OVERVIEW
We Are Seeing Strength: Breadth Is Expanding

Yesterday, the market showed continued improvement in breadth, with the percentage of stocks above their 20-day EMA (MMTW) bouncing off historically oversold levels and rallying higher. After peaking in mid-December, the MMTW saw a sharp pullback, erasing the uptrend we had observed for some time. This shift has also been reflected in our daily scans, where leading stocks are starting to break out—a positive sign heading into the final days of 2024.

As we approach the end of the year, markets have largely digested the remaining key economic data points. Now, investors are shifting their focus to two major themes for 2025: the Federal Reserve's path for interest rates and the potential market implications of Donald Trump's return to the White House.

On the Fed front, stocks initially dipped last week on news that rate cuts will be scaled back next year but have since stabilized. Current bets are targeting May as the most likely time for the next rate cut, with the Fed balancing persistent inflation concerns against signs of a cooling labor market.

With just three trading days left in a year marked by significant gains, traders are watching closely to see if the market can deliver a "Santa Claus" rally to close out 2024 on a high note.

For newer traders, remember: the best time to lean bullish isn’t after weeks of rallying and the MMTW soaring into the high 70% range. Instead, the goal is to increase long exposure when the market begins recovering after a correction—when the MMTW is in the 20-30% range and the strongest stocks are starting to break out.

Nasdaq

The Nasdaq continues to lead stocks higher after consolidating above its daily 10-EMA. Yesterday’s intraday retracement was met with strong demand, pushing the QQQ back up. We’re now sitting just below a low-volume pocket, and if the QQQ can break higher, it’s likely we’ll see a rapid move toward $535—and potentially new all-time highs.

Large-cap technology stocks remain the strongest group in the market right now and should be a primary focus for your daily research.

S&P Midcap 400

The midcaps are continuing their bounce from last week’s reversal extension and are now approaching a test of their declining daily 10-EMA for the first time. This level is likely to act as short-term resistance, so some choppiness is expected here. The key, however, will be how the MDY reacts to this test—whether it signals a strong leg higher and the potential for a full recovery or suggests there’s more downside ahead.

From a technical standpoint, the setup looks bullish. The bounce occurred on very high relative volume, and the Visible Range Volume Profile (VRVP) highlights a low-volume pocket above, which could be filled quickly if momentum continues. At the same time, there’s solid support below, as shown by the high volume traded at the current level. This makes the upcoming sessions critical for confirming whether midcaps can sustain this upward momentum.

Russell 2000

The small caps also had a strong session, breaking out of an intraday flag on relatively high volume and slightly outperforming the midcaps. They made their first test of the declining 10-EMA, but the bigger challenge lies ahead.

The key test will be whether the overhead supply from the declining 20-EMA and 50-EMA prompts sellers to step in aggressively, forcing a longer consolidation period, or if buyers can step up and hold their ground at these levels. The next few sessions will be crucial in determining whether small caps can sustain this momentum or if they’ll need more time to base.

DAILY FOCUS
What Are The Market Leaders Telling You?

While evaluating the overall market through indices is helpful, it doesn’t give you the full picture. To truly understand where the market is heading, you need to focus on the individual stocks that make up those indices. Remember, stocks lead, and indices follow.

Right now, we’re seeing real strength in select stocks, with breakouts working well in specific names and sectors. This is a positive sign that the market is shaking off the recent sell-off and finding its footing. The reversal in the MMTW confirms that breadth is improving, which is a green flag that it could be a good time to get more aggressive with your trades.

However, there’s a crucial factor to keep in mind: volatility contraction. Before jumping into a trade, prioritize stocks that are showing a contraction in volatility. If a stock isn't tight—meaning it’s not forming a clean, consolidating pattern—then it’s not the right time to buy. Tight patterns, where the stock is consolidating in a narrow range, offer the best risk-to-reward setups for a breakout.

Without this contraction, you’re likely to see erratic price action, which increases the risk of false breakouts and whipsaws. Focus on stocks that have been holding within a defined range and look for them to tighten up before pulling the trigger. If the volatility is not under control, it's better to wait until the setup is cleaner.

WATCHLIST
Focus On These On Continued Strength

ERJ: Embraer S.A.

• ERJ, an aerospace and defense stock, is showing a strong setup in a leading sector. We’re seeing a very tight contraction forming on the stock, particularly with an hourly flag pattern. ERJ has been consolidating just below its 10-EMA, sandwiched between that and the rising 50-EMA on the daily chart.

• This creates a clear compression, and we’re getting very close to a major breakout level. If ERJ can expand higher on high relative volume, it will present an excellent risk-to-reward trade. The technicals are lining up, and a clean breakout here could lead to significant upside.

PAY: Paymentus Holdings, Inc.

• PAY is another strong candidate showing a textbook contraction in its price action, trading just below its daily 10-EMA and 20-EMA. The stock bounced off rising support yesterday, confirming the trend of higher lows it has been forming for the past couple of weeks.

• We’re now closely watching the hourly chart for a break above the hourly 20-EMA as a potential entry point. This breakout could signal the next leg higher, and with the consistent pattern of higher lows, the setup looks solid. PAY is shaping up to be a strong move if it clears that level with momentum. Keep it on your radar for the next opportunity.