Market Insights: Friday, January 10th, 2025

Market Overview

U.S. markets took a sharp hit on Friday following the release of a surprisingly strong December jobs report, which added to inflation worries and renewed uncertainty around interest rate trajectories. The Dow Jones Industrial Average plunged approximately 1.6%, wiping out year-to-date gains, while the S&P 500 and Nasdaq both fell, 1.5% and 1.6%, respectively. This marked the worst week of the year so far, with the Dow down 1.1%, the S&P off by 0.7%, and the Nasdaq retreating 0.6%. The report showed robust hiring, with over 250,000 jobs added and unemployment dipping to 4.1%, fueling fears that the Federal Reserve may keep rates elevated for longer. Treasury yields climbed as the 10-year reached 4.761%, its highest since late 2023, exacerbating equity market pressures. Rising inflation expectations, reflected in the University of Michigan's consumer sentiment index, further dented sentiment. Despite upbeat earnings from select companies like Walgreens and Delta, the broader market was firmly gripped by macroeconomic concerns, leaving investors on edge as they brace for next week's key data releases.

SPY Performance

SPY closed at $580.50, down 1.53% for the day, reflecting a challenging session where downside momentum dominated. After opening at $585.88, SPY briefly touched a high of $585.95 before falling to a low of $578.55. Trading volume surged to 63.50 million, significantly above the average, underscoring heightened activity around the day’s economic data. SPY’s failure to hold above key support levels signals continued pressure, with investors eyeing $580 and below as pivotal areas for the coming sessions.

Major Indices Performance

The Russell 2000 underperformed significantly, shedding 2.20% as small caps bore the brunt of rising borrowing costs. The Dow and Nasdaq followed with losses of 1.56% and 1.64%, respectively, while the S&P 500 fell 1.5%. Defensive sectors like utilities and healthcare provided little refuge, with growth and cyclical stocks facing broad sell-offs. Tech-heavy indices remained particularly vulnerable amid elevated Treasury yields, reflecting the ongoing headwinds for equities in a rising rate environment.

Notable Stock Movements

The "Magnificent Seven" saw a tough day, with Netflix and Nvidia leading the declines, dropping over 4% and 3%, respectively. Meta was the lone standout, gaining 0.84% as it diverged from its peers. Broader tech weakness mirrored market sentiment, highlighting persistent investor concerns about elevated valuations and tighter monetary conditions. Notably, Meta’s outperformance came amidst optimism around its cost-cutting measures, offering a rare bright spot in an otherwise challenging session.

Commodity and Cryptocurrency Updates

Crude oil surged 3.58% to $76.57, buoyed by a bullish inventory report and geopolitical supply concerns, bucking the broader risk-off sentiment in markets. Gold continued its ascent, climbing 0.76% to $2,690 as investors sought safety amid economic uncertainty. Bitcoin reversed its recent downtrend, rising 2.33% to close just above $94,700, reflecting renewed demand for digital assets despite broader market turmoil. We are buyers of Bitcoin between $77K and $83K should it reach that level.

Treasury Yield Information

The 10-year Treasury yield rose 1.71%, closing at 4.761%. This sharp increase reflects mounting inflationary pressures and the likelihood of prolonged high rates, casting a shadow over equity markets. As yields approach critical levels above 4.8%, the risk to growth-sensitive sectors intensifies, with a break above 5% potentially triggering broader equity market corrections and above 5.2% our model suggests equity markets could plunge as much as 20%. We advise all our readers to watch this market closely for clues to the broader market.

Previous Day’s Forecast Analysis

Wednesday’s forecast highlighted a trading range of $580 to $595 for SPY, with a bearish bias under $588.50. Key resistance at $590 and support at $580 were emphasized. We favored selling into all rallies given the bearish tone of the market. We stated a break of $580 could test $576.74 and lead to further declines. We favored two way trading from the extreme levels of $580 and $590, advising long trades only from failed breakdowns.

Market Performance vs. Forecast

Friday’s market action validated Wednesday’s forecast, with SPY adhering to the expected range and bearish tilt. The ETF’s sharp move below $585 aligned with projections, offering opportunities for short trades targeting support levels near $580. Resistance at $585 held firm, providing effective pivots for traders while longs on failed breakdowns from $580 also proved highly profitable. The day unfolded largely as expected, with SPY breaking below $585 and touching $578.55, confirming the bearish bias and traders following the advice to short near resistance levels and target $580 or lower were rewarded as the market respected the forecasted range and bias. The high-volume sell-off underscored the accuracy of the bearish scenario, highlighting the model's reliability in volatile conditions.

Premarket Analysis Summary

Friday’s premarket analysis, posted at 8:55 AM, projected a consolidating market with targets above at $585.50, $588, and $591.50 and below at $582.50. The anticipated downside bias materialized as SPY failed to recover to its bias level of $588, confirming a rejection of major resistance. Clear rejections at key levels guided traders effectively, while the nonfarm payroll report intensified the downward pressure.

Validation of the Analysis

The premarket analysis proved accurate, with SPY respecting the outlined targets and bias. Resistance near $585.50 held, while the downside target of $582.50 was surpassed, validating the bearish outlook. The sharp rejection at $585.50 and subsequent fall to $578 demonstrated the utility of the analysis in identifying actionable trading opportunities.

Looking Ahead

The upcoming week brings significant data, including FOMC minutes and PMI releases, culminating in a key speech from Federal Reserve Chair Jerome Powell. These events are likely to dictate market direction, with heightened volatility expected. Traders should monitor developments closely and remain nimble in response to evolving conditions. There is no material economic news on Monday or Tuesday, however the rest of the week will be jammed packed with economic data so expect volatility to increase as the week unfolds.

Market Sentiment and Key Levels

SPY’s close at $580.50 near the day’s lows highlights the bearish sentiment dominating the market, with resistance at $585 and $594 and support at $580, $578, and $575. Breaking below $575 could expose $570, a critical level for bulls to defend. Conversely, clearing $585 may trigger a recovery toward $590, though macroeconomic headwinds remain a significant hurdle.

Expected Price Action

Our model forecasts a range of $578 to $588 for Monday, with a bearish bias prevailing. Resistance at $585 and $594 is expected to cap any rally, while support at $580, $578, and $575 will be pivotal for maintaining stability. A break below $575 could intensify selling pressure, while sustained buying above $585 would be required for bullish momentum to appear. Our model suggests further weakness on Monday with a test of $585 likely which fails. Below $578 our model sees the gap at $576.74 as the next stop on the way to lower levels.

Trading Strategy

Traders should focus on shorting SPY near resistance at $585 and $590, targeting support at $578 and $575. Long trades near $575, with a target of $580, may offer limited opportunities in a bearish environment and should only be considered on failed breakdowns. The bulls have ceded control to the bears and given the volume supporting today’s decline, the market is likely to reach the November lows before the bulls step back into the arena. Elevated VIX levels suggest increased volatility, reinforcing the need for tight stop-losses to manage risk effectively, particularly on any long trades.

Model’s Projected Range

The model projects a maximum trading range of $574.50 to $589, reflecting a slightly narrowing trend but still conducive to directional trading. SPY remains within the bear trend channel formed on December 18th, with significant resistance at $602 and support at 576. Below $575 there is little to keep price from falling to $570 where the bulls may step in to defend price. We stated a few days ago the head and shoulders pattern on the daily chart has a measured move target of $550, should $575 break. While we are not forecasting this at this time, traders should be aware of this level as it represents a healthy 10% correction but more importantly, it is key to keeping the market from falling materially lower to the $500 level and a deeper, 20% correction.

Market State Indicator (MSI) Forecast

Current Market State Overview:
The MSI is currently in a Bearish Trending Market State, with prices closing mid-range. The range is average and there are no extended targets printing below, which implies a weak bear trend for Monday. The MSI opened the day in a bearish state and rescaled lower several times with extended targets printing below which indicated the herd was participating in today’s decline. While there was a brief respite with the MSI moving to a ranging state, we do not favor trading level to level in this state given the odds of success are less than 50%. Instead we favor trading major levels within this range in the direction of the prevailing trend. While the MSI was in a ranging state prior to the open, when the jobs report was released, this stated quickly disappeared and the MSI clearly warned traders of the impending market decline. MSI support is $578.55 and resistance is $581.39.  
Key Levels and Market Movements:
As forecast SPY continued its decline today after reaching major resistance at $590 in the premarket. Once the jobs report was released, market participants sold hard, causing price to open at major resistance at $585. The MSI rescaled lower and we shorted $585.33 taking first profits at MSI support but holding our runner for lower levels. The MSI then printed extended targets below and price fell quickly to a rescaled lower, MSI support level of $579.69 where we took off our runner, given our model suggested $580 would provide major support. This level did in fact hold but with extended targets below, we did not go long. Instead we waited for price to reach MSI resistance at $582.30 and shorted again to MSI support at $579.72 knowing the odds of success for this trade are 70%. We held our runner until @ noon given extended targets were printing below price occasionally. But these stopped printing and price put in a textbook failed breakdown at MSI support at $578.62 so we reversed long seeking MSI resistance at $581.50.  After banking level to level first profits, we held onto our runner given the MSI rescaled to a ranging state. Our model had identified $585 as a major level so once price reached this level, price once again set up a textbook pattern, a failed breakout, and we reversed short with a first target at MSI support at $581.39. We decided to hold our runner into the close given the weakness evident in the market and closed it at the end of the day, going four for four in a fantastic and highly profitable day. The MSI once again did its job, showing us the strength of the trend, where we would find major support and resistance and providing levels for us to trade to and from. The MSI continues to provide actionable information to assist traders in staying on the right side of the market and with the prevailing trend. We highly recommend integrating the MSI into your trading arsenal to maximize your long-term success.
Trading Strategy Based on MSI:
We stated Wednesday with “the bears in control nothing has changed our view” and that “price may fall below $587 which opens the door to $585 and $580”. We also stated we continued to “favor leaning bearish and recommend rallies be faded”. Finally we also stated price “will have a difficult time moving beyond $591” and “should price move lower to $585, expect price to fall to $580”. Our advice and forecasts cannot be clearer. These should be simple and easy to understand and apply to your trading. And the accuracy of these forecasts continue to be over 70%. For Monday, the market is forecast to slow its decline but continue to move lower. At some point we expect a short squeeze to materialize which will move price back to $585, where we will look to sell. Short squeezes are almost always triggered by failed breakdowns so look for this pattern to enter long from major levels such as $575, but do not fight the MSI. If extended targets are printing do not trade countertrend. If they cease, however, you can take a crack at a long off major support given short squeezes can provide quick and easy money, like today’s long at noon. But we continue to favor short trades and will lean on the MSI resistance levels to find triggers to enter short. The MSI will help you identify the trend and key levels to trade to ensure alignment with prevailing market conditions. If you do not have this tool, we highly suggest contacting your representative to secure a copy.

Dealer Positioning Analysis

Summary of Current Dealer Positioning:
Dealers are selling $580 to $589 and higher strike Calls while selling $575 to $579 Puts implying Dealers believe the market may take a respite from the current decline, but perhaps not before reaching $575. They are not selling Puts in large size so this conviction appears limited to a few Dealers. Certainly Dealers do not see prices rallying beyond $587 on Monday, therefore Dealers are bearish but with some hope that prices may stabilize a bit lower, at least on Monday. To the downside Dealers are buying $574 to $560 and lower strike Puts in a 1:2 ratio to the Calls/Puts they are selling/buying, implying a bullish outlook for Monday. This has changed from slightly bearish to bullish, likely reflecting Dealers belief that a relief rally may be in store for Monday or alternatively, the market may tread water until FOMC on Wednesday.       
Looking Ahead to Next Friday:
Dealers are selling $600 to $610 and higher strike Calls while buying $581 and $599 Calls indicating their desire to participate in any market rally to as high as $610 by the end of next week. $605 appears to be the ceiling for the week. To the downside, Dealers are buying $580 to $550 and lower strike Puts in a 3:1 ratio to the Calls they are selling/buying, reflecting a slightly bearish view for next week. This positioning remains unchanged from today although Dealers continue to add significant quantities of protection which implies a fear of falling prices. Dealers are prepared for any market decline that may develop, but again, this positioning is not overly bearish. Should we see the Dealers with a 5:1 ratio or greater, we would be very concerned about lower price. But Dealer positioning changes daily so it’s essential to monitor these updates each day for shifts in sentiment.

Recommendation for Traders

Stay aligned with the bearish bias, focusing on short trades near resistance levels and cautiously considering long trades at major support on failed breakdowns. Manage risk with tight stops and reduced position sizes in anticipation of elevated volatility. Be sure to review the premarket analysis before 9 AM ET for updated insights and shifts in sentiment.

Good luck and good trading!