Market Insights: Tuesday, December 31st, 2024

Market Overview

Stocks ended 2024 on a mixed and subdued note as the major indices struggled for direction amidst a year that delivered impressive gains. The S&P 500 slipped 0.4%, while the Nasdaq Composite led losses with a 0.9% decline, and the Dow Jones Industrial Average hovered just below the flatline. Despite these year-end declines, 2024 proved to be a remarkable year for equities, with the S&P 500 gaining 23%, driven by strong contributions from the "Magnificent Seven" tech stocks. The Nasdaq surged nearly 30%, showcasing the dominance of the AI and tech rally, while the Dow posted a more modest 13% increase. This marked back-to-back annual gains for the S&P 500, a feat not seen in almost three decades. On the economic front, the Federal Reserve’s first interest rate cut in four years added fuel to the rally, complemented by optimism surrounding the incoming administration. Commodities also saw notable moves, with gold rising 28% and Bitcoin more than doubling its value despite late-year setbacks. Yet, the anticipated "Santa Claus" rally was largely absent, setting a cautious tone for the start of 2025.

SPY Performance

SPY edged lower, closing at $586.07, marking a 0.27% decline. The ETF traded between a low of $584.42 and a high of $590.64 on elevated holiday week volume of 47.53 million shares. Despite efforts to reclaim $590 during the session, resistance at this level held firm, underscoring continued selling pressure. The inability to sustain above $586 leaves traders eyeing critical support zones as the new year begins.

Major Indices Performance

The Russell 2000 managed to eke out a 0.12% gain, leading the indices amidst a broadly cautious trading environment. The Dow Jones Industrial Average shed a modest 0.14%, reflecting mixed sentiment across blue chips. The S&P 500 fell by 0.4%, while the Nasdaq Composite experienced the steepest decline of 0.74%, pressured by weakness in tech heavyweights. Defensive sectors outperformed, signaling cautious positioning by investors wary of upcoming volatility.

Notable Stock Movements

Among the Magnificent Seven, Tesla once again led losses, plunging over 3.3%, as concerns over valuations persisted. Other members of the group saw declines, albeit more modestly, with none bucking the broader bearish trend. These moves highlight the sector's sensitivity to rising yields and profit-taking. Broader market caution was evident as traders rotated into safer assets, further pressuring growth-oriented names.

Commodity and Cryptocurrency Updates

Crude oil climbed 1.11% to settle at $71.78, buoyed by optimism over longer-term demand prospects. Gold advanced 0.75%, closing at $2,638, supported by its safe-haven appeal. Bitcoin recovered 1.74% to finish just above $93,700, regaining some ground after recent declines. These movements reflect mixed sentiment as traders weigh risk-on and risk-off opportunities heading into 2025. We continue to believe buyers are waiting to add to long positions on Bitcoin at $83000.

Treasury Yield Information

The 10-year Treasury yield rose by 0.75%, ending the session at 4.579%. Yields holding above 4.5% remain a significant headwind for equities, as they indicate tighter financial conditions and reduced risk appetite. This uptick further underscores the delicate balancing act investors face as they navigate high-rate environments. The market will struggle mightily should 10-year yields rise to 5% or higher.

Previous Day’s Forecast Analysis

Monday’s forecast anticipated a trading range of $584 to $592, with a bearish tilt unless SPY could reclaim $590. Short trades were favored over longs from $590 and higher with longs potentially from $585 on failed breakdowns.

Market Performance vs. Forecast

SPY adhered closely to Monday’s projected range, with actual movement spanning $584.42 to $590.64. Resistance near $590 proved impenetrable, and support at $584 held steady, aligning with the analysis. SPY struggled to hold above $590 and shorts from this level proved profitable to key support at $585. Resistance near $590 ultimately capped any upside, validating the projected range and the cautious outlook. The forecast effectively highlighted key levels that guided trading strategies and traders who followed the forecast's guidance found opportunities on both sides of the market, capitalizing on pivotal support and resistance levels.

Premarket Analysis Summary

Today’s premarket analysis, posted at 7:33 AM, projected a trading range of $589.60 to $593, with $591 as the bias level. The expectation of a neutral to slightly bullish tilt hinged on breaking and holding above $591. Resistance at $593 and $595 were identified as upside targets, while failure at $589.60 could lead to testing $586.25. The cautious sentiment outlined premarket reflected the session’s choppy conditions.

Validation of the Analysis

Today’s market adhered well to the premarket analysis. SPY struggled to break through $591, confirming resistance near this bias level. Once again the premarket and post market levels aligned. Readers of this newsletter know this implies a near certainty a level will hold and to trade in size and with confidence. Shorts from overhead resistance at this level led to material gains to the session's low at $584.42, emphasizing the premarket’s accuracy in identifying pivotal levels. This alignment provided actionable trading opportunities for disciplined traders.

Looking Ahead

Thursday brings Unemployment Claims, followed by Friday’s ISM data, both critical for early 2025 sentiment. Thin trading conditions may amplify reactions to these releases, creating heightened volatility and new trading setups.

Market Sentiment and Key Levels

SPY’s close at $586.07 places $583, $581, and $580 as key support levels, with resistance at $589 and $590. The broader bearish tone persists, with a cautious outlook dominating. A break below $585 could trigger further declines while reclaiming $590 would signal a potential limited recovery to $592. There is little to indicate prices rising beyond $592 on Thursday.

Expected Price Action

The model projects a trading range of $583 to $592 for Thursday, leaning bearish unless SPY regains $590. Below $585, watch for a drop toward $578. Above $590, price could push to $592. Traders should anticipate periods of trending price action with some level of chop given year-end dynamics.

Trading Strategy

Long trades remain favorable perhaps for one more test of $585 targeting $590, with stops below $582. Short entries should be considered near $590 to $592, aiming for $585. Elevated VIX levels around 17.35 suggest vigilance in managing positions. We continue to favor failed breakout and failed breakdown trades as triggers to entries.

Model’s Projected Range

The model forecasts a maximum range of $582 to $598.75, with resistance at $589 and $590 and support at $583, $581, and $580. The market is Call dominated which could lead to some attempt at a Santa Rally on Thursday. SPY remains in the new bear trend channel, and price action is likely to remain constrained without a significant catalyst or a return to the bull channel from the September lows. Should price falter and decline below $585 on volume, the door is open to further declines to close the gap at $576 where it is likely to find support from the current bear channel.

Market State Indicator (MSI) Forecast

Current Market State Overview:
The MSI is currently in a Bearish Trending Market State, with prices closing mid-range without extended targets below. Extended targets began printing briefly at 10 am as a warning sign of what was likely to develop. The MSI rescaled lower three times during the morning session while printing extended targets forecasting price to reach major support at $585. A bounce at this level to MSI resistance at $587.50 and price once again sold off to MSI support at $585.25. MSI’s range is average in size, which could forecast to a break of $585 and lower prices on Thursday. We stated yesterday “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 attempt a Santa rally on Tuesday”. Overnight price did attempt a rally at the open to resistance at $591 which held, triggering the day’s decline. MSI support is $585.25 and resistance is $587.42.  
Key Levels and Market Movements:
SPY attempted to rally prior to the open but reached major resistance at $590 which proved to be an immovable wall market participants were unable to scale. As such a triple top at MSI resistance and we were short when extended targets began printing, banking first profits at MSI support and holding a runner to see how far the market would fall. The MSI kept us short as it rescaled lower and printed extended targets below. When the MSI rescaled to major support at $585.25 we knew to take profits and wait for a mean reversion long to develop. While this trade materialized late in the day, we chose to pass given the time and the upcoming holiday. The MSI kept us out of harm’s way all afternoon by printing extended targets below. One solid short trade the day before a holiday and we were pleased that once again, the MSI did its job, showing us the strength of the trend and where we would find major support and resistance. Again we reiterate one or two trades per day is all a trader needs to make a solid living. And with the MSI in hand, entries and exits are easily confirmed making trading simple. The MSI provides actionable information and 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 Thursday. With multiple attempts to break $585 this level is now weakened enough that the bulls have likely stepped away. A material push below this level will lead to further declines while the gap at $576.80 remains a target for the bears. Probabilities suggest this is likely to close on a further decline. Extended targets are no longer printing, which weakens the bear case a bit for Thursday. If extended targets begin printing in the premarket on Thursday, look for a break of the $585 major support level. We stated yesterday it “would not surprise us to see prices attempt a retest of $585 before any move higher on Tuesday”. Well got the retest late in the day on Tuesday so now the market needs to decide if that was enough of a test to trigger a short squeeze and push prices higher. Or will the recent weakness simply continue after the New Year. Our model suggests there may be one more squeeze left to drive prices higher on Thursday and perhaps on Friday, but it’s likely once price reaches major resistance at $590, the bear trend will resume. One more test of $585 is likely to hold but any further attempts to test this level are unlikely to contain price and therefore lower prices are forecast for January. Therefor for Thursday we continue to favor long trades on a failed breakdown on the next move to $585 but would avoid long trades from this level on any subsequent tests of this level. Instead after the short squeeze materializes, look to fade any rally from $590 or higher on a failed breakout or other topping pattern. The bears have more control of the market than the bulls, even with price above $585. But the bulls are biding their time and are ready to move all in should the bears stumble. The best way to do that is to trap shorts at the lows and swoop in to pick up all that bear liquidity to shake out weak bears. But that is unlikely to last long once price reclaims $590. There is simply too much resistance above this level to believe the bulls can resume the bull trend. We favor shorts from overhead resistance and as we said yesterday, the “markets often reserve the real bear case for the start of January” so even after a bit of a rally on Thursday or Friday, be prepared for perhaps a more significant sell off next month. Certainly the bulls can resume control of the market above $595, but below $590 the bears are in charge. Should $585 fail, watch for the MSI to rescale lower, expanding its range which could lead to much lower prices to $575. We advise making use of the MSI to identify the trend and key levels to trade to ensure alignment with prevailing market conditions. Thursday looks to be setting up as a strong trending day so use the MSI to get with the trend and stay with it for material gains.

Dealer Positioning Analysis

Summary of Current Dealer Positioning:
Dealers are selling $589 to $603 and higher strike Calls while also buying $586 to $588 Calls indicating a desire by the Dealers to participate in any Santa Rally that develops on Thursday. The upside for Thursday appears limited to $600. To the downside, Dealers are buying $584 to $577 and lower strike Puts in a 2:3 ratio to the Calls they are selling/buying, implying a bullish outlook for Thursday. This shift in positioning from slightly bullish/neutral to bullish reflects what Dealers see as the potential development of the Santa Rally after the first. Perhaps a bit of wishful thinking.     
Looking Ahead to Friday:
Dealers are selling $592 to $600 and higher strike Calls while buying $586 to $591 Calls indicating their desire to participate in any market rally to as high as $600 by Friday. $600 looks to be a ceiling for the week. To the downside, Dealers are buying $584 to $570 and lower strike Puts in a 2:1 ratio to the Calls they are selling/buying, reflecting a neutral view for the rest of the week. This positioning has changed from slightly bearish to neutral. Again it appears Dealers, while ready for further declines, are anticipating at least some type of Santa Rally after the first. At this point Dealers for Thursday and Friday believe a rally will materialize but are also solidly positioned for further declines should they develop. Dealer positioning changes daily so it’s essential to monitor these daily updates for shifts in sentiment.

Recommendation for Traders

Traders should focus on trading between $585 and $590, with a preference for short entries near resistance and potentially one more long from $585. $585 has been weakened and we do not favor any type of knife catch from this level. Major levels weaken on repeated tests and $585 has seen enough action for probabilities to suggest one more test is likely all that is left in this level. Further tests favor $585 giving way and price moving to lower levels where the bears will be fully in charge. Any short squeeze that develops on Thursday should be faded as well given the resistance above $590 is significant. Maintain disciplined stop-losses due to increased volatility and be sure to review the premarket analysis posted before 9 AM ET for real-time updates on key levels and market sentiment.

Good luck and good trading!