Market Insights: Friday, December 6th, 2024
Market Overview:
U.S. stocks ended a volatile week with mostly positive performance on Friday following the release of a closely watched jobs report. The Nasdaq led gains, climbing 0.78%, while the S&P 500 rose 0.19%. The Dow, however, slipped 0.26% amid weakness in cyclicals. The U.S. economy added 227,000 jobs in November, slightly surpassing expectations and easing fears of a slowing labor market. However, the unemployment rate ticked up to 4.2%, offering a "Goldilocks" reading—indicative of moderate growth without adding pressure for aggressive Federal Reserve action. Markets now price in nearly 90% odds of a December rate cut, up from 70% earlier in the week. In corporate news, Meta and Amazon reached all-time highs, boosting sentiment in the tech-heavy Nasdaq. Meanwhile, Bitcoin surged over 2%, closing above $101,000 amid optimism for regulatory support under President-elect Trump, who announced plans to appoint David Sacks as "White House AI & Crypto Czar."
SPY Performance:
SPY added 0.19%, closing at $607.81 after reaching a high of $609.06. Trading volume was subdued at 25.72 million, reflecting cautious optimism following the jobs report. The ETF respected key resistance levels, consolidating within a narrow range as markets digested the implications of the data for Federal Reserve policy.
Major Indices Performance:
The Nasdaq posted the strongest performance, gaining 0.78%, led by tech heavyweights like Meta and Amazon. The S&P 500 rose 0.19%, bolstered by gains in growth-oriented sectors. The Dow fell 0.26%, reflecting underperformance in industrials and financials. The Russell 2000 edged up 0.37%, marking a modest rebound in small-cap stocks after recent weakness. Overall, the day reflected a mixed sentiment, with tech and retail sectors standing out amid broader consolidation.
Notable Stock Movements:
The "Magnificent Seven" stocks saw a strong day overall, led by Meta, which surged over 2.4% to a record high. Amazon and Tesla also posted notable gains, contributing to Nasdaq’s outperformance. Nvidia was the outlier, dropping 1.81%, reflecting profit-taking after recent strength. Investors are closely watching the group for cues on market leadership, particularly as tech remains the primary driver of the broader indices.
Commodity and Cryptocurrency Updates:
Crude oil fell 1.65%, settling at $67.48 per barrel, as concerns over global demand weighed on prices. Gold edged up 0.23% supported by dovish Fed expectations and moderate safe-haven demand. Bitcoin jumped 2.29%, trading above $101,000 as optimism surrounding regulatory support and institutional adoption continued to drive the cryptocurrency higher.
Treasury Yield Information:
The 10-year Treasury yield dropped 0.70% to close at 4.151%, extending its recent decline. This move reflects heightened expectations for a December rate cut, with lower yields providing continued support for growth stocks. Yields remain well below the critical 4.3% threshold that could pressure equity valuations.
Previous Day’s Forecast Analysis:
Thursday’s forecast anticipated a trading range of $605 to $609, with a bullish bias above $605 and resistance at $608. It emphasized the potential for limited upside momentum barring a strong catalyst, while support at $605 was expected to limit downside risk. The analysis guided traders to seek long trades near targeting $608 and $610 and to use caution on shorts from major overhead resistance, targeting $606 and $605. We stated, “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.”
Market Performance vs. Forecast:
While price did not close below Thursday’s lows, it did in fact push higher initially only to fail at overhead resistance at $609, a level we identified as major resistance both in the post and premarket reports. SPY’s actual trading behavior closely matched the forecast, trading between $607.02 and $609.06 within the projected range. Resistance at $609 proved formidable, consistent with the forecast’s warning about headwinds near this level. Support at $606.50 provided a reliable floor, validating the model’s emphasis on trading within the range. Opportunities arose for both longs off support and shorts near resistance, though the subdued movement limited the extent of potential gains. By respecting these key levels, traders could mitigate risks and capitalize on modest rebounds and rejections. The model’s accuracy in identifying these boundaries underscored its utility, offering a structured approach in an environment dominated by caution ahead of Friday’s jobs report. Price behavior aligned well with the forecasts call for a narrow trading window, offering actionable opportunities for range-bound trading. The day’s performance validated the model’s key levels and bias, providing traders with clear parameters to navigate a session characterized by light volume and mixed sentiment. By staying disciplined and adhering to these predefined levels, traders could extract value from an otherwise quiet market.
Premarket Analysis Summary:
Friday’s premarket analysis, posted at 7:45 AM ET, highlighted critical resistance at $608 and $609.45, with support levels starting at $606.45 and extending to $605. The analysis projected sideways trading with a bearish bias unless SPY could sustain a break above $608. It also identified $605 as a potential turning point, noting that any breach of this level could invite downside pressure toward $603.40 or $601.50. These insights prepared traders to approach the day with caution, focusing on failed breakouts for short trades near resistance and failed breakdowns for long trades near support. The guidance to prioritize discipline and quick profit-taking reflected the market’s consolidative nature and the looming impact of the jobs report, which would likely disrupt this balance.
Validation of the Analysis:
SPY’s movement throughout the session validated the premarket analysis, adhering to the outlined resistance and support levels. The ETF tested resistance at $609.06 but failed to sustain a break, retreating toward support near $606. This mirrored the analysis’ expectation of limited upside momentum and the likelihood of a consolidative session. Traders who followed the premarket guidance could capitalize on brief rebounds and rejections at key levels, extracting value from a session marked by light volume and cautious sentiment. The alignment between the forecast and actual price action underscored the importance of using structured analysis to navigate market uncertainties, particularly on days with significant data releases.
Looking Ahead:
With no major economic releases on Monday or Tuesday, market attention will shift to Wednesday’s CPI report, a critical input for Federal Reserve policy decisions. Traders should prepare for potential volatility as markets digest the implications of inflation data for rate cuts and broader economic outlooks. Key resistance at $610 and support at $607 will likely serve as pivotal levels in the interim.
Market Sentiment and Key Levels:
SPY’s close at $607.81 reflects cautious optimism, with resistance at $609 and $610 remaining formidable barriers. A break of $610 opens the door to $615. Support levels include $607 and $605, while a break below could invite a test of $600 or lower. Bulls maintain complete control, but the rally’s extended nature and subdued volume suggest vulnerability to profit-taking. Low volume markets are subject to more violent price swings given the ease with which institutional traders are able to move the market. Keep an eye on volume as an indication of markets returning to a more “typical” trading regime. The upcoming CPI report could provide the catalyst for either a breakout above $610 or a deeper pullback toward $600, perhaps infusing additional volume.
Expected Price Action:
Our model projects a trading range of $606 to $610 for Monday, with a bullish bias above $606. Long trades targeting $609 and $610 remain actionable, while short opportunities near resistance should be approached cautiously. With no major data releases early in the week, price action is likely to remain range-bound, though traders should monitor sentiment for signs of positioning ahead of the CPI release. There is a gap from December 4th at $604.14 which is likely to close at some point next week. While still not a major pullback by any means, given the last three weeks move from $585, traders may be a bit complacent and not be ready to take advantage of this pullback. We recommend buying dips to this level should it develop next week.
Trading Strategy:
Long trades above $606 remain attractive, targeting $609 and $610 with stops near $605. Short positions from $610 could aim for a pullback to $608 or $606 but must be managed carefully in the prevailing bullish trend. A failed breakout is the best pattern to trade for this type of entry. The VIX fell over 5% on Friday continuing to suggest controlled volatility, though the potential for sharp moves increases as the CPI release approaches. We continue to favor the long side but at these levels and without a material pullback, there is an elevated risk of a rug pull with price dropping through multiple major support levels. A drop to $600 or $595 would not change the narrative of the bulls in control. Knowing which side controls the market is perhaps the most important concept in trading. Trading with the controlling party keeps traders on the right side of the market and away from fighting the trend or top picking. Only after several support levels are broken will the bulls give up some control to the bears. Traders need not pick tops and instead should focus on trading with whomever is in control. Peter Lynch famously remarked that the only people who successfully predict market tops are those who have tried and failed dozens of times before—a classic case of the "broken clock" effect. You might eventually get one right, but the costs incurred from those repeated attempts, coupled with the opportunity cost of missing out on substantial trend movements, will likely outweigh any gains from that one lucky prediction. When the bulls control stay long, which is the market we have currently. Traders should align strategies with prevailing momentum and use failed breakout or breakdown patterns to maximize opportunities.
Model’s Projected Range:
The model forecasts a maximum range of $604 to $611.25 for Monday, reflecting a narrowing market range as event risk looms. Puts dominate the options market for Monday as Dealers add to their protection at these lofty levels implying an increasing concern that the market is due for a pullback. This will provide two-way trading in a relatively tight range with periods of trending price action, particularly in light of the low volume environment. Resistance at $609 and $610 aligns with broader bullish momentum, while support at $607 provides a floor. SPY remains within its bullish trend channel from September lows, though a test of key levels could determine the next directional move.
Market State Indicator (MSI) Forecast:
Current Market State Overview:
The MSI is currently in a narrow Bullish Trending Market State with price closing at support. There are no extended targets printing above. Early in Friday’s session extended targets printed but briefly and sporadically indicating a weak trend without the herd participating. We stated yesterday this type of behavior “is the definition of confusion which leads to a trading range and consolidation.” and today after a pop from a favorable jobs report, the market traded in very narrow, $2 range on low volume. The MSI rescaled both higher and lower today several times…again displaying uncertainty by market participants. Toward the end of the day the MSI rescaled to a Ranging Market State and with price tenuously resting on support in a bullish state. Monday is likely to offer more sideways price action with price moving between a bullish and ranging state. MSI support currently is $607.78 and resistance is $608.48.
Key Levels and Market Movements:
Another new all-time high on Friday and the rally continues. While the market closed off its highs a bit, this is still an exceptionally strong rally which has gone parabolic and is therefore unsustainable. The market will find a day or two to sell off to trap shorts into thinking the bull run is over. But until that happens, we continue to cautiously favor longs but are open to two-way trading given current price action and the projected sideways market. At the open SPY popped to new highs at $609 and the MSI printed extended targets briefly on and off. A triple top ensued and with price at a major level indicated in both the post market and premarket reports, we entered a mean reversion short just below $609 to MSI support at $607.78. We have been recommending all week to take profits quickly, particularly on short trades and nothing changed our view for Friday given how tight the range has been the last several days. With a quick win in the books, we waited for a failed breakdown from major support to enter long for a retest of overhead resistance. This set up nicely at 12:40 pm ET with a less than perfect failed breakdown but one that provided us with enough information from @ $607.50 to go long, targeting MSI resistance at $608. While we don’t love the idea of trading when MSI is in a ranging state, when price moves up from below through MSI support with MSI in a bullish state, the odds of price reaching the other side of the range and MSI resistance is over 70%. We like those odds and when coupled with a failed breakdown in a strong bull trend, the odds were skewed enough for us to enter this long trade. With another winner in the books, we decided two trades was enough and took Friday afternoon off, banking a solid week of profits without any losing trades. Once again the MSI kept us trading on the right side of the market, providing us levels 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 weak bull trend. We continue to believe “the bulls will seek more liquidity to fuel higher prices and will push the market lower to trap unsuspecting shorts before breaking $610.” While the jobs report supported price on Friday, perhaps Monday will finally be the day the market pulls back enough to bring the bears and their liquidity back to the market. That said, there is nothing other than a Put dominated options market for Monday to indicate this will occur. We are simply stating that this is how the market will resolve at some point, be it Monday or a month from now. Pullbacks are needs for markets to consolidate and bring the liquidity required to move price. If there are no sellers in the market, price cannot move higher. Currently there are no sellers so price is stagnating in a very narrow range and will continue to do so until volume increases. December typically sees a rally into the end of the month and we believe this is still probable. Given there are only three weeks left for December, any pullback to fuel a Santa rally needs to happen soon otherwise we may simply grind higher $1 at a time. Our model forecasts a failure at $605 will bring in a test of $603 and perhaps lower while a break above $610 will drive the market to $615. There is little news early in the week to act as a catalyst to move price so for Monday, we will seek failed breakouts for shorts from $609 to $610 and failed breakdowns for longs from $607 and $606. If $605 fails, we recommend being very careful initiating longs as that could be more than just a trap. We continue to believe dips will be bought as long as the market remains above $600 yet 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 $609 to $615 and higher strike Calls while buying $608 Calls indicating the Dealers wish to participate in any move higher on Monday. While Dealers sometimes buy Calls thinking price may move higher, selling Puts ATM is a much stronger indication of higher prices. Even if price does move higher, it appears that $610 is a ceiling for Monday. To the downside, Dealers are buying $607 to $595 and lower strike Puts in a 3:1 ratio to the Calls they are selling/buying implying a neutral to slightly bearish view of the market for Monday. This stance shifted from bearish to only slightly bearish. Dealers continue to own substantial quantities of downside protection and are prepared for a deeper pullback to set up a stronger Santa rally. While there is little to indicate this will happen on Monday, it’s our view it is coming at some point.
Looking Ahead to Next Friday:
Dealers are selling $608 to $615 and higher strike Calls while also selling $606 Puts implying the belief that next week, the market will remain above $606. Dealers do not sell Puts at the money unless they are convinced prices will move higher. Yesterday we suggested these may be temporary and should be viewed daily to see if Dealers conviction that prices will move higher remains. It does remain therefore Dealers expect higher prices on Monday or at least do not expect prices to fall below $606. To the downside, Dealers are buying $605 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 pullbacks will be bought and be relatively short lived. We continue to recommend any long book purchase inexpensive short-dated Puts to protect from a deeper pullback given if it does come, it should arrive within the next week or so. 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 $607 support and $610 resistance. Long trades remain favorable above $606, targeting $610, while short positions from $610 should aim for $608 and $607, with disciplined stops. The market is likely to remain range-bound early in the week, providing two-way trading opportunities. As such continue to look for failed breakout and failed breakdown patterns as triggers to entries. And be sure to review the premarket analysis posted before 9 AM ET for updated strategies and actionable insights.
Good luck and good trading!
