Market Insights: Wednesday, December 4th, 2024

Market Overview:

The stock market continued its impressive rally on Wednesday as tech stocks fueled gains across all major indices, leading to record closes. The Nasdaq surged 1.3% to a new high of 19,735.12, while the Dow climbed 0.7%, closing above 45,000 for the first time ever. The S&P 500 also reached a fresh peak, advancing 0.6% to 6,086.49. Federal Reserve Chair Jerome Powell bolstered investor confidence with remarks highlighting the U.S. economy's resilience, describing it as in "remarkably good shape" during his appearance at the New York Times DealBook Summit. Powell’s comments reinforced expectations for a December rate cut, with traders now pricing in a 77% probability of a 25 basis point reduction. Tech giants like Amazon and Apple hit all-time highs, while Nvidia gained over 3%, further fueling the bullish sentiment. Salesforce rocketed 11% after delivering strong earnings and showcasing progress in its AI initiatives. Despite some softness in private payrolls, market participants remain optimistic, viewing these developments as indicative of a healthy but cooling labor market. However, corporate news took a tragic turn with the fatal shooting of UnitedHealthcare CEO Brian Thompson, prompting UnitedHealth Group to halt its investor day.

SPY Performance:

SPY climbed 0.61% to close at $607.59, marking its strongest performance this week. The ETF moved decisively higher, with a trading range between $604.96 and $607.91. Increased volume of 34.21 million, though still below the average, underscored the upward momentum, pushing SPY closer to key resistance levels.

Major Indices Performance:

The Nasdaq led the indices with a 1.15% rally, propelled by significant gains in the tech sector. The Dow followed with a 0.66% increase, reaching a new milestone above 45,000. The S&P 500 added 0.61%, closing at a record high. The Russell 2000 rose modestly by 0.36%, showing relatively weaker performance compared to larger-cap indices. Tech stocks dominated the day, with Nvidia and Salesforce leading gains, while defensive sectors like utilities remained subdued.

Notable Stock Movements:

The "Magnificent Seven" stocks enjoyed broad-based strength, with Nvidia leading the charge, gaining over 3% as enthusiasm around AI technologies continued to grow. Amazon and Apple also reached all-time highs, reflecting robust investor confidence in tech leaders. Salesforce soared 11% after its earnings beat and strong guidance reinforced optimism about its AI-driven products. These moves underline the tech sector's dominance as the primary driver of market gains.

Commodity and Cryptocurrency Updates:

Crude oil declined 1.76%, settling at $68.51 per barrel, as concerns about oversupply outweighed optimism around demand. Gold edged up 0.28% to close at $2673 per ounce, supported by moderate safe-haven demand amid global uncertainties. Bitcoin surged 3.19%, crossing the $98,500 mark, as institutional interest and broader market sentiment remained bullish.

Treasury Yield Information:

The 10-year Treasury yield fell by 0.85%, closing at 4.187%. This decline reinforced positive sentiment in equity markets as lower yields reduce the cost of capital and bolster growth stock valuations. Investors viewed Powell’s comments on economic resilience as a signal that the Fed will likely maintain a supportive policy stance.

Previous Day’s Forecast Analysis:

Tuesday’s forecast projected a trading range of $602 to $606, with a bullish bias above $603. SPY outperformed expectations, breaching the upper limit and closing at $607.59. Resistance levels at $606 were tested and held until the afternoon session when this level was surpassed, reflecting stronger-than-anticipated buying momentum. Traders who followed the guidance for long trades above $603 likely capitalized on the robust upward movement.

Market Performance vs. Forecast:

SPY exceeded Tuesday’s forecasted range, reaching a high of $607.91. The model accurately identified $606 as a key level which kept SPY contained for the morning hours. After pulling back to $605, SPY reversed on Powell’s comments and decisively broke through $606, signaling strong bullish sentiment. The day’s performance validated the model’s bullish bias while also advising traders to take quick profits until the market broke either higher or lower. This guidance provided traders with ample opportunities for profitable trades, particularly as resistance levels gave way.

Premarket Analysis Summary:

Wednesday's premarket analysis posted at 7:44 am ET forecasted a trading range of $603.40 to $609.40, with a bullish bias toward long positions above $605. SPY’s movement adhered closely to this projection, opening at $603.74 and climbing steadily to close near the upper target. Key levels identified premarket, including $606.40, served as pivotal resistance points above which we stated the door would be open to higher prices to as high as $609.

Validation of the Analysis:

Today’s trading strongly aligned with the premarket analysis, which highlighted $606.40 as a critical resistance level and $605 as a support. SPY’s breakout above $606.40 confirmed the analysis’ upward bias, offering long trade opportunities as predicted while $606.40 held for the morning, providing traders with a level to short for a scalp early in the session. The session validated the utility of the premarket levels in guiding traders through a trending market.

Looking Ahead:

The market turns its attention to Thursday’s unemployment claims and Friday’s highly anticipated Non-Farm Employment Change report. Multiple Fed members are also slated to speak, potentially adding to volatility although with Fed Powell’s speech out of the way, the remaining speakers comments are less likely to move the markets. Collectively these events and in particular Friday’s jobs report are expected to shape short-term market direction, particularly as the market approaches key resistance and support zones.

Market Sentiment and Key Levels:

SPY’s close at $607.59 underscores bullish control, with the market poised for further gains. Major resistance lies at $610, with support at $605. A sustained break above $610 could set the stage for a test of $613, while a failure at this level may invite consolidation or a minor pullback to $605. Bulls remain in control as long as price is above $600, but the rally’s extended nature warrants caution as profit-taking looms. Thirteen days of higher highs and straight up price action is unsustainable and within the next few days its highly likely the market pulls back 1 to 2%.

Expected Price Action:

The model forecasts a trading range of $605.50 to $609 for Thursday, with a bullish bias above $606. Targeting $610 on the upside is actionable, while caution is advised for potential retracements to $605. A breakout above $610 could trigger further rallies, while a rejection may lead to consolidation near support levels. The bullish trend remains intact, but traders should watch for signs of exhaustion. It’s likely within the next day the market retests the breakout level of $606.50 before determining the next leg of its move higher or lower.

Trading Strategy:

Long trades are favored above $605, targeting $610 and beyond, with stop-losses near $604. Short positions may be considered near resistance at $610, aiming for a pullback to $607 or $606, but should be executed cautiously in this strong bullish trend. On all shorts trade in smaller size and take profits quickly as this bull trend is simply too strong…until it isn’t. We continue to favor longs over shorts but given how extended prices are, we are open to two-way trading, particularly if it is supported by our MSI indicator (more below). The VIX remains subdued at 13.45, suggesting low volatility, though upcoming economic events could create sharp moves. Traders should align strategies with prevailing momentum and monitor key levels closely.

Model’s Projected Range:

The model predicts a maximum trading range for Thursday of $603.75 to $611, reflecting an expanding, Call-dominated market. This aligns with the ongoing bullish trend, with $610 serving as major resistance and $605 as critical support. The range is expanding so expect more trending price action. Volume remains low so it’s likely the market spends more time consolidating than trending but when it does trend, it’s likely to be strong. SPY remains within its bullish channel from September lows, leaving room for further upside with the downside limited to $592. Traders should prepare for potential breakouts or retracements as market sentiment evolves.

Market State Indicator (MSI) Forecast:

Current Market State Overview:
The MSI is currently in a wide Bullish Trending Market State with price closing just below resistance. There are no extended targets printing above however there were several hours today with extended targets printing above indicating the herd was pushing price to new heights. The MSI rescaled higher five times today, extending and expanding its bullish state. Rapid rescalings of the MSI indicate a powerful and unrelenting trend, especially when they are accompanied by extended targets. MSI support currently is $606.42 and resistance is $607.78.
Key Levels and Market Movements:
After doing nothing for two days, the market stored enough energy to propel price to new heights today and as such, the thirteen-day, parabolic rally continues. $605 is now the pivot above which the market moves higher to $610, while below, the market retests $600 and lower. Today’s breakout and gap higher  continues the bullish euphoria since the election. There is little to suggest the market can move above $610 tomorrow. Between the current close at $607 and $610 there is a fairly strong wall of resistance which implies $608 and $609 will not give way easily on Thursday. Expect the market to at least slow as it approaches $610. We stated yesterday breaking $605 “opens up higher prices for December while a failure to break $605 on volume will lead to a deeper pullback.” There has been no failure as of yet so prices are likely to continue to move higher but perhaps more as a grind than a strong trend. After the open with price chopping around in tight range, given extended targets printed from @ 5 am up and until the open, we took the opportunity to go long off MSI support @ 10 am ET at $605.40 on a textbook failed breakdown which tested major support at $605 which was also a premarket report level. This played out nicely reaching the MSI extended target at $606.20. As we advised yesterday, we took profits quickly and waited for another set up. While we contemplated shorts at this level, with extended targets printing above price we knew to stay out of this trade until 1 pm ET when they stopped printing and we were able to scalp a short from major resistance at $606.40 to MSI support at $605.40. Again knowing the market was trading in a tight range, we quickly booked profits and with another, less than textbook failed breakdown from MSI support at 1:32 pm ET, we reversed long and rode this trade to our first target at $606.20 once again. But this time extended targets started printing and the MSI rescaled higher telling us to hold onto our trailer and ride this long to new highs. We finally closed this trade at MSI resistance at $607.50 toward the end of the day. Two quick scalp trades and one strong trend trade made it a three for three day with exceptional profits booked on the session. Another day when the MSI kept us trading on the right side of the market, providing profit levels and actionable information to keep us in our trades long enough to capture all that the market provided. We highly recommend incorporating the MSI into your trading toolbox to achieve your best results.
Trading Strategy Based on MSI:
The MSI's current state suggests a strong bull trend. We stated yesterday the MSI told us the market was on “the verge of either breaking out higher or retracing much of its recent move.” And that “with November being the best month of the year, December is likely to follow through with higher prices.” We still believe the bulls will seek more liquidity to fuel higher prices and will push the market lower to trap unsuspecting shorts before breaking $610. But as we stated, a “break above $606 will target $610” and that looks firmly in play for the rest of this week. Certainly a failure at $605 will bring in a test of $603 and perhaps lower. The herd came back to push the market up today and we suspect the market reaches $610 where we will await new information for what is to follow. We continue to seek failed breakouts for shorts from $610 toward $606 and failed breakdowns for longs from $605 to $610. Our model continues to project any and all dips will be bought as long as the market remains above $600. Caution is still warranted until SPY sells off to find more fuel to push price above $610. Continue to 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 $608 to $610 and higher strike Calls while also selling $605 to $607 Puts implying Dealer’s strong belief that prices will move higher on Thursday. Dealers sell Puts when they are convinced the market will move up. This implies a floor at $605 with a strong probability that price will attempt to reach $610. To the downside, Dealers are buying $604 to $590 and lower strike Puts in a 3:1 ratio to the Calls/Puts they are selling implying a neutral view of the market for Thursday. This stance shifted from bearish to neutral for tomorrow. Dealers continue to own lots of downside protection for what is traditionally a seasonally weak period but they firmly believe prices are going higher and perhaps this year, the market will not follow the Thanksgiving rally with a week of selling…at least not this time.  
Looking Ahead to Friday:
Dealers are selling $608 to $613 and higher strike Calls while also selling $605 to $607 Puts implying the belief that a floor is in the market this week at $605 and that prices are likely to move higher into Friday as high as $613 with $610 being a major hurdle which may not be overcome by Friday. To the downside, Dealers are buying $604 to $585 and lower strike Puts in a 2:1 ratio to the Calls/Puts they are selling, implying a neutral to slightly bullish view of the market heading into Friday. This has changed slightly from bearish to neutral. We continue to recommend any long book purchase inexpensive and short-dated Puts to protect from a pullback which is overdue. We stated yesterday “the market is setting up a more substantial move” and we got a solid move today to new highs even after the epic November rally. Dealers are certainly protected from any downside but surely believe higher prices will follow, at least for the rest of this week. We advise watching Dealer positioning closely for clues of what is likely to develop in the near term.

Recommendation for Traders:

Traders should remain focused on key levels such as $605 support and $610 resistance. Long trades above $605 remain attractive, targeting $610 and higher, with stops near $604. Short positions should be approached cautiously, with profit-taking around $607 or $605. The market’s low volatility suggests tight risk management, and traders should remain vigilant for any breakout or reversal signals. With a strong December rally underway, the bulls remain in complete control, but caution is warranted as profit-taking is likely at these elevated levels. Review the premarket analysis posted before 9 AM ET for updated strategies.

Good luck and good trading!