Market Insights: Wednesday, January 15th, 2025

Market Overview

Markets soared on Wednesday following a cooler-than-expected inflation report, fueling optimism that the Federal Reserve might ease its monetary tightening sooner than anticipated. The Dow Jones Industrial Average climbed over 700 points, a gain of 1.6%, while the Nasdaq Composite surged 2.4%, buoyed by strong performances from tech stocks. The S&P 500 mirrored this rally with a 1.8% gain, reaching its highest level in weeks. The Consumer Price Index (CPI) showed core prices increased by only 0.2% in December, down from 0.3% in November, with the annual core inflation rate easing to 3.2%. This marked the first decline in annualized core inflation since July, adding to optimism that inflationary pressures are subsiding. Treasury yields responded sharply, with the 10-year yield falling 13 basis points to 4.65%, relieving pressure on equities. Meanwhile, strong earnings from major banks like JPMorgan Chase and Goldman Sachs added to the upbeat mood, showcasing resilience in corporate profits. Traders are cautiously optimistic about the Fed's next move, although lingering risks remain as market participants digest these developments.

SPY Performance

SPY had a strong session on Wednesday, closing at $592.78, up 1.82%. The ETF opened at $590.57 and reached an intraday high of $593.94 before settling near its highs. Trading volume was robust, with 49.01 million shares traded, well above the average. The bullish momentum was driven by easing inflation concerns and solid earnings, signaling renewed confidence in equities.

Major Indices Performance

The Nasdaq Composite led gains among major indices with a 2.35% increase, reflecting strength in technology and growth stocks. The Russell 2000 followed with a 1.98% gain, showcasing small-cap resilience. The Dow Jones added 1.75%, buoyed by industrial and financial sectors, while the S&P 500 climbed 1.8%, supported by broad-based sector participation. Energy and technology were standout performers, with financials also contributing significantly due to upbeat earnings. Defensive sectors like utilities lagged but still posted modest gains, reflecting a risk-on sentiment in the market.

Notable Stock Movements

The "Magnificent Seven" stocks rebounded sharply, led by Tesla, which surged over 8%, followed by Meta, up 3.85%. Other giants like Apple, Microsoft, and Nvidia posted gains exceeding 2%, reflecting renewed confidence in the tech sector amid easing inflation fears. The strong performance underscored the market's pivot back to growth-oriented sectors after weeks of caution, with investors betting on robust earnings and a favorable macroeconomic outlook.

Commodity and Cryptocurrency Updates

Oil prices rallied sharply, climbing 3.6% to close at $79.12 per barrel, supported by optimism over global demand recovery. Gold advanced 1.41% to settle at $2,720 per ounce as lower Treasury yields bolstered safe-haven demand. Bitcoin continued its impressive run, rising 3.26% to just below $99,700, as risk-on sentiment extended into the crypto market. Analysts remain optimistic about Bitcoin’s 2025 trajectory, while cautioning against potential retracements in the near term.

Treasury Yield Information

The 10-year Treasury yield dropped by 2.9%, closing at 4.649%. This decline reflected market optimism about a slowing inflation trend, which could ease pressure on the Federal Reserve to maintain aggressive rate hikes. The falling yield boosted equity markets, particularly growth-sensitive sectors like technology and small-cap stocks.

Previous Day’s Forecast Analysis

Tuesday’s forecast anticipated a trading range of $575 to $590, with key resistance at $586 and major support at $580 and $578. Traders were advised to short near resistance and buy dips at support, being careful to trade what you see after CPI. Traders were advised, “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”.”.

Market Performance vs. Forecast

The SPY’s performance on Wednesday largely aligned with the prior day’s forecast. Given CPI was an unknown, the model correctly stated “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”. With the market opening above resistance the bulls resumed control and the only trades were long off major support. Two failed breakdowns set up entries in the morning session which turned into highly profitable trades. Following the prior day forecast set our readers up to trade with the trend and to enter long and stay long, given price broke above all major resistance.

Premarket Analysis Summary

In Wednesday’s premarket analysis posted at 8:40 AM ET, SPY was forecasted to favor long trades above $584.75, with an upside target at $593. The analysis accurately captured the bullish momentum that lifted SPY to $593.94 intraday. The cautious approach for resistance levels and the potential for retracements proved insightful.

Validation of the Analysis

Wednesday’s market adhered closely to the premarket analysis. SPY respected the bias level at $584.75, quickly rallying to the upside target of $593. Key support at $584.75 held firm, and resistance at $593 offered a brief pause before SPY settled near this level. Traders who followed the suggested levels capitalized on the predictable price movements.

Looking Ahead

Thursday’s focus will shift to Retail Sales and Unemployment Claims, both of which will provide fresh insights into consumer behavior and labor market strength. These data points could shape the market’s direction heading into the end of the week, with heightened sensitivity to any surprises. But given the size of today’s move, its more likely this economic information will have little impact on the current trend.

Market Sentiment and Key Levels

With SPY closing at $592.78, sentiment remains cautiously bullish. Key resistance levels are identified at $593, $596, and $600, while support lies at $590, and $585. A break above $593 could open the door to $596, while a failure to hold $590 may lead to a retest of $585. The bulls do not want price to drop below $585 and will defend this level.

Expected Price Action

For Thursday, the model projects a trading range of $588 to $596 with price moving more sideways, than continuing the strong move higher. With SPY trending upward, the bias remains bullish yet cautiously so. A move above $593 could trigger further gains toward $596, while a drop below $590 may test lower support at $585. A break below $585 will bring back droves of bears which will push prices back to $580. We see price rallying briefly on Thursday but running into heavy resistance a bit higher where price is likely to stall and retrace. Expect two way price action on Thursday.

Trading Strategy

Traders should focus on long trades near support at $588 and $585, targeting $590 and $596. Short trades may be considered near $596 if resistance holds. Enter using failed breakout and failed breakdown patterns, given sideways markets tend increase the probability of these patterns. Tight stop-losses are essential in this volatile environment, with the VIX indicating increased caution. Look for failed breakout patterns to confirm trade entries.

Model’s Projected Range

The model forecasts a maximum trading range of $586.50 to $599, which is still wide, indicating the potential for trending behavior. We believe Thursday will provide two way trading opportunities with more of a drift to higher levels, with periods of trending price action. With a Call-dominated market, the outlook leans bullish with the bulls reclaiming much of the control from the bears. SPY remains within a bear trend channel, with room higher to test the upper trend channel at $601.25, and lower to $575.25.

Market State Indicator (MSI) Forecast

Current Market State Overview:
The MSI is currently in a Bullish Trending Market State, with price above MSI support at $591.65. The MSI range is wide and there are extended targets printing above, which implies a strong bull trend for Thursday, and one that is likely to see some follow through overnight and tomorrow. The MSI opened the day in a bullish state with an overnight rally as projected. And with CPI data coming in as forecast, price gapped up to open well above major resistance. Extended targets printed overnight and for much of the day, which pushed price to major resistance at $593. The MSI has not rescaled since the premarket and as such is implying a topping pattern for tomorrow. The range, however, is wide and as long as extended targets are printing above price, expect higher prices. MSI support is $591.65 and lower at $588.33.  
Key Levels and Market Movements:
Once again as forecast SPY continued the short squeeze overnight, reaching major resistance at $585 level where it paused until CPI was released. A gap higher after CPI to major resistance at $590 and the MSI rescaled higher twice while also printing extended targets above. This was a sign to get long and stay long. We stated yesterday we “cannot in good conscience advise trading off $580 or $586 given these levels can be blown out by a strong or weak CPI” and sure enough this is exactly what happened with CPI fueling the day’s rally. The model’s levels were made moot by CPI and today was a day to trade what you see, using the MSI and the premarket analysis as a guide. At the open after the gap higher, price pulled back to premarket support at $589.25 and put in a less than textbook failed breakdown, but one that was good enough for us to go long trading to MSI resistance at $591.65. We held onto the runner since extended targets were printing above and took final profits at the premarket resistance level of $593. While we thought about a short at that level, the MSI kept us from entering given it continued to print extended targets indicating the herd was participating in the day’s rally. Price pulled back to $589.25 where we once again entered long, seeking the same outcome as the first trade. And sure enough the MSI showed us the way. We replicated the first trade with trade #2, achieving virtually identical results. When price broke resistance at $593 we considered a short but with extended targets above price, we sat on our hands and by 3:15 pm, called it a day going two for two. Another 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 Tuesday “above $586 be careful shorting as the bulls want to move the market above $590 to reclaim control from the bears” and again, this was sage advice. By the open with price well above $586, the only trade was long. And with price closing above $590, the bulls have reclaimed much of the control from the bears and as such, the market is likely to move higher for another day and perhaps the rest of the week. But with price in bear trend channel, expect resistance the closer price gets to the upper channel at $600. For Thursday the market will likely take a day to consolidate and digest gains before deciding how much more is left in today’s rally. For tomorrow our model sees major resistance at $596 with major support at $590 and $585. As long as the bulls keep price above $585, the market should continue to drift higher, reaching $600. At $600 the bears will likely step in to try and push prices lower. But its likely $600 becomes the battle zone for control, which is likely to keep price contained until the next major catalyst appears. When markets consolidate, using failed breakout and failed breakdown patterns offer the highest probability set ups as triggers for entries so we continue to advise seeking these patterns from major levels. 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 $593 to $601 and higher strike Calls while also selling $592 to $585 Puts implying Dealers believe the current rally will continue, but has limits to how far price will rise, at least for tomorrow. Dealers were spot on positioning for a ceiling at $593 today. For tomorrow this ceiling is $598, but Dealers do not sell Puts close to the money without extreme confidence that prices will continue to rise. To the downside Dealers are buying $584 to $560 and lower strike Puts in a 2:1 ratio to the Calls they are selling, implying a neutral outlook for Thursday. This has changed from slightly bearish to neutral, likely reflecting Dealers belief that the relief rally still has some legs, at least for Thursday.
Looking Ahead to Next Friday:
Dealers are selling $601 to $605 and higher strike Calls while buying $593 to $600 Calls indicating their desire to participate in any market rally to as high as $605 by the end of the week. $605 appears to be the ceiling for the week. Dealers are no longer selling at the money Puts. To the downside, Dealers are buying $592 to $550 and lower strike Puts in a 5:1 ratio to the Calls they are selling/buying, reflecting a bearish view by Friday. This positioning has changed from neutral to bearish. We have stated all week that “Dealers continue to add significant quantities of protection which implies a fear of falling prices.” Today it appears Dealers decided to increase protection significantly to ensure that this rally is not just a short squeeze. Dealers are certainly prepared for any market decline that may develop and have shifted the positioning to decidedly bearish. We suggest any long book take the opportunity at these levels to purchase downside protection as well, as this shift in Dealer sentiment is a new development. Dealer positioning changes daily so it’s essential to monitor these updates each day for shifts in sentiment.

Recommendation for Traders

With CPI behind us traders should focus on trading from major levels. Look for long trades near $588 and $585, with upside targets at $590 and $593. Short trades are advised near $596, targeting $592 and $590. While the market looks like it wants to move slightly higher, Dealers are positioning for a different outcome and as such, as price approaches $600 its likely to pull back. While the bulls are in control for Thursday, after a monster move like today, trading becomes more complex and riskier. Shorts are unwise given the strength of today’s move but longs at these levels pose risks. Therefore we advise looking for two way trades on Thursday from major levels, but only on confirmed rejections (failed breakout/breakdown patterns). Manage risk carefully and use tight stop-losses and disciplined position sizes which are crucial for navigating the current environment. Be sure to review the premarket analysis posted before 9 AM ET to account for any changes in the model’s outlook and in Dealer Positioning.

Good luck and good trading!