Market Insights: Monday, January 13th, 2025
Market Overview
Markets ended the day mixed, with the Dow Jones Industrial Average outperforming as tech stocks dragged the Nasdaq lower. Investors continued to grapple with climbing Treasury yields and a strengthening U.S. dollar, both of which dampened optimism for rate cuts. The S&P 500 recovered from earlier losses to finish up 0.2%, while the Nasdaq slid 0.4%, weighed down by declines in tech giants Nvidia and Apple. Meanwhile, the Dow surged 0.9%, buoyed by gains in energy and industrial stocks, underscoring a clear divergence in sector performance.
The 10-year Treasury yield rose further to 4.8%, marking a fresh 14-month high as bond prices fell. This fueled concerns that persistently high rates may restrain economic growth and pressure equity valuations. Investors are now fixated on this week’s Consumer Price Index (CPI) data, anticipating whether inflation will continue to exceed the Federal Reserve’s 2% target. Oil prices also grabbed attention, climbing to multi-month highs before retreating slightly, as renewed sanctions on Russia raised supply concerns.
SPY Performance
SPY demonstrated resilience in a volatile session, closing at $581.47, up 0.17%. After opening at $575.74, it touched an intraday high of $581.75 and a low of $575.35. Trading volume was slightly below average at 41.70 million shares, signaling cautious participation as traders awaited key economic data. SPY’s ability to recover and close near session highs underscores short-term support, with $580 serving as a pivotal level moving forward.
Major Indices Performance
The Dow Jones led gains, advancing 0.9% as industrial and energy stocks surged. The Russell 2000 followed with a modest 0.19% uptick, reflecting a steadier performance among small-cap stocks. The S&P 500 posted a marginal gain of 0.2%, while the Nasdaq lagged, down 0.4%, reflecting continued weakness in tech. Sector dynamics were mixed, with defensive names underperforming while cyclicals found renewed strength amid shifting investor sentiment.
Notable Stock Movements
Tech remained under pressure, with Apple sliding 2.4%, leading losses among the "Magnificent Seven." Nvidia also dropped 2%, weighed down by new export restrictions from the Biden administration targeting AI technologies. However, Tesla and Netflix bucked the trend, showing relative strength late in the session. Tesla, in particular, reversed earlier losses to close higher, highlighting selective buying interest within the group.
Commodity and Cryptocurrency Updates
Oil prices continued to rise, with crude gaining 1.76% to settle at $77.09 per barrel, supported by geopolitical tensions and tighter supply prospects. Gold retreated by 1.3%, closing at $2,679, as higher Treasury yields dulled the appeal of non-yielding assets. Bitcoin edged lower by 1%, finishing just above $93,700. The cryptocurrency remains under pressure as higher yields and a stronger dollar weigh on speculative assets. Crypto buyers should support Bitcoin at $83K and $77K.
Treasury Yield Information
The 10-year Treasury yield climbed to 4.79%, up 0.34% for the day, maintaining its trajectory toward the critical 5% mark. Rising yields continue to pose a challenge for equities, especially growth-sensitive sectors. Market participants remain watchful, as surpassing 5% could trigger a sharp correction in equity markets, with a potential decline of up to 20% if yields reach 5.2%.
Previous Day’s Forecast Analysis
Friday’s forecast anticipated a trading range of $578 to $588 for SPY, with a bearish bias and resistance at $585. It highlighted $580 and $575 as critical support levels. The model forecast further weakness on Monday with the gap at $576.74 likely filling. Traders were advised to short resistance and seek longs from $575 on failed breakdowns.
Market Performance vs. Forecast
SPY fell overnight to major support at $575 as forecast, closing the gap as anticipated. The ETF remained within the maximum projected range, holding above $575 support. Trading opportunities included successful short positions near resistance at $580 and long trades at $575, validating the model's reliability. The analysis correctly emphasized selling rallies near resistance, with opportunities for short trades targeting lower levels while seeking longs only from lower levels at $575. The projected price action aligned with the market's bearish tone, offering actionable insights for traders while the session’s price action demonstrated the accuracy of the forecast in identifying key levels and trading scenarios.
Premarket Analysis Summary
Monday’s premarket analysis, posted at 8:53 AM, forecasted a bearish bias with a focus on key levels at $580 and $575. The projection accurately anticipated resistance at $580 and downside targets near $577. While SPY attempted several rallies, the session adhered to the bearish outlook, confirming the reliability of the premarket analysis in navigating volatile conditions.
Validation of the Analysis
The premarket analysis proved remarkably accurate, with SPY respecting both the projected range and key levels. Resistance at $580 capped upside attempts, while support at $575 provided a pivotal base. Traders who followed the outlined strategy of shorting failed rallies and targeting lower levels were rewarded with consistent opportunities.
Looking Ahead
This week brings significant economic releases, including the CPI report on Wednesday and several Federal Reserve Members speaking. Thursday continues the slew of economic data with Core Retail Sales and Unemployment Claims. These events are expected to set the tone for the market, with heightened volatility likely. Traders should monitor inflation data closely for clues about future rate policies and adjust strategies accordingly.
Market Sentiment and Key Levels
SPY’s close at $581.47 reflects a market struggling to find direction amid rising yields and macroeconomic uncertainty. Resistance levels are identified at $584, $585, and $586, while support lies at $580 and $577. A break above $586 could signal a recovery, but downside risks remain prominent if SPY fails to hold $577.
Expected Price Action
For Tuesday, our model projects a trading range of $578 to $586, with a bearish bias persisting, although the short squeeze will still have room to push the market a bit higher before the bears seek lower prices. Resistance at $585 and $586 will likely cap any rallies, while support at $580 and $577 will be critical for maintaining stability. With CPI due premarket, these levels could be challenged and as such, traders should remain cautious, and be prepared to trade what they see as this new information is introduced to the market. Elevated volatility will continue to amplify price swings.
Trading Strategy
We recommend shorting SPY near resistance levels of $585 and $586, targeting support at $580 and $577. Long trades near $580 may offer opportunities if breakdowns fail, but the prevailing bearish bias necessitates tight stop-losses. The market wants to move higher and test above $585 to see if the bears will step back in and push prices back down again. Our model does not forecast the low is in and as such, rallies should be faded. Short squeezes can move price materially and until price reaches $590, we favor shorting all rallies. Above $590 we would be very cautious and only short on failed breakouts. Elevated volatility, indicated by a VIX hovering near critical levels, underscores the importance of disciplined risk management.
Model’s Projected Range
The model forecasts a maximum trading range of $572.75 to $588 for Tuesday, implying the potential for trending behavior. SPY remains in a bear trend channel, with $585 as a key resistance level and $580 as pivotal support. A break below $580 could trigger a retest of $575 and a break of $575 will retest the November lows. A move above $585 may open the door to $590 where the bulls and bears will battle it out for control. The bears are still in control and we suggest not being lulled into a false sense of security given today’s rally. SPY tested the lower trend channel and gap from November which is why the market rallied. This does not mean the recent declines are over. Just look at the short squeeze on December 23 and 24th to understand how markets work. We suspect this is what is likely to transpire once again.
Market State Indicator (MSI) Forecast
Current Market State Overview:
The MSI is currently in a Bullish Trending Market State, with price at MSI resistance at $581. The range is narrow but there are extended targets printing above, which implies a strong bull trend for Tuesday. The MSI opened the day in a bearish state but did not print extended targets, nor did it rescale lower which implied a bottoming formation which led to today’s rally. The MSI around 1:30 pm ET began rescaling higher and quickly moved to a bullish state with extended targets above. The MSI continued to rescale higher in rapid succession which implied a strong bull trend. This pushed price to major resistance at $580 which is where SPY closed. The herd is participating in this short squeeze with MSI support at $579.65 and resistance is $581.00.
Key Levels and Market Movements:
As forecast SPY continued its decline today in the morning hours, falling overnight, closing the November gap at $576.74. The MSI rescaled lower overnight and by the open, price was resting at MSI support at $575.60 which was a major support level both in the post market and premarket newsletters. As readers of these newsletters know, when these two reports coincide, the levels are likely to hold and offer excellent trading opportunities. This means trade heavier and with confidence, seeking larger targets. A less than textbook failed breakdown just after the open at MSI support had us long at $575.75 which we traded to MSI resistance at $579. We faded this level on a failed breakout at MSI resistance back to MSI support…a 70% probability trade, historically. Once back to $576 and MSI support and without extended targets below, we reversed our short, going long and looking for a mean reversion trade back to MSI resistance. But in the second test the MSI broke above MSI resistance which became support, and the MSI rescaled higher which allowed us to hold our runner for higher prices and the major resistance level of $580. We closed this second long at the end of the day going three for three for a great start to the week. 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 Friday 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” and also stated 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”. Once again we had a plan going into the day and the levels to trade to and from. We also advised to “lean on the MSI resistance levels to find triggers to enter short” which is what gave us the short at 10:45 am. Every day we do our best to give you the highest probability set ups. It’s up to you to take the trades. We trust the more you read these newsletters the easier this becomes. For Tuesday we forecast a continuation of the current short squeeze until CPI at 8:30 am. After that the market will dictate which way it wants to move. We believe CPI will be hotter than forecast which will give the bulls reason to sell and entice the bears back to the market. We may see $586 as a high before the bears step in but we do believe they will step in and push price lower. Above $586 be careful shorting as the bulls want to move the market above $590 to reclaim control from the bears. At the other extreme, should the market retest the lows at $575 we also advise some caution as this level has been tested a few times and is weaker as a result. It may have one more bounce in it but it’s likely on a second or third test, $575 gives way and the market falls to $570. Continue to use 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 $582 to $593 and higher strike Calls implying Dealers believe the current short squeeze has limits to how far it will go. Dealers are positioned for a ceiling at $590. We told you Friday “the market may take a respite from the current decline, but perhaps not before reaching $575”, which is exactly what transpired today. To the downside Dealers are buying $581 to $560 and lower strike Puts in a 2:1 ratio to the Calls they are selling, implying a neutral outlook for Tuesday. This has changed from bullish to neutral, likely reflecting Dealers belief that the relief rally they were perfectly positioned for today may be nearing an end.
Looking Ahead to Next Friday:
Dealers are selling $593 to $610 and higher strike Calls while buying $582 and $592 Calls indicating their desire to participate in any market rally to as high as $610 by the end of the week. $605 appears to be the ceiling for the week. To the downside, Dealers are buying $581 to $550 and lower strike Puts in a 5:2 ratio to the Calls they are selling/buying, reflecting a slightly bearish view for the 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 at 5:2. Should we see the Dealers with a 5:1 ratio or greater, we would be very concerned about lower prices. 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 as long as price remains below $586, 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!
