OVERVIEW
Seasonality Favours The Bulls

US stocks started the week with a strong move higher, bringing a sense of optimism as the year winds down. Chipmakers led the charge, giving the tech sector a boost and helping all three major indexes close in the green. The Nasdaq, home to many of the market’s tech giants, climbed nearly 1%, showing renewed strength after a rocky stretch. Investors now have their eyes on what’s often called the “Santa Claus Rally,” hoping for a bit of market magic to close out the year on a high note.

This so-called rally refers to the final five trading days of the year and the first two of the new year—a period that has historically been kind to stocks. Since 1950, the S&P 500 has logged gains during this stretch nearly 80% of the time, delivering average returns of about 1.4%. And when the rally appears, it’s often a good omen for the year ahead: the S&P 500 has averaged a robust 10.4% annual gain in those cases. On the flip side, if the market stumbles during this stretch, the year ahead tends to look a little less cheerful, with average gains dropping to just 5.7% and far fewer winning years.

Yesterday’s gains were driven largely by a bounce in chip stocks, which had been hit hard during last week’s sell-off sparked by a hawkish Federal Reserve. Their recovery helped fuel the broader tech sector, providing some relief to investors after a rough patch. While nothing is guaranteed, history shows that a strong finish in December often sets the stage for a positive start to the new year.

That said, it’s not all smooth sailing. December’s Consumer Confidence data showed its steepest drop since late 2020, highlighting ongoing economic uncertainty even as the market searches for reasons to rally. We’ll take a closer look at this in the daily focus section below. But first, let’s break down how the major indices performed.

Nasdaq

The Nasdaq had a promising session yesterday, finding support after an intraday undercut below its 10- and 20-day exponential moving averages (EMAs). It closed strong, finishing above its 10-day EMA for the first time since last week’s breakdown. However, trading volume was relatively light, which is less than ideal. For the QQQ to push above the key short-term breakout level of $525, we’ll need to see a stronger wave of demand come into the market.

The medium-term trend in large-cap tech, as reflected by the QQQ, remains positive. The rising 50-day EMA has consistently acted as support over the past several months, and Friday’s bounce followed by yesterday’s confirmation suggests this trend remains intact. Furthermore, tech continues to lead the market, bolstered by exceptional strength in both semiconductor stocks and the broader tech sector over recent weeks. This leadership is a positive signal, as tech remains a critical driver of market momentum.

S&P Midcap 400

Midcaps saw a quiet session yesterday, with the index forming an inside day on relatively low volume as it continued consolidating within the $563–$575 range. This sideways movement has built a bear flag over the last few sessions—a pattern typically characterized by a sharp move down followed by a period of consolidation. Technically, this setup leans bearish, but here’s the catch: if the consolidation ends up being a base for a move higher, it would look almost identical.

So, what’s the play? The key is to monitor how the index behaves around the upper end of the range near $575. Over the past several sessions, this level has consistently attracted sellers, leading to intraday fades and pushing prices lower. If this pattern continues, it could confirm the bearish outlook.

However, this doesn’t mean you should adopt a bearish bias just yet. In trading, having no opinion is often the best opinion until the market gives you a clearer signal. The visible range volume profile (VRVP) shows a low-volume pocket above the current range, leading up to the declining moving averages. If we see a surge in demand, this area could fill quickly, potentially flipping the script on the current setup. Stay nimble and let the market dictate your next move.

Russell 2000

The Russell 2000, which tracks small-cap stocks, is showing a similar bear flag setup to the midcaps, but with a more bearish tilt. The index has been forming a clear pattern of lower lows and lower highs—a classic sign of weakness. This price action suggests a lack of support from buyers and a prevailing downward trend.

For small caps to show any signs of recovery, we would ideally need to see the index consolidate further, forming a sideways range that could serve as a springboard for a potential rebound. However, the current setup isn’t providing that foundation. Both the price action and volume profile remain decisively weak, signaling that buyers are hesitant to step in with any conviction.

Until we see a shift in this pattern—either with stronger demand or more constructive consolidation—it’s hard to make a bullish case for the small-cap space. For now, patience and caution are warranted as the Russell 2000 continues to struggle.

DAILY FOCUS
The Tape Tells The Tale

As we approach today's abbreviated trading session, it's important to recognize that Christmas Eve typically brings subdued market activity. Historical trends indicate that participation during the holiday season is low, often resulting in limited market movement.

Despite the overall quiet, we're observing promising setups, particularly within large-cap tech stocks. Select breakouts are emerging in this sector, showcasing notable strength.

While it's important to be aware of seasonal factors, our primary focus should remain on price action. Let the charts guide your decisions, keeping seasonality in the back of your mind but not letting it dictate your strategy.

Today, we'll prioritize large and mega-cap tech names exhibiting well-formed volatility contraction patterns. We'll monitor these stocks closely for potential entry points, adjusting to a half sized position size to account for the lighter volume and increased risk of false moves typical of holiday trading.

WATCHLIST
Stocks On Breakout Watch

GOOG: Alphabet Inc

• GOOG has been one of the standout mega-cap tech names recently, forming a solid sideways consolidation pattern along its daily 10-day EMA. After briefly undercutting this level on Friday, it successfully reclaimed it, showing strength.

• The price action here has been strong, with Friday’s bounce generating impressive relative volume. Yesterday’s inside range day further confirmed the strength in the stock, making GOOG a name to watch closely. It’s now approaching the key $197.50 breakout level, which is our target for a potential move higher.

• For an entry, we’re looking for both high relative volume and confirmation via a 5-minute opening range high (ORH). If both conditions are met, we’ll look to trigger an entry and capitalize on the breakout. This setup is one of the cleaner opportunities in the market right now, and it’s crucial to stay alert for confirmation before taking action.

ALKT: Alkami Technology, Inc.

• ALKT has been quietly building a strong multi-month base, starting back in late October, when it saw a remarkable rally of +30% in just two weeks. Since then, the stock has been consolidating sideways, forming what looks like a solid base for potential further gains.

• This mid-cap stock, a blend of tech and finance, operates through Alkami Technology, which provides digital banking software solutions to credit unions, banks, and credit union service organizations. ALKT has been outperforming the general market, the MDY (MidCap ETF), and both tech and financial ETFs, showing relative strength despite a period of consolidation.

• Our focus will be on the descending level of resistance, with a key area to watch around $40. If the stock can break through this level, it could signal a strong move higher. We’ll be closely monitoring price action around this area for a potential entry point.