OVERVIEW
The Rally Finally Arrived: Will We See Follow Through?

The “Santa Claus Rally” is officially in full swing! Historically, this seasonal trend boosts markets during the last five trading days of the year and the first two in January, delivering an average gain of 1.3% for the S&P 500 since 1950. Think of it as a little holiday bonus for traders paying attention.

So far, the S&P 500 is up 1.1%, with the Nasdaq leading the way at 1.4%—a strong rebound after last week’s Fed-driven pullback. This rally puts both indexes closer to their recent highs and adds some momentum heading into the final stretch of the year. But here’s the catch: December’s typical strength hasn’t fully shown up yet. Historically, the S&P 500 (SPY) posts a +1.0% return in December, but we’re currently sitting at -0.7% month-to-date with just four full trading sessions left.

Interestingly, much of the strength in large-cap and megacap names—tracked by SPY and QQQ—has been driven by the ongoing AI theme. Tesla (TSLA) has been leading the FAANG names, alongside impressive performances from Alphabet (GOOG) and companies in the quantum computing space.

Meanwhile, Wall Street is starting to shift its attention to interest rates. The Fed has done a good job of steering the economy toward a “soft landing,” but inflation remains a challenge. Most traders are betting the Fed will hold rates steady in January and March, leaving May’s decision uncertain.

As markets regain strength and fresh opportunities start to appear, this is a perfect time to evaluate the best setups for risk-reward trades. Experience and market principles, such as Wyckoff Logic, teach us an important truth: the greatest breakouts and long opportunities often emerge after corrections in a prevailing uptrend.

These pullbacks serve as a reset for market leaders, allowing them to consolidate and build fresh momentum after becoming overextended. This is exactly what we’re witnessing right now—strong stocks are regrouping and positioning themselves for potential follow-through moves. Recognizing these setups can make all the difference as we navigate this potentially very exciting phase in the markets.

Nasdaq

The Nasdaq has been the standout performer among the major indices, showing impressive strength on Tuesday. It gapped above its daily 10-EMA and posted a solid green candle with surprisingly high relative volume, especially given it was only a half trading session. The QQQ, in particular, saw significant demand, pushing the index into a low-volume pocket on the visible range volume profile (VRVP) that stretches up to $534—right near all-time highs.

Over the past three sessions, the QQQ has delivered three strong green days, bouncing decisively off its rising 50-EMA and point of control (POC) level. This rebound was a clear signal of bullish strength and supported the thesis of a rapid recovery, which is exactly what we’ve seen. From here, it wouldn’t be surprising to see some sideways consolidation, especially after this 3-day momentum surge. A period of intraday consolidation before challenging all-time highs would be a healthy and expected development.

The Nasdaq’s strength highlights where the highest-probability trades are likely to be right now: large- and mega-cap technology stocks. This leadership is driving the market, and understanding its momentum can help guide traders to the most promising setups.

S&P Midcap 400

Midcaps also had a strong showing on Tuesday, but they still have significant ground to cover to match the relative performance of the Nasdaq and QQQ. The MDY, which tracks midcap stocks, has yet to establish a short-term uptrend, as it continues to move sideways after bouncing off the $565 support and demand level. This key level halted the sharp selloff midcaps experienced after topping out in late November.

Despite this, there’s substantial potential in midcaps if they can capitalize on the current momentum. A move to fill the low-volume pocket up to the declining 10-EMA would be a promising short-term development. Given how oversold and extended to the downside the MDY has been, this recovery could spark some major breakouts in the strongest names with the highest relative strength. If this recovery continues to materialize, midcaps might present exciting opportunities for traders ready to seize them.

Russell 2000

Small caps are showing similar technical patterns to midcaps, with their own low-volume pocket stretching from current levels—where the IWM stalled on Tuesday—up to its declining 10-EMA. The price action has formed a flag-like structure, which currently resembles a bear flag. This makes it important to approach the analysis with caution. The key to deciphering likely direction lies in the presence (or absence) of setups across the same cap space.

From our analysis, there are still setups among small-cap relative strength leaders, and these stocks could play a crucial role in lifting the Russell 2000 out of its current slump. However, the broader strength and highest-probability breakouts right now are not in small caps. As traders, we always aim to focus on where the most strength lies. When comparing the QQQ to both the MDY and IWM, it’s clear that large- and mega-cap tech names are the relative strength leaders driving the market forward.

DAILY FOCUS
The Best Risk-Reward Entries Are Here

If we’re truly at the bottom of the market, now is the time to position yourself for the best risk-to-reward trades. The strongest breakouts often occur at the beginning of a recovery, when the market is still shaken, and stocks that have been heavily beaten down begin to rebound. This is when you’ll see the market leaders—the stocks that held strong during the pullback—emerge as the new bullish catalysts.

This is the perfect time to focus on identifying and tracking those stocks that have shown relative strength despite the broader market weakness. By now, you should have a solid list of these leaders, ready to take advantage of the next wave. If you don’t have this list yet, we’ve got you covered. Through our desktop and mobile app, we provide a daily breakdown of these leaders along with entry criteria, so you can stay ahead of the curve without having to do the heavy lifting yourself.

It’s important to remember that the best trades often come when sentiment is most bearish. You want to be the most bullish when things look the most bearish, and vice versa. That’s when the greatest opportunities arise—when others are hesitant, and you’re positioned for the rebound. Now is the time to stay proactive, refine your watchlist, and prepare for the breakout setups that will define the next bull phase.

WATCHLIST
Today’s Breakouts To Watch

SMTC: Semtech Corporation

• SMTC finds itself in one of the leading industry themes—AI and semiconductors—which adds significant strength to its already impressive technical setup. The stock has formed an incredibly tight contraction in both price and volume, consolidating just below the breakout level around $65. This setup suggests that SMTC is positioning itself for a potential test of this level today.

• Following a strong earnings report, SMTC has built a multi-week consolidation phase, during which it has demonstrated relative strength while the broader market experienced a pullback. This consolidation, coupled with its positioning in the AI and semiconductor sectors, makes SMTC one of the stronger names in this space. We’re closely watching this stock for a potential entry today, as it looks poised to break out and continue its upward momentum.

UI: Ubiquiti Inc.

• UI is another high relative strength leader we’re closely watching today, especially as it’s positioned in the tech space, particularly telecommunications and software—two of the strongest market groups right now. Since its strong run-up in mid-November following impressive earnings, the stock has been building a solid consolidation base.

• During this time, it has traded sideways, finding support along its daily 20-EMA, and has been making higher lows. More recently, UI reclaimed its daily 10-EMA, setting the stage for a potential breakout above the $352 level. With its strong technical setup and leadership in a key market group, UI is a stock we’re watching closely for a breakout move.