Market Insights: Thursday, December 26th, 2024

Market Overview

U.S. stocks posted mixed results in a subdued session following the Christmas holiday, as the Santa Claus rally appeared to lose momentum. The S&P 500 dipped below the flatline, while the Nasdaq also struggled to maintain gains, indicating an overall lack of directional conviction. The Dow Jones Industrial Average managed a modest gain, closing 0.1% higher after fluctuating between positive and negative territory throughout the session. Small-cap stocks performed well, with the Russell 2000 rising 1.05%, showcasing resilience among smaller companies.

In the cryptocurrency space, Bitcoin fell sharply to just under $95,500, experiencing heightened volatility. This decline extended to crypto-linked stocks like MicroStrategy, which mirrored Bitcoin's losses. While broader markets paused, traders focused on the weekly jobless claims report, which offered mixed signals about the labor market. Initial claims dropped to 219,000, slightly better than expected, but continuing claims rose to their highest level since 2021, suggesting potential cooling. Despite the pause in the rally, optimism remains for broader indices to regain upward momentum as the week progresses.

SPY Performance

SPY displayed limited movement, closing at $601.30, flat compared to the prior session. The ETF traded within a narrow range, with a high of $602.48 and a low of $598.08, reflecting a cautious market environment amid low holiday trading volumes of 27.2 million. The lack of significant direction suggests traders are awaiting key economic data before making substantial moves.

Major Indices Performance

The Russell 2000 led gains with a 1.05% rise, driven by robust small-cap performance. The Dow Jones followed, adding 0.1% after oscillating throughout the day. In contrast, the S&P 500 and Nasdaq both finished marginally lower, with percentage losses of 0.00% and 0.04%, respectively. Defensive sectors appeared to slightly outperform, reflecting investor caution. The subdued performance of major indices highlights the market’s hesitancy to extend the Santa Claus rally as traders digest the latest labor market data.

Notable Stock Movements

The Magnificent Seven stocks were mostly down, with Apple as the sole gainer, posting a marginal increase. Tesla, Meta, and Nvidia led the declines, pulling back from recent highs. The tech-heavy sentiment weighed on broader indices, reflecting cautious investor positioning in high-growth stocks. Apple’s resilience underscores its role as a defensive choice amid broader market volatility, while the underperformance of other tech leaders hints at profit-taking in the sector.

Commodity and Cryptocurrency Updates

Crude oil retreated 0.77% to close at $69.56, reflecting continued uncertainty in global demand forecasts. Gold, in contrast, climbed 0.69% to settle at $2,654, benefiting from a slight shift toward safe-haven assets. Bitcoin tumbled 3.88%, closing just under $95,500, as the cryptocurrency market experienced a surge in volatility. The decline in Bitcoin mirrored broader risk aversion, particularly in speculative asset classes.

Treasury Yield Information

The 10-year Treasury yield edged lower, declining 0.15% to close at 4.581%. The dip in yields provided slight support for equities but remains a concern for long-term valuation, especially if yields persist above 4.5%. The marginal decline in yields signals that bond markets are watching for further signs of economic softening.

Previous Day’s Forecast Analysis

Wednesday’s forecast expected SPY to trade between $596 and $605, with $600 serving as a critical support level. The analysis suggested upward momentum would dominate if SPY remained above $599. This projection proved accurate, as SPY respected the $599 support level throughout the session and approached resistance near $602 before closing at $601.30. The forecast’s call for cautious upward drift aligned well with the day’s range-bound movement.

Market Performance vs. Forecast

SPY adhered closely to the forecasted range of $596 to $605, opening at $599.48 and closing at $601.30. Resistance at $602 provided a temporary ceiling, while support at $598 was briefly tested but held firm. The session’s muted action validated the forecast’s expectation for sideways movement, emphasizing the importance of trading around key levels. Opportunities for both long and short trades were limited, but disciplined traders likely found success near intraday support and resistance zones.

Premarket Analysis Summary

The premarket analysis, posted at 7:59 AM, identified $599 as the bias level, with upside targets at $601.50 and $603.70. The session unfolded largely in line with expectations, as SPY maintained strength above $599 and tested the $601.50 target before retreating slightly. The analysis accurately captured the session’s cautious sentiment and provided clear guidance for traders navigating the post-holiday environment.

Validation of the Analysis

Thursday’s market action confirmed the accuracy of the premarket analysis. SPY respected the $599 bias level and achieved the initial upside target of $601.50. Traders who followed the analysis were well-positioned to capitalize on the predictable range-bound activity. The day’s performance reinforced the reliability of the model’s projections, particularly in identifying actionable levels in a low-volatility environment.

Looking Ahead

Upcoming economic data, including next Thursday’s unemployment claims report and Friday’s ISM release, will set the tone for the final trading days of 2024. The labor market data could influence sentiment as traders assess the strength of the economy heading into the new year. Expect amplified price swings due to thin liquidity, with key indices likely reacting to macroeconomic cues.

Market Sentiment and Key Levels

SPY’s close at $601.30 highlights $604 as the next resistance level, with $600 and $598 as key support zones. The sentiment remains cautiously bullish, though the subdued Santa Claus rally suggests resistance at $604 could present a challenge. A breakout above this level could target $605, while a failure to hold $600 may lead to a retest of $598.

Expected Price Action

Our AI model projects a trading range of $598 to $604 for Friday, with a slight bullish bias. A breakout above $604 could signal a continuation of the Santa Claus rally, while a drop below $600 would likely pressure SPY toward $598. The market’s overall sentiment leans bullish, favoring long trades at support levels.

Trading Strategy

Traders should focus on long entries near $599, targeting $604 and $605. Short trades may be considered at resistance around $605, with a downside target of $600. Given the low holiday volatility, position sizes should remain smaller to manage risk effectively. The VIX at 14.73 suggests a subdued environment, ideal for strategic trading around key levels.

Model’s Projected Range

The model forecasts a maximum range of $597.75 to $605.50 for tomorrow in a Call-dominated environment. The range is narrow and therefore sideways price action is likely. Resistance at $604 and support at $598 will be pivotal, and a breakout above resistance could reenter the bull trend channel that broke a few days ago. Price is still currently in the bear trend channel that was redrawn and hovering along the border between the bull and bear channel. The next several days will tell us if the bear channel will hold with prices trading lower or if the bull trend will resume. Traders should monitor these levels closely for actionable opportunities.

Market State Indicator (MSI) Forecast

Current Market State Overview:
The MSI is currently in a narrow, bullish trending market state, with prices closing well above support and extended targets. Extended targets printed consistently throughout the session, beginning at @ noon on the 24^th and continuing all day today. This implies a strong participation by the “herd” keeping the Santa rally going. And like Tuesday, SPY moved steadily higher off support at $600 all session. The MSI has not rescaled since Tuesday potentially indicating a developing topping formation near major overhead resistance. The MSI range remains narrow, but as long as extended targets continue printing, the market is likely to push higher. MSI support remains $593.92 and lower at $592.36.
Key Levels and Market Movements:
With SPY once again opening above extended targets in a bullish MSI state, prices drifted higher from major support at $600 throughout the session. 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. We remain in the Santa Rally window until the end of next week and the bull case is simply that the market trending higher continues until the end of next week. The herd, or what little of it is left in the market, continues to push prices up against major overhead resistance. Note 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. But markets often reserve the real bear case for the start of January, and that will likely be the case this year as well. Those with long books should consider buying some end of January Puts to protect your portfolio. At the open after drifting lower overnight, SPY found major support at $599, a level identified in the premarket analysis, and moved higher during the morning session to $601.50, another level correctly identified in the premarket analysis. Once there SPY traded sideways all day as this battleground is establishing itself as a difficult barrier to higher prices. There was only one trade long today from the $599 level at 9:50 am on a less than perfect failed breakdown. While the range today was quite narrow, this was the one and done trade given extended targets kept us out of any mean reversion shorts…a wise decision aided by the MSI given the market did not sell off materially all day. At the close, extended targets remained intact, signaling the potential for further gains on Friday. 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 bullish market for Friday but with a very narrow range. If extended targets stop printing, there is a high probability that prices will retest $598 support. We previously advised to avoid “short trades until extended targets cease printing. The Santa rally remains intact, so the focus should be on identifying long setups to capitalize on further upside”. Our advice for tomorrow remains the same but with a minor change to the levels for long trades. We do not recommend longs from $600 or $601. This level looks to be quite difficult to overcome. While $604 and $605 will present major resistance, we advise caution entering new longs at this $600 to $601 level. We would much prefer to see a set up like today where the market drifts lower overnight so we can find longs on a failed breakdown around $599 or $598. Even with this advantage the market will likely only deliver small gains. Should a failed breakout occur from $601 or higher without extended targets printing, there may also be opportunities for short trades targeting as low as $598. Using the MSI to identify trends and key levels will ensure alignment with prevailing market conditions. The next week will be filled with more of the same, choppy, narrow 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 $606 and higher strike Calls. Dealers are no longer selling Puts for tomorrow. This implies while the Dealers believe prices will continue to drift higher, perhaps like the MSI is indicating above, prices will top out at $602 or $603 on Friday. The Dealers certainly appears to be setting a ceiling at $604 which will limit further upside. To the downside, Dealers are buying $600 to $590 and lower strike Puts in a 3:2 ratio to the Calls they are selling, implying a slightly bullish outlook for Friday. This shift in positioning from bullish to slightly bullish reflects what Dealers see as a likely top forming, at least for tomorrow.  
Looking Ahead to Next Friday:
Dealers are selling $602 to $610 and higher strike Calls for next week implying the potential for the market to rally to as high as $610. This looks like a very significant level of resistance. Dealers are no longer selling Puts. To the downside, Dealers are buying $601 to $580 and lower strike Puts in a 3:1 ratio to the Calls they are selling, reflecting a neutral to slightly bearish view for next week. This positioning has changed from bullish to slightly bearish, reinforcing the shorter term outlook for Friday. It appears Dealers have some concern that prices could unravel into late next week. While they are not overly bearish, they are also no longer overly bullish which is a change in sentiment. Positioning can change quickly, so it’s essential to monitor daily updates for shifts in sentiment.

Recommendation for Traders

Traders are encouraged to focus on executing trades around key levels such as $599 for support and $604 for resistance. Long trades are favored if SPY maintains its position above $599, with targets at $604 and $605. Conversely, short trades can be considered near $604 if resistance holds, aiming for a retracement to $600. To navigate the holiday market conditions, traders should maintain tight stop-losses and smaller position sizes. As the VIX remains low, traders can capitalize on reduced volatility by trading key levels with discipline. It’s essential to stay updated with premarket analysis before 9 AM ET for any adjustments to the model’s outlook and Dealer positioning.

Good luck and good trading!