Market Insights: Thursday, December 5th, 2024

Market Overview:

U.S. stocks paused their recent rally on Thursday as investors awaited Friday’s crucial jobs report and digested fresh economic data. The Dow led losses with a 0.55% decline, while the S&P 500 and Nasdaq each dipped 0.16%. Bitcoin pulled back after reaching a milestone of over $103,000 on Wednesday, trading near $99,000 as the euphoria faded slightly. The market’s retreat follows Federal Reserve Chair Jerome Powell’s recent remarks highlighting a strong economy but urging a cautious policy approach. Traders are watching for confirmation of Powell's optimistic outlook, with the monthly jobs report expected to offer clarity on the labor market's health. Meanwhile, weekly jobless claims climbed to 224,000, up from the previous week’s 215,000, raising questions about the labor market’s resilience. Market sentiment was further tempered by reduced bets on a December rate cut, now at 74% according to the CME FedWatch tool, down slightly from Wednesday.

SPY Performance:

SPY slipped 0.16% to close at $606.66, retreating from an intraday high of $608.19. Trading volume was light at 25.42 million, reflecting a cautious tone as investors consolidated recent gains. The ETF briefly tested resistance at $608 but was unable to sustain the upward momentum, closing closer to the session's low.

Major Indices Performance:

The Russell 2000 posted the steepest loss, down 1.17%, reflecting weakness in small-cap stocks. The Dow followed with a 0.55% decline, weighed down by profit-taking. Both the Nasdaq and the S&P 500 fell 0.16%, halting their record-breaking streaks. The broader market appears to be in a holding pattern ahead of Friday’s jobs report, with growth sectors showing relative resilience while cyclicals underperformed.

Notable Stock Movements:

The "Magnificent Seven" stocks were mixed. Tesla led gains, climbing over 3%, while Alphabet, Meta, and Nvidia registered modest losses. Apple, Amazon, and Microsoft posted minor advances, reflecting a bifurcated tech sector. Tesla’s rally underscores its recent momentum, even as broader tech sentiment cooled slightly. Investors are closely monitoring these leaders for signals about the next phase of the market’s direction.

Commodity and Cryptocurrency Updates:

Crude oil was virtually flat, closing at $68.50 per barrel as traders balanced supply concerns with muted demand growth. Gold fell 0.81% to $2655 per ounce, pressured by a stronger dollar and reduced safe-haven demand. Bitcoin rose 0.58%, hovering above $99,000 after briefly surpassing the $103,000 mark on Wednesday. Its rally reflects ongoing enthusiasm about institutional adoption, though profit-taking tempered gains. We forecast several days ago that Bitcoin would breach the $100,000 market and exceed it before any material profit taking. We maintain our view that rallies above $100,000 are likely to face selling pressure unless driven by a significant external catalyst or preceded by a more substantial pullback in the cryptocurrency market.

Treasury Yield Information:

The 10-year Treasury yield dipped 0.07% to close at 4.179%. This slight decline aligns with cautious equity sentiment, as investors await confirmation of economic strength from Friday’s labor market report. The yield remains below the critical 4.3% threshold, keeping valuation pressures in check for growth stocks.

Previous Day’s Forecast Analysis:

Wednesday’s forecast anticipated a trading range of $605.50 to $609, emphasizing a bullish bias above $606 and resistance at $608. The analysis suggested that SPY would struggle to decisively break above $608 without strong buying pressure, while support at $606 and $605 would likely limit downside movements. Two-way trading was recommended seeking failed breakout and failed breakdown patterns as triggers to entry. SPY traded within the projected range but failed to maintain strength above $608 as forecast, closing just above the lower target. Resistance at $608.50 held firm, reflecting the anticipated headwinds while providing ample opportunities for shorts, with long trades near $606 offering modest profits.

Market Performance vs. Forecast:

SPY’s actual trading behavior mirrored the forecast almost precisely, fluctuating between $606.31 and $608.19. Resistance at $608 served as a ceiling for much of the session, as predicted, while support levels kept SPY from drifting lower. This adherence to the model’s projected range reinforced the importance of defined entry and exit points, particularly in a market marked by consolidation and light volume. The premarket suggestion to take long positions near $606 capitalized on available upward momentum, while resistance at $608 provided short opportunities for traders who managed their risks effectively. By adhering to the model’s framework, traders could extract value from limited price movement, validating the forecast’s emphasis on caution and strategic entry points. The day’s performance highlighted the validity of the projected range, underscoring the utility of identifying these key levels for traders. This forecast enabled traders to approach the day with confidence, capitalizing on minor swings within a controlled environment as the market awaited further catalysts.

Premarket Analysis Summary:

Thursday’s premarket analysis, posted at 8:08 AM ET, highlighted a resistance range starting at $608, with additional barriers at $609.45 and $610. It also emphasized a key support zone at $605.95, noting that consolidation between $605.95 and $608 was likely to dominate the day unless momentum broke through these levels. The analysis accurately forecasted a slow, upward drift in early trading, with a critical need to clear $608 to unlock higher targets toward $610 and $612. Conversely, failure to hold $605.95 was identified as a trigger for potential consolidation rather than significant selling pressure. This guided traders to focus on long trades near support while being cautious about shorting, given the market's broader bullish bias. The premarket’s warnings about subdued volatility and strong headwinds at higher levels proved invaluable in framing the day’s cautious sentiment and price action.

Validation of the Analysis:

SPY’s performance aligned closely with the premarket analysis, validating the levels and trends outlined. The ETF opened at $608.03, briefly tested resistance at $608.19, and then retreated to close near $606.66, solidly within the projected range. The market’s struggle to maintain momentum above $608 reflected the analysis’ expectation of headwinds at this level, while support at $606 provided a reliable floor. Traders who followed the guidance could capitalize on minor rebounds from key levels and avoid significant risk by adhering to the recommended approach of cautious long trades near support. The premarket analysis accurately captured the day’s lack of strong directional movement and provided clear guardrails for navigating a consolidating market. By emphasizing the narrow trading window and key resistance at $608, the premarket insights offered a framework that helped traders remain disciplined in their strategies. The analysis provided actionable insights, highlighting the likely consolidation within this range as traders awaited clearer catalysts.

Looking Ahead:

Attention now turns to Friday’s Non-Farm Employment Change report, a pivotal release that could reshape market sentiment. Multiple Fed speakers will also weigh in, though their impact may be limited compared to the jobs data. Traders should prepare for heightened volatility, particularly if the labor market surprises in either direction and be prepared to trade what they see, adjusting market view and expectations accordingly.

Market Sentiment and Key Levels:

SPY’s close at $606.66 reflects cautious sentiment, with resistance at $608, $609, and $610 remaining key hurdles. Support levels include $605 and $603 although there is little to keep price from falling to $600 should $605 fail. A break above $608 could reopen the path toward $610, while a failure to hold $605 may invite further consolidation or a test of this level. Bulls still maintain control, but the market’s stretched rally and lighter volume suggest vulnerability to near-term pullbacks.

Expected Price Action:

Our model projects a trading range for Friday of $605 to $609, with a bullish bias above $605. Long trades targeting $608 and $610 remain actionable, while short opportunities near resistance should be approached cautiously. The jobs report could serve as a catalyst for larger moves, with a potential breakout above $610 or a retracement to $600 depending on the data. The market is looking for any reason to push prices higher or lower and the jobs report may provide this ammunition. It would not surprise us to see the market push higher initially and approach $610, only to sell off hard and reverse to close below today’s lows. These types of moves are typical on jobs report days so be cautious and be aware…trade what you see. 

Trading Strategy:

Long trades continue to be favored above $605, targeting $608 and $610 with tight stops near $604. Short positions from $608 should aim for $606 or $605 but must be managed carefully in the prevailing bullish trend. The VIX was unchanged today and remains subdued, indicating controlled volatility, though the jobs report could disrupt this calm. Traders should stay nimble, adapting strategies to align with the market’s reaction to economic releases. We favor failed breakout/breakdown patterns from major levels for the highest probability opportunities on Friday. While today broke the 13-day higher high streak, it was a very unimpressive pullback. The bears need to do a lot more to change this market’s direction and the bulls seems eager to keep prices moving up into month end. Even a $10 or $20 pullback in SPY wouldn’t do much to dissuade the bulls. Keep an eye on $600 as a pivot and line in the sand where its likely the bears take a shot at pushing prices lower. As long as price remains above $600, we recommend cautiously buying dips at major levels and shorting major resistance. Expect more trending price action on Friday which will still provide opportunities both long and short.

Model’s Projected Range:

The model forecasts a maximum range of $602.75 to $611.85 for Friday, suggesting an expanding market  range driven by event risk. Resistance at $608, $609, and $610 align with broader bullish momentum, while support at $605 provides a floor, below which we recommend caution for long trades, holding for a failed breakdown pattern to trigger entries. SPY remains within its bullish trend channel from the September lows, leaving room for upward continuation or deeper consolidation.

Market State Indicator (MSI) Forecast:

Current Market State Overview:
The MSI is currently in a narrow Bearish Trending Market State with price closing at support. There are no extended targets printing below however earlier in the day there were extended targets printing both above and below price indicating a confused market with big up moves followed by big down moves. This is the definition of confusion which leads to a trading range and consolidation. The MSI rescaled both higher and lower today several times…again displaying uncertainty by market participants. Rapid rescalings of the MSI indicate a powerful and unrelenting trend, especially when they are accompanied by extended targets. And today we saw this in full display with price falling in the morning session just to rallying @ noon to fall once again after 1 pm. At the end of the day the MSI rescaled lower and expanded its range indicating a bear trend may be in the cards for Friday. MSI support currently is $606.30 and resistance is $606.92.
Key Levels and Market Movements:
After new highs yesterday and a thirteen-day parabolic rally, the market took a little breather which was well overdue. We stated yesterday “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.” This was the case today with the market unable to break above $608.50. After the open and a somewhat favorable unemployment claims report, price rallied to $608.20 and set up a textbook failed breakout at major resistance which quickly led to lower prices. While there were extended targets above price at the open, these stopped printing and gave us the all clear to short $608, targeting MSI support at $606.71. The MSI cooperated rescaling to a bearish state but the range was extremely narrow which implied a weak bear trend. We adjusted our target to take profits at MSI support and followed yesterday’s post market advice to take profits quickly given the current market regime. Once extended targets stopped printing below we decided to take a crack at the double bottom and reverse long from $607 with a quick first target a bit higher. The market again cooperated and the MSI rescaled to a ranging state so we held onto this trade, moving our stop up to breakeven to see if the market would continue higher. It did and the MSI began rescaling to a bullish state, printing extended targets. But once again the MSI printed an extremely narrow range indicated a weak bull trend and as we approached $608 we locked in more profits thinking the market would stall…which it did. While not textbook, another failed breakout at $608.50 and when extended targets above stopped printing, we were short to MSI support. This trade moved quickly with the MSI rescaling through a ranging state to a bearish state. We held for MSI support at $606.90 where we booked profits. While there were several more MSI trades possible, selling MSI resistance to support during the afternoon session, three trades is more than enough action for one day and we were done with solid profits. Those who continued to trade were rewarded with a nice short off MSI resistance in the last 15 minutes, which was another, highly profitable trade for the day. In the hours before the monthly jobs report, the market is often filled with chop and uncertainty and today was no exception. Market knowledge, coupled with our model’s post and premarket reports allowed us once again to use the MSI to keep us trading on the right side of the market, providing us level to take profits and informing us with actionable intelligence 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 bear trend could be ready to rear its ugly head on Friday. We stated yesterday “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.” Perhaps today is the start of a few red days to entice bears back to the market to get them short. This adds liquidity to the market, which is trading on very low volume. The bulls want to push prices higher but can’t do so without willing sellers. So the bulls will push prices lower until enough bears jump on board, just to reverse hard and grab their liquidity. This is classic market behavior and is what creates failed breakout and failed breakdown patterns. Our model continues to forecast a failure at $605 will bring in a test of $603 and perhaps lower while a break above $608 will drive the market to $610. On Friday we will wait to gain insight from the market’s reaction to the jobs report and trade what we see. But absent this information, we will continue to seek failed breakouts for shorts from $607 to $610 and failed breakdowns for longs from $606 and $605. If $605 fails, we recommend being very careful initiating longs as that could be more than just a trap. While we continue to believe dips will be bought as long as the market remains above $600, caution is warranted until SPY sells off to find more fuel to push price above $610 or stabilizes around $605. Using the MSI to identify the trend and levels to buy and sell will keep you on the right side of the market in real time, which is critical to day trading because when market dynamics change, the MSI will also change to keep you trading with the market and not against it, the key to long term success.   

Dealer Positioning Analysis:

Summary of Current Dealer Positioning:
Dealers are selling $608 to $610 and higher strike Calls implying any move higher on Friday will top out at $610. Dealers are no longer selling Puts. While the floor today at $605 held, it seems Dealers are no longer as optimistic as they were yesterday. To the downside, Dealers are buying $607 to $590 and lower strike Puts in a 5:1 ratio to the Calls they are selling implying a bearish view of the market for Friday. This stance shifted from neutral to bearish for tomorrow. While not heavily bearish like a 10:1 ratio, 5:1 does indicate more concern about weaker prices than we have seen in some time. Dealers own lots of downside protection and perhaps believe the market needs and is due to pullback 2% or more to set up a stronger Santa rally.  
Looking Ahead to Next Friday:
Dealers are selling $608 to $615 and higher strike Calls while also selling $605 to $606 Puts implying the belief that next week, the market will remain above $605. Remember Dealers do not sell Puts at the money unless they are convinced prices will move higher. That said, this may be remnants of positions held from today and tomorrow it will be telling to see if these are still there or if Dealers closed this Puts. To the downside, Dealers are buying $604 to $580 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 next week. This is unchanged from today. Perhaps Dealers see any pullback the way our model does and believe any sell off will be bought and be relatively short lived. The next two days will provide plenty of information for our model and the Dealers will likely also show us the way at the end of the day tomorrow or on Monday. We continue to recommend any long book purchase inexpensive short-dated Puts to protect from a deeper pullback. We advise continuing to watch Dealer positioning for clues of what is likely to develop in the near term.

Recommendation for Traders:

Traders should focus on key levels such as $605 support and $608 resistance. Long trades above $605 remain attractive, targeting $608 and beyond, with stops near $604. Short positions should be executed cautiously, with profit-taking around $606 or $605. The jobs report is likely to introduce volatility, so traders should remain vigilant, prepared for sharp moves, and ready to adapt to market developments. The tools we provide such as the MSI and the post and premarket analysis are your best defense to keep you trading with the trend and earning profits virtually every day. Be sure to review the premarket analysis posted before 9 AM ET for updated strategies.

Good luck and good trading!