The markets have wrapped up for the year and it was a good year for stocks with SPY gaining 24.3% and QQQ gaining a whopping 53.8% as it reached new all time highs in December. Meanwhile small caps lagged the rest of the markets, but IWM still finished up 15.1% for the year. Nearly all of IWM’s gains for the year came in December with it jumping 11.7% this month as it played catch up to the rest of the markets. With the strong rally into the end of year, volatility got crushed and the VIX finished at $12.45 which was near the lows of the year and its lowest annual close since 2017.

What’s in store for 2024? Well, the Fed pivoted in its last meeting and said they now expect rate cuts in 2024 which caught everyone by surprise and led to treasury yields sinking and the risk on rally into the end of the year. Some bears are still claiming that this is nothing more than a bear market rally, but bear market rallies are generally short term and don’t last over a year. The markets bottomed in October of 2022 and haven’t looked back, and I think it’s safe to say that we have been in a new bull market for the past year or so. Historically bull markets have lasted much longer than bear markets, so this could be just the first year of the next multi year bull market. After all, they haven’t really done anything in two years as the S&P is just getting back to 2021 highs. While we could be entering a new bull market, it doesn’t mean that we won’t have large corrections along the way, and for now the question is have the markets gone too far too fast? The Fed’s dot plot is currently signaling for three 25bps rate cuts in 2024. However, the markets are pricing in seven rate cuts for 2024!

Markets are currently pricing in a 100% chance of rate cuts in each meeting past March (99.50% in May) which seems overly optimistic at this point. There’s always risk that inflation peaks its head out again and there’s always geopolitical risk. On the other hand, if the Fed cuts rates too quickly it could be because they see a slowing economy and potentially a recession which lower rates would help to combat, thus the reason for them cutting faster. So the Fed will have to thread the needle between a soft and hard landing next year.

Along with the optimism around rate cuts, we are at ‘Extreme Greed’ levels in CNN’s Fear and Greed Index which essentially measures market sentiment. The index entered extreme greed territory on December 15th and briefly dipped back out of it on December 20th during the one day market reversal, however it has been back in extreme greed since then.

Here’s why this matters. When the Fear and Greed Index has flashed extreme levels in the past (fear or greed) it has led to significant market reversals. Since June of 2022 when it has flashed fear there has been an average rally of 14.8% in the S&P from low to high. This includes the current rally of 16.8% from the October 27th low to this week’s high as the index fell into extreme fear territory in late October. Extreme greed signals have also been accurate in marking reversals, albeit smaller ones, with average pullbacks of 6.09% over the last four times it has flashed extreme fear since June ’22.

Let’s take a look at the technicals now. I’m currently looking for a significant pullback in January and have been positioning for that over the past week. In the near term, there are confirmed bearish daily divergences for SPY, IWM and QQQ. Divergences occur when price moves one way and RSI is moving the other way. In this case because RSI is making lower highs/lows it is a bearish divergence.

Looking at a monthly time frame now, SPY will have resistance at $477.55 which is the December high and resistance from the current monthly uptrend. SPY closed at $475.31 on Friday, so assuming we open below the December high, the first monthly support to watch on a pullback will be at $473.50-$474. Keep in mind that the average pullback coming out of extreme greed territory was just over 6%. So if we do get a pullback, we’ll likely see a break below $473.50-$474 as that is less than half a percent away. So, the next support levels to watch will be at $459-$460 and there would be more at $458. This would be about a 4% pullback from the December highs.

For QQQ it’s an almost identical monthly setup. The first resistance will also be at the December high of $412.92 which is over $3 away from Friday’s close. So assuming that there is no gap above that level, then the first supports to watch on a pullback will be at about $407, $404 and $402. $402 is only about 2.6% away from the December highs, so if it breaks through that as well then the next major support will be at about $393 and then $389-$390. Theses last two levels would be a 5-6% pullback from the December high.

Lastly, IWM looks a bit different on the monthly chart. First uptrend support is at about $202.75 which it would need to gap above next week to remain in, if not that level will be resistance. From there, $193.50-$194 would be the major support level to watch which is about 5.5% away from the December highs.

Finally let’s take a look at the annual charts. The first annual resistance is going to be right around $475-$476 which is where it closed out the year. After that, the 2023 high at $477.55 will be next resistance followed by $481-$482. This is resistance from the sideways channel that it has traded in for the past three years. If it clears through the sideways channel, the next resistance will be at $506-$509. If it clears through this resistance as well, then $535-$540 would be the next and final annual resistance I would be looking at. I do think we’ll pull back to start the year and the first major support that I’m looking at is around $446. This is the blue descending channel which it closed above, and this would simply be a re-test of support before moving higher. A move to the $446 area would be about a 6.5% pullback from the 2023 highs which would is about the average drawdown the S&P has seen coming out of extreme greed territory.

For QQQ, the first support to watch on a pullback will be at $388-$390. This would be also be about a 6% pullback from the 2023 highs. If that level does not hold then I believe there would be significant downside back towards $315. Resistances to watch will be at $412.92 which will be at $415-$416 and then $423-$425. If it breaks through this resistance then it will break through all of the current uptrends and a new uptrend will start which will be based on which support is held which I’ll update on later.

Finally, IWM closed below its annual downtrend resistance this year, but it will open above it to start 2024 (purple channel). This area will be support on a re-test and is around $192-$194 which is also around the monthly support that I’m looking at on a pullback. If that support does not hold, then $169-$170 would be the next major level to watch. Resistances to watch will be at $204-$205 as well last the 2023 highs of $205.49. If it clears through the 2023 highs, then it will be clear up to $221-$222 with more resistance just above that at $225.

The markets rallied back sharply in November with SPY gaining 9.1% while QQQ closed up 10.8% and saw new highs for the year. Small caps also finally participated with the rest of the markets as IWM gained 9.2% for the month. With the massive rally this month, the VIX got crushed and fell to new lows for the year and settled below $13. All of the indexes held most of their gains as well and for now it looks like the bulls are still in control and we can head higher into the end of the year.

While I do think we can head higher into end of year, there has been a bearish divergence on daily time frames over the past week or so which haven’t really played out yet. So I do think it’s likely we get a small pullback before resuming the rally. For SPY, monthly uptrend support will be at $449.50-$450. If this doesn’t hold, then the next support to watch will be down to about $440. But, I think it’s likely that the $449.50-$450 support does hold and we continue to rally from there. If that level is tested and holds, I would look to get long. The first monthly resistance would be at the November high of $458.32, and if we break through those highs then the next levels to watch will be at $465.75-$466 and then $468. I don’t think we’ll break through $468 by end of year, but if it were to the last monthly resistance in the current uptrend would be at about $478.50.

For QQQ the first monthly support to watch is around $383.50. If that doesn’t hold, then $372-$372.50 would be next. Resistances to watch will again be at the November high of $394.14 and then $398.25 and then $403.50.