Market Insights: Tuesday, December 24th, 2024

Market Overview
U.S. stocks rallied during the final, shortened trading session before Christmas, marking the start of the traditional "Santa Claus" rally. The Nasdaq Composite led with a robust 1.4% gain, followed by a 1.1% rise in the S&P 500 and a 0.9% climb in the Dow Jones Industrial Average. The market's upward trajectory was bolstered by strength in the technology sector, led by Nvidia, which extended its remarkable gains in 2024. Investors are recalibrating expectations for Federal Reserve policy in 2025, as inflation remains a critical focus. While the Fed achieved a soft landing for the economy this year, persistent inflation above the 2% target suggests a challenging road ahead. Economists forecast core inflation to hover around 2.5% next year before moderating further in the long term. As markets entered the holiday break, optimism surrounding the tech sector and muted expectations for immediate rate hikes supported positive sentiment.

SPY Performance
SPY closed at $601.30, reflecting a solid 1.10% gain during the half-day holiday session. The ETF reached a high of $601.34 and a low of $595.48, with a notable trading volume of 32.93 million. This rally demonstrated strong follow-through from Monday’s gains, as the ETF surpassed key resistance levels, indicating bullish momentum heading into the holiday break.

Major Indices Performance
The Nasdaq outperformed with a 1.35% gain, supported by robust advances in technology stocks, particularly Nvidia and Tesla. The S&P 500 followed closely with a 1.1% rise, while the Dow Jones Industrial Average added 0.74%. The Russell 2000 also had a positive day, climbing 0.92%, reflecting broad-based market strength. These gains came as Wall Street embraced the onset of the Santa Claus rally, driven by improving sentiment and diminishing concerns over immediate rate hikes.

Notable Stock Movements
The Magnificent Seven stocks all delivered strong performances, led by Tesla, which surged over 6% to close as the group’s best performer. Nvidia continued its impressive 2024 run with additional gains, reinforcing its leadership in the semiconductor sector. Other major players, including Meta and Amazon, also posted robust advances, reflecting widespread investor optimism. The tech-heavy momentum highlighted growing confidence in the sector as a key driver for the year-end rally.

Commodity and Cryptocurrency Updates
Crude oil advanced 1.33%, closing at $70.16, as markets anticipated a pickup in demand during the new year. Gold saw a modest increase of 0.20% to $2,634, benefiting from holiday trading volumes. Bitcoin had an impressive day, rallying 5.74% to close just below $99,000, signaling strong speculative interest despite regulatory headwinds. These movements reflect a mixed sentiment across asset classes, with optimism driving risk-on trades in cryptocurrencies and equities.

Treasury Yield Information
The 10-year Treasury yield fell slightly, declining 0.17% to close at 4.591%. The drop in yields provided some relief to equity valuations, particularly in the growth-heavy tech sector. Yields remain in a challenging range for equities, with sustained levels above 4.5% continuing to pose risks to broader market sentiment.

Previous Day’s Forecast Analysis
Monday’s forecast anticipated SPY trading between $590 and $598, with resistance at $597 and support at $593. The analysis highlighted the potential for slow, choppy upward movement given the shortened trading day. The market closely followed this projection, as SPY steadily climbed, eventually breaching the $597 resistance level. The cautious approach suggested in the forecast proved prudent, as the rally unfolded in a controlled manner.

Market Performance vs. Forecast
SPY adhered closely to Monday’s forecast, opening at $595.91, testing support at $595, and ultimately climbing to close above resistance at $601.30. The day’s range of $595.48 to $601.34 validated the model’s projection, with long opportunities materializing around key resistance and pivot levels. The bias toward upward momentum and actionable trade suggestions provided clear guidance for traders navigating the holiday market.

Premarket Analysis Summary
The premarket analysis, posted at 7:27 AM, projected SPY’s key levels at $595 for support and $597 as initial resistance, with an upside stretch target at $600. The session unfolded in line with these expectations, as SPY tested $595 early before rallying past $597 and reaching the $600 target. The model accurately captured the market’s sluggish yet upward trend during the holiday session.

Validation of the Analysis
Tuesday’s market action validated the premarket analysis, with SPY respecting the projected levels and providing clear trading opportunities. The breach of $597 resistance and steady drift toward $600 demonstrated the effectiveness of the analysis in identifying actionable levels. Traders who followed the analysis were well-positioned to capitalize on the session’s predictable movement.

Looking Ahead
The next key economic data release is Thursday’s unemployment claims report, which could set the tone for the remaining trading days of 2024. With thin holiday liquidity, traders should prepare for amplified price swings and maintain a cautious approach until normal trading resumes.

Market Sentiment and Key Levels
SPY’s close at $601.30 positions $605 as the next significant resistance, while $600 and $596 serve as key support levels. Sentiment remains bullish as the Santa Claus rally gains traction, but traders should watch for potential resistance near $605, which could temper further gains.

Expected Price Action
Our AI model projects a trading range of $596 to $605 for Thursday, suggesting a narrow, choppy session. A breakout above $605 could extend gains, while a drop below $596 may lead to retests of lower support at $593. The overall sentiment leans cautiously bullish, with upward momentum likely to dominate.

Trading Strategy
Traders should consider long positions from $597, targeting $605, while shorts on a failed breakout pattern may be initiated near $605 with a downside target of $600. Given the holiday conditions, smaller position sizes and disciplined stop-losses are advised. As the VIX remains subdued, traders can capitalize on reduced volatility by focusing on key levels and failed breakout/breakdown patterns.

Model’s Projected Range
The model predicts SPY will trade within a maximum range of $597.50 to $604.50, reflecting a Call-dominated environment. This narrow range, at the upper end, will test the lower trendline of the bull channel from the September lows. Price is still trading within the redrawn bear trend channel. A break higher, back into the bull channel from September, will invalidate the newly redrawn channel. Resistance at $605 and support at $596 serve as pivotal levels. Traders should closely monitor these levels to adapt their strategies to evolving market conditions.

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. These extended targets printed consistently throughout the session, beginning in the premarket, indicating strong participation by market participants during the Santa rally. Consequently, SPY moved steadily higher all session. The MSI has not rescaled since yesterday, 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.
Key Levels and Market Movements:
With SPY opening above extended targets in a bullish MSI state, prices drifted higher throughout the session. This was expected since market participation remained robust. Price broke through major resistance at $597 and advanced to the next major resistance level at $600, which only temporarily slowed the upward trajectory. The only viable trade setup for the day occurred at the open, around support at $595.50, which aligned with the MSI’s extended target level. While trading off extended targets as support is typically less ideal, the context of the Santa rally made this a strong opportunity for gains. Although we chose not to trade today, traders who entered this setup experienced significant gains. The consistent printing of extended targets throughout the day discouraged mean reversion shorts and reinforced confidence in the upward trend. Heading into the close, extended targets remained intact, signaling the potential for further gains on Thursday. 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 Thursday but with a narrow range. If extended targets stop printing, there is a high probability that prices will retest $596 support. We previously noted that "$595 will likely become the pivot between higher and lower prices." Once again, this pivot held firm, and as prices surpassed $595, they reached major resistance levels. For Thursday, we advise monitoring the MSI closely for rescaling higher or lower. 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, with targets as high as $605. Should a failed breakout occur from $601 or higher without extended targets, there may also be opportunities for short trades targeting as low as $596. Using the MSI to identify trends and key levels will ensure alignment with prevailing market conditions.

Dealer Positioning Analysis

Summary of Current Dealer Positioning:
Dealers are actively selling $602 to $607 and higher strike Calls, while also selling $597 to $601 Puts. This positioning indicates strong conviction that prices will rally on Thursday, although resistance near $603 could limit further upside. Dealers typically sell Puts close to the money when confident that prices will move higher. On the downside, Dealers are buying $596 to $585 and lower strike Puts in a 2:3 ratio to the Calls/Puts they are selling, reinforcing their bullish outlook for Thursday. This shift in positioning from neutral to bullish reflects growing confidence in continued market strength.
Looking Ahead to Friday:
Dealers are maintaining a similar stance for Friday, selling $602 to $610 and higher strike Calls while selling $594 to $601 Puts. This suggests a belief that prices will rise into Friday but remain capped near $605. To the downside, Dealers are buying $593 to $570 and lower strike Puts in a 1:1 ratio to the Calls/Puts they are selling, reflecting a neutral to slightly bullish sentiment for the remainder of the week. Dealers’ confidence in the Santa rally’s continuation is evident in their willingness to sell Puts close to the money. However, positioning can change quickly, so it’s essential to monitor daily updates for shifts in sentiment.

Recommendation for Traders

Traders should focus on executing trades around key levels identified for SPY, such as $600 and $596 for support and $605 for resistance. Long trades are favored if SPY holds above $596, with targets at $605 and beyond. Conversely, short trades can be initiated near $605 if resistance holds, aiming for a retracement to $600. Maintain tight stop-losses in this choppy environment, and remain disciplined with position sizes, especially during the holiday period. With the VIX down to 14.27, volatility is subdued, presenting opportunities for strategic trading. Be sure to review premarket analysis and dealer positioning updates for any changes to key levels or trends.

Good luck and good trading!