even more crucial to understand who is in control and when, and where major support and resistance levels are to effectively navigate the markets. These twice daily newsletters have a better than 70% track record of accurately forecasting these levels so we advise continued study and focus on these posts while utilizing all the tools and training our services provide. Be sure to review the premarket analysis before 9 AM ET for updates on key levels and sentiment shifts.

Good luck and good trading!