Market Insights: Tuesday, January 14th, 2025

Market Overview

U.S. stocks closed mixed on Tuesday as investors braced for a pivotal inflation report due Wednesday morning. The Producer Price Index (PPI), a measure of wholesale price changes, offered a glimpse of moderating inflation with a year-over-year rise of 3.3%, slightly below expectations. The report suggested that pricing pressures are easing, though concerns linger about the Federal Reserve's ability to achieve its 2% inflation target. Markets displayed caution as traders assessed the implications of the data on future monetary policy.

The Dow Jones Industrial Average extended its winning streak, rising 0.5% to notch a back-to-back gain, while the S&P 500 edged 0.1% higher. Meanwhile, the tech-heavy Nasdaq Composite fell 0.2%, weighed by ongoing struggles in the technology sector. As the Federal Reserve remains focused on inflation, upcoming CPI data will likely determine the market’s next moves. Meanwhile, geopolitical news and tariff discussions added layers of uncertainty, with reports suggesting a phased approach to new tariffs by the incoming administration. The 10-year Treasury yield, a key barometer for interest rates, continued hovering near 14-month highs, capping gains in rate-sensitive equities.

SPY Performance

SPY navigated a narrow trading range on Tuesday, reflecting subdued market sentiment ahead of key economic releases. The ETF opened at $584.36, hit an intraday high of $585, and closed slightly lower at $582.19, a gain of 0.14%. Trading volume was average at 44.42 million shares, indicating cautious participation. As SPY consolidates near key levels, traders are focused on Wednesday’s inflation data, which could trigger heightened volatility.

Major Indices Performance

The Russell 2000 led the day with a 1.14% gain, underscoring robust performance among small-cap stocks. The Dow Jones Industrial Average followed, climbing 0.66% as industrials and cyclicals outperformed. The Nasdaq Composite lagged with a modest decline of 0.2%, dragged down by tech sector weakness, while the S&P 500 added 0.1%, supported by gains in defensive sectors. Sector performance was mixed, with energy and financials leading, while technology and consumer discretionary stocks weighed on broader indices.

Notable Stock Movements

The Magnificent Seven stocks faced another tough session, with all members ending the day in the red. Meta led the decliners, falling over 2.3%, as broader concerns about tech valuations and growth weighed on sentiment. Other key names like Apple and Nvidia also struggled, with modest losses adding to the negative momentum in tech. Despite the group’s challenges, the broader market found support in financials and energy, reflecting a shift in investor focus toward value-oriented sectors.

Commodity and Cryptocurrency Updates

Oil prices slipped, with crude retreating 0.87% to settle at $76.63 per barrel. The pullback came as traders balanced supply concerns with the potential for weaker demand amid persistent inflation. Gold saw a slight recovery, rising 0.5% to $2,692 per ounce, benefiting from safe-haven demand. Bitcoin surged 2.49% to close just above $96,500, signaling renewed interest in cryptocurrencies amid broader market uncertainty. Long term crypto investors are advised to buy Bitcoin on pullbacks, as our model is forecasting significant increases in 2025. That said, Bitcoin could retrace to $50K from the current levels so invest cautiously and look for pullbacks, averaging as price retraces.

Treasury Yield Information

The 10-year Treasury yield dipped slightly, falling 0.33% to close at 4.789%. While yields remain elevated, the modest decline provided some relief for equities, particularly in defensive and income-sensitive sectors. The proximity of yields to the critical 5% level continues to concern traders, as any breach could exacerbate market declines, particularly in growth-sensitive areas. 5.2% is a line in the sand, above which equities will realize a material pullback.

Previous Day’s Forecast Analysis

Monday’s forecast projected a trading range of $578 to $586, with resistance at $585 and $586 expected to cap rallies. Support was identified at $580 and $577, with the forecast emphasizing caution around volatility ahead of key inflation data. Traders were advised to short rallies near resistance and buy dips near support levels, expecting a bearish bias to persist despite intermittent short squeezes.

Market Performance vs. Forecast

Tuesday’s market performance largely aligned with Monday’s forecast. SPY respected the identified resistance at $585, reversing from this level to close at $582.19, within the projected range. Support near $580 held firm, providing a solid base for intraday rebounds. The predicted bearish bias was tempered by cautious optimism, creating profitable opportunities for traders who followed the strategy of fading rallies and buying dips at major levels.

Premarket Analysis Summary

In Tuesday’s premarket analysis, posted at 8:00 AM ET, SPY’s bias level was pegged at $582.10, with upside targets at $584 and $587. The analysis anticipated cautious upward momentum with potential dips being bought, provided SPY remained above $582.10. Downside targets were identified at $579 and $575, with consolidation expected if the initial bias level was breached. The projected behavior closely mirrored actual trading, confirming the analysis’s reliability.

Validation of the Analysis

Tuesday’s trading adhered closely to the premarket analysis. SPY respected the bias level at $582.10, with dips to $580 met with buying interest. Resistance at $585 capped upward momentum, as projected. Once again the post market and premarket analysis aligned, which is the green light to trade larger and with conviction at these levels. Traders who followed the suggested strategy of buying near $580 and shorting near $585 could capitalize on the predictable price action, underscoring the accuracy of the analysis.

Looking Ahead

Wednesday brings the critical Consumer Price Index report, expected to influence Federal Reserve policy. Core CPI data will shed light on inflationary pressures, potentially swaying market sentiment. Additionally, speeches from Federal Reserve members on Thursday and retail sales data will offer further insights. Elevated volatility is expected, with traders advised to remain cautious and closely monitor economic developments.

Market Sentiment and Key Levels

SPY’s close at $582.19 positions it near pivotal levels, with sentiment leaning cautiously bullish. Resistance is identified at $585, $586, and $590, while support lies at $580, $578, and $575. A move above $586 could signal renewed strength, while failure to hold $580 may bring further downside risks.

Expected Price Action

For Wednesday, the model forecasts a trading range of $575 to $590, with CPI data likely driving significant price swings. Resistance at $585 and $586 could cap rallies, while support at $581, $578, and $575 remains critical. A break below $575 could trigger a retest of lower levels near $567, while sustained momentum above $586 may push SPY toward $590.

Trading Strategy

We recommend shorting SPY near resistance at $585 and $586, targeting support at $580 and $578. Long trades near $578 may offer opportunities if breakdowns fail, but caution is advised around volatile periods tied to CPI data. With $575 being tested several times, there is likely only one more bounce left at this level before it gives way. Similarly another test of $586 may also give way to $590 or higher. While we typically advise trading the edges and these major levels, CPI days are difficult with major price moves that are designed to trap traders and capture liquidity. Anything can happen on a CPI day. Absent CPI the model is leaning toward a bit more of a relief rally and short squeeze to as high as $587. But CPI days can move +- $10 so we caution about trading in size, trying to pick tops and bottoms. Instead wait for failed breakouts and failed breakdowns at or near major levels, waiting for price to reverse before entering a trade. Do not rush into a trade and try to “catch a falling knife”. There is no reason to seek out the absolute top or bottom given the market will likely move substantially. Even a less than perfect entry has the potential to earn a profit, as long as you trade with the trend. Take $1 for first targets and wait to see if runners provide more profits for bigger trades. The VIX, currently near elevated levels, highlights the need for disciplined risk management and tight stop-losses.

Model’s Projected Range

The model projects a maximum, wide trading range of $572 to $591.75, implying the potential for strong, trending behavior. The market is Put dominated with resistance at $585 and $586 which remains critical for the bears to maintain control over the market. $581, $578, and 575 are key support levels. The bulls need $575 to hold to have any hope of a recovery. SPY’s position in a bear trend channel suggests further downside risks if support is breached with lower trend channel support at $575.50 and upper trend channel resistance at $601.50.

Market State Indicator (MSI) Forecast

Current Market State Overview:
The MSI is currently in a Bullish Trending Market State, with price well above MSI resistance at $581. The MSI range is very narrow and there are no extended targets printing above, which implies a weak bull trend for Wednesday, and one that is likely to revert lower overnight. The MSI opened the day in a bullish state with an overnight rally as projected, but without extended targets above, price fell after reaching overhead resistance at $586 with the MSI rescaling lower to a very narrow bearish state. While there were a few extended targets below, price fell only to major support at $579 given the very narrow MSI bearish trend. The MSI then rescaled to a ranging state and to a bullish state and spent the afternoon bouncing between these two states. MSI support is $581 and lower at $580.34.  
Key Levels and Market Movements:
As forecast SPY continued the short squeeze overnight, reaching major resistance at the models $586 level where it stalled, with a double top which saw price fall to the lows of the day. The premarket report had also noted $585 as a major level and as such we shorted this level in size and held for MSI support at $581 where we took first profits. We decided to continue to hold our runner to see if price would decline further, given there were no extended targets above price. And sure enough, price continued to fall and the MSI confirmed price was in fact moving lower. At $579 with a very narrow, bearish MSI, we closed out our short and waited for extended targets below to stop printing. Just after noon, without extended targets below and a very narrow bearish MSI and with price at major support, the market gave us a textbook failed breakdown which put us long just above $579. We took first profits at $580 given the MSI was in a ranging state as we know the odds of price moving from one MSI level to the next in this state is only 50%. Once at $580 however the MSI rescaled to a bullish state and we held our runners for a nice rally back to major resistance. A triple top at $584 and we closed our long and once again, shorted this major level for a retest of $580. And sure enough, price did fall to $579 where once again, we closed our short. While there was another opportunity for a long at 3 pm ET, we decided to call it a day going three for three given the size of these trades. Because the pre and post market reports concurred, we loaded the boat on these trades as we knew the probability of success increased. Another very solid trading day with the MSI doing 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 Monday “we forecast a continuation of the current short squeeze” and sure enough overnight this is exactly what transpired. We also stated we “may see $586 as a high before the bears step in but we do believe they will step in and push price lower.” And again, price reached $586 in the premarket where it failed, which set up the perfect short in the morning session. For Wednesday, our model sees the short squeeze potentially continuing but with major resistance continuing to show resistance at $586. But with CPI looming, as we state often, trade what you see after new information is released to the market. And be careful given CPI like FOMC days are fraught with trappy, whippy price action. We cannot in good conscience advise trading off $580 or $586 given these levels can be blown out by a strong or weak CPI. Instead our advice is to trade cautiously and in small size, entering only on failed breakout/breakdown patterns near these major levels but only AFTER price has moved back to the failure point. If you do not understand where that point is, reread archived newsletters to see examples of textbook failed breakout and failed breakdown patterns. Alternatively take the day off and do not trade given CPI days require skill and speed which only comes with time in the market. Certainly our advice from yesterday holds true; “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.” And continue to use the MSI to help 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 $583 to $595 and higher strike Calls implying Dealers believe the current short squeeze has limits to how far price will rise. Dealers are positioned for a ceiling at $593. To the downside Dealers are buying $582 to $560 and lower strike Puts in a 3:1 ratio to the Calls they are selling, implying a slightly bearish outlook for Wednesday. This has changed from neutral to slightly bearish, likely reflecting Dealers belief that the relief rally may be nearing an end.       
Looking Ahead to Next Friday:
Dealers are selling $592 to $605 and higher strike Calls while buying $582 to $591 Calls indicating their desire to participate in any market rally to as high as $605 by the end of the week. $600 appears to be the ceiling for the week. To the downside, Dealers are buying $581 to $550 and lower strike Puts in a 3:1 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. Dealer positioning changes daily so it’s essential to monitor these updates each day for shifts in sentiment.

Recommendation for Traders

With CPI ahead of the open, be extremely cautious trading level to level. It is advised to wait for failed breakout and failed breakdown patterns at major levels while also waiting for price to revert before attempting to pick a level and simply enter a trade. After CPI price can move plus or minus $10 with ease so we advise caution for traders who are not yet fully trained or prepared for what may transpire tomorrow. We are particularly concerned about this CPI print given the market is already under pressure, having retraced toward the 100 DMA. While the current pullback only represents a 5.5% decline, with a hot CPI and a new administration taking office next week, market participants are more nervous than they have been in some time. Fear and unease are damaging to the broader market so we stress caution tomorrow as an underlying theme to ensure a bad day doesn’t cause unrecoverable damage. That said, we still favor aligning with the prevailing bearish bias, shorting near resistance levels of $585 and $586 with the proper pattern, while targeting support levels at $580 and $578. Long trades may also be considered near $580 if breakdowns fail, but traders should maintain tight stop-losses given the likelihood of heightened volatility surrounding CPI data. Review premarket analysis prior to 9 AM ET to stay informed about updated market dynamics and dealer positioning.

Good luck and good trading!