Market Insights: Tuesday, December 3rd, 2024

Market Overview:

U.S. stocks closed mixed today as investors weighed fresh economic data and remarks from Federal Reserve officials that hinted at future rate cuts. Both the S&P 500 and the Nasdaq posted modest gains of 0.1% and 0.4%, respectively, marking new record highs. The Dow, however, slipped 0.2%, unable to recover from earlier losses. A surprising uptick in job openings to 7.74 million in October, according to the JOLTS report, contrasted with a decline in hiring. The increase in the quits rate to 2.1% signaled worker confidence despite broader hiring slowdowns. Traders remain on edge ahead of Friday's key payroll report, which will provide additional insights into labor market health. Fed officials, including Mary Daly and Austan Goolsbee, indicated a likely move toward more neutral rate policies, contributing to optimism. Treasury yields edged higher, with the 10-year note closing near 4.22%, reflecting cautious optimism. Meanwhile, market jitters were heightened by political uncertainty after President-elect Trump's opposition to a major U.S. Steel deal, leading to an 8% drop in its shares.

SPY Performance:

SPY saw minimal movement, gaining just 0.05% to close at $603.91. The ETF traded within a narrow range, with a high of $604.16 and a low of $602.34 on light volume of 24.07 million, well below its average. The muted action reflects investor caution as markets consolidate recent gains near all-time highs.

Major Indices Performance:

The Nasdaq led the day with a 0.39% increase, bolstered by continued strength in the tech sector. The S&P 500 followed, inching up 0.1% to another record close. The Dow declined 0.17%, weighed down by underperformance in industrials and financials. The Russell 2000 underwhelmed, sliding 0.71% as small-cap stocks faced headwinds. Defensive sectors, including utilities, lagged, while tech and growth names continued to drive sentiment.

Notable Stock Movements:

Among the "Magnificent Seven," Alphabet and Tesla fell slightly, bucking the broader tech rally. The other members of the group posted modest gains, with no standout performers leading the day. The subdued trading within this influential cohort reflects a consolidation phase, as traders assess upcoming economic data for direction. Broader tech optimism remains intact, but individual stock movements were limited.

Commodity and Cryptocurrency Updates:

Crude oil surged 2.73% to close at $69.76 per barrel, driven by optimism over demand recovery and tighter supply forecasts. Gold added 0.24% as geopolitical risks provided modest support for the safe-haven asset. Bitcoin climbed 0.34% to just under $96,000, sustaining its upward trajectory despite moderate profit-taking.

Treasury Yield Information:

The 10-year Treasury yield rose by 0.91% to close at 4.231%, remaining below the critical 4.3% threshold that could pressure equities. The modest increase reflects growing confidence in the Fed’s ability to manage inflation while fostering economic stability. Lower yields continue to support risk assets, particularly growth stocks.

Previous Day’s Forecast Analysis:

Monday’s forecast projected a trading range of $601 to $606 for SPY, with a bullish bias above $603 and resistance near $605. The recommendation to favor long trades from support levels aligned well with the day’s movement. SPY stayed within the expected range, testing the $604 resistance without significant deviations. Traders who followed the guidance likely capitalized on controlled upward moves, though opportunities were limited by subdued volatility.

Market Performance vs. Forecast:

SPY adhered closely to Monday’s forecast, trading between $602.34 and $604.16. The model’s identification of $603 as a pivotal level proved accurate, as the ETF hovered near this mark for much of the session. The day played out as forecast trading in a very narrow range that was chop filled with little movement. Both longs off support and shorts from resistance also worked as forecast and while resistance at $605 remained untested, the anticipated range and sentiment were well-reflected in SPY’s performance, affirming the forecast’s reliability.

Premarket Analysis Summary:

Tuesday's premarket analysis anticipated a trading range of $604 to $609, with a bias toward long positions above $604. Early trading validated these levels as SPY opened at $603.45, tested $604 resistance, and remained within the projected range. The analysis correctly highlighted the difficulty of breaking $605, as the ETF’s narrow range reflected cautious sentiment. Opportunities for long entries near support levels were present but limited.

Validation of the Analysis:

Today’s trading closely followed the premarket analysis, reinforcing its utility for traders. Key levels, including $604 as a resistance zone, were tested but not breached. The market’s restrained moves validated the predicted bias and range, offering modest but actionable opportunities around pivotal levels. Traders adhering to the analysis likely found value in the structured approach to today’s market.

Looking Ahead:

Key economic events loom large, with the ADP Non-Farm Employment and ISM Services reports due this week. Fed Chair Powell’s speech on Wednesday could provide additional clarity on rate policy, potentially driving increased volatility. Friday will likely move the markets more dramatically when the monthly jobs report is released. Traders should brace for movement around these data points, particularly as markets approach significant resistance and support zones.

Market Sentiment and Key Levels:

SPY’s closing at $603.91 underscores a cautiously bullish sentiment. Resistance at $605 remains a critical hurdle, with further upside targeting $606 and $610. On the downside, $603 and $602 offer strong support, while a breach below these levels could see SPY test $598. Bulls retain total control, but the market’s narrow range suggests patience will be key as traders navigate upcoming data releases.

Expected Price Action:

Our model projects a trading range of $602 to $606 for Wednesday, with a bullish bias above $603. Actionable intelligence suggests targeting $605 and $606 on the upside, while caution is warranted if SPY dips below $603. A break of $605 could signal further gains as there is little resistance presently above $606 to keep SPY from reaching $610. A failure to break $606, however, will invite profit-taking in the form of either further consolidation or a more material sell off. The market is stretched at these levels and has rallied for 11 straight days in a parabolic fashion. And as long as the bulls are in control, price will move higher. But parabolic rallies are unsustainable and after an 11, 12 or 13 day rally, would it surprise if SPY pulled back 2% or more? Be forewarned…its coming and its just a matter of when not if. There was virtually no volume today which is a warning sign that perhaps a pullback is coming sooner than everyone thinks.  

Trading Strategy:

Long trades are favored above $602, targeting $605 and $606. Short positions could be initiated near resistance at $605 or $606, aiming for $603 and $601, but should be approached cautiously given strength of the bullish trend. For shorts and also longs, given the low VIX, take profits quickly as the market will chop up most traders up in this environment. These are not the times to ride the trend as they are nonexistent. Economic events could trigger sharp moves so be prepared to trade what you see and be sure to align strategies with market momentum, adjusting to key levels for optimal entry and exit points. Continue to seek failed breakout/breakdown patterns as triggers to entry. They have been far and few between the last two days but they will appear once again as the markets start to move.

Model’s Projected Range:

The model forecasts a maximum trading range of $599.75 to $606.75 in a Call-dominated market. The narrow range suggests more choppy, sideways action. Resistance at $605 and $606 aligns with the broader bullish channel in place from the September lows. Support at $603 provides downside stability with the trend channel intact with room for new highs if buying pressure resumes.

Market State Indicator (MSI) Forecast:

Current Market State Overview:
The MSI is currently in a very narrow Bullish Trending Market State with price closing mid-range. There are no extended targets printing. The MSI rescaled several times today from a bullish state to a ranging state, flip flopping back and forth in a very narrow range. As we mentioned yesterday the bull trend was likely to stall, which is precisely what happened at major resistance of $604. MSI support currently is $603.68 and resistance is $604.15.
Key Levels and Market Movements:
The market hasn’t moved in two days after an eleven-day, parabolic rally. $600 remains the pivot above which the market moves higher to as high as $610, while below, the market retests $595 and lower. The last two days the market has traded in a smaller than $2 range on very low volume. This represents consolidation as the bulls build a base to push prices above $605 toward $610. Doing so opens up higher prices for December while a failure to break $605 on volume will lead to a deeper pullback. At the open with the market once again facing resistance at $603.75, we waited for the MSI to rescale to a Bearish Trending Market State and took a quick scalp short to $602.35. While there was a brief period of extended targets below, they stopped printing by 11 am ET and with a triple bottom from MSI support at $602.45, we initiated a long to MSI resistance at $603. The market’s price action was so muted, we called it a day @ noon and decided there was no point in risking capital after two successful, albeit small, profitable trades. While the market did retest MSI support once again and rallied to MSI resistance, our day was successful with two winning trades in the books. We restated yesterday “shorts needed to take profits quickly” and given the extremely narrow range of the MSI we knew the day would be nothing but chop. We took profits quickly and will continue to do so until the market breaks out of this narrow range between $602 to $604. We continue to favor longs from support but again, would be extremely careful given the risk of a rug pull at these elevated levels. Another slow and uneventful day where the MSI kept us trading on the right side of the market and taking quick profits in the midst of an otherwise very choppy market. We highly recommend incorporating the MSI into your arsenal to achieve your best results.
Trading Strategy Based on MSI:
The MSI's current state suggests a very weak bull trend on the verge of either breaking out higher or retracing much of its recent move. With November being the best month of the year, December is likely to follow through with higher prices. But its highly probable the market will pull back to trap shorts before launching to new highs. A break above $606 will target $610 and a failure at $605 will bring in a test of $603. A break of $603 and the market could visit $592. Narrow ranges have little earnings potential for traders so we continue to advise trading with the MSI trend and scalping first profits from one side of the MSI to the other…a 70% probability of success. Without extended targets the herd is sitting out this market and it’s likely the market continues to move sideways building energy for a much larger move one way or the other. We continue to seek failed breakouts for shorts toward $602 and failed breakdowns for a long to $604. Our model projects any and all dips will be bought as long as the market remains above $595. We advise caution until the market consolidates further or until SPY sells off. Use the MSI to identify the trend and levels to buy and sell as when this changes, it will change quickly and you want to make sure you are on the right side of the market.  

Dealer Positioning Analysis:

Summary of Current Dealer Positioning:
Dealers are selling $604 to $609 and higher strike Calls implying Dealer’s belief that should price continue to move higher, it will likely slow at $606 and stall at $609. To the downside, Dealers are buying $603 to $580 and lower strike Puts in a 4:1 ratio to the Calls they are selling implying a bearish view of the market for Wednesday. This stance has not changed from today. Dealers continue to protect themselves from what is traditionally a seasonally weak period and have significant downside protection should the market start to pull back.  
Looking Ahead to Next Friday:
Dealers are selling $604 to $610 and higher strike Calls implying the market may break $605 but not exceed $610. To the downside, Dealers are buying $603 to $585 and lower strike Puts in a 4:1 ratio to the Calls they are selling, implying a bearish view of the market for this week. This has changed slightly from neutral to bearish. But this is not overly bearish and has not changed materially. Dealers are loaded with downside protection given how inexpensive Puts are currently. We highly recommend any long book do the same. The market is setting up a more substantial move and after an epic November rally, protecting profits is wise and prudent. Dealers are protected from any downside and when it comes, they will be rewarded handsomely. We advise watching Dealer positioning closely for clues of what is likely to develop in the near term.

Recommendation for Traders:

Traders should focus on opportunities near key levels such as $602 support and $605 resistance. Long trades are favored above $602, targeting $605 and $606 with stops near $601. Short positions from resistance levels should be executed cautiously, aiming for $603 or lower. Two-way trading is appropriate given the weak trend. As volatility remains subdued, position sizing should reflect current market conditions, with tight stop-losses recommended to manage risks effectively. Always align strategies with the prevailing trend, favoring long positions in this bullish environment. Knowing what side is in control is 90% of the battle. The bulls control so favor longs and do not fight the trend until several major support levels fail. The bulls will maintain control even after a 1 or 2% sell off. Use any of these opportunities as they arise to buy dips for what is setting up to be a strong December. Review the premarket analysis posted before 9 AM ET for the latest insights.

Good luck and good trading!