Market Insights: Thursday, January 16th, 2025

Market Overview

Markets closed lower on Thursday as the Nasdaq Composite led a downturn, pressured by weakness in tech stocks and mixed earnings reports. The S&P 500 dropped 0.2%, while the Dow Jones Industrial Average slid 0.1%. The Nasdaq fell nearly 0.9%, dragged down by underperformance in Apple and Tesla, which tumbled more than 4% and 3%, respectively. Investors balanced optimism from earlier rallies with concerns about future Federal Reserve rate cuts, even as bets on a rate decrease before mid-year increased. Retail sales data showed slower-than-expected growth of 0.4% for December, compared to November's 0.7%. Bank earnings were mixed, with Morgan Stanley surging over 4% on robust profits, while UnitedHealth slipped 6% after disappointing revenue. The Senate Finance Committee hearing for Treasury Secretary nominee Scott Bessent also captured market attention, as topics like tariffs and tax policy were discussed. While investors remain hopeful about economic stability, the divergence in corporate results and tech underperformance tempered sentiment.

SPY Performance

SPY finished slightly lower on Thursday, closing at $591.69, down 0.18%. After opening at $594.20, it reached a high of $594.35 but slipped to a low of $590.94. Trading volume was below average at 34.07 million shares, reflecting cautious sentiment after the previous session’s sharp gains. The pullback was attributed to consolidation following Wednesday's rally, as traders reassessed resistance levels near $595 and the potential for continued upward momentum.

Major Indices Performance

The Russell 2000 posted a modest 0.21% gain, outperforming its larger-cap peers, as small-cap stocks demonstrated resilience amid mixed broader market performance. The Dow edged down 0.25%, weighed by a pullback in industrial and financial sectors. The Nasdaq struggled the most, losing 0.77% due to underperformance in tech heavyweights. Defensive sectors like healthcare also lagged, as UnitedHealth’s disappointing earnings report dragged the group lower. The mixed performance highlighted investors' cautious approach following Wednesday's optimism.

Notable Stock Movements

The "Magnificent Seven" tech stocks underperformed on Thursday, with all but Microsoft declining by more than the Nasdaq’s 0.89% loss. Apple dropped over 4%, leading the group lower, while Tesla fell more than 3%. The widespread losses among these stocks underscored the challenges facing growth sectors as concerns about valuations and earnings persist. Microsoft’s relatively smaller decline reflected a modestly defensive stance among investors seeking stability in an uncertain market environment.

Commodity and Cryptocurrency Updates

Oil prices fell 1.12% to $77.83 per barrel as concerns about slowing demand counteracted optimism about economic recovery. Gold extended its rally, rising 1.04% to $2,746 per ounce, as a haven bid supported prices amid uncertainty in equity markets. Bitcoin climbed 0.62%, briefly surpassing $100,000, fueled by ongoing enthusiasm for cryptocurrencies despite market volatility. The modest gains in gold and Bitcoin reflected diverging risk preferences among investors. We firmly believe Bitcoin can reach significantly higher levels longer term under the Trump administration and would use pull backs to initiate long positions. We favor $83K and $77K as potential entry points but would start averaging in on any pullback.

Treasury Yield Information

The 10-year Treasury yield eased slightly, closing at 4.609%, a 0.35% decline. While lower yields offered some support for equities, the level remains above the critical 4.5% threshold, keeping pressure on market sentiment. Persistent concerns about inflation and rate trajectory continue to weigh on risk assets, with traders closely monitoring developments for signs of stabilization. Should treasuries reach 5.2%, the market will sell off given Europe and other zones are reducing interest rates in 2025 so foreign capital will make its way to the US for the higher yield.

Previous Day’s Forecast Analysis

Wednesday’s forecast projected a trading range of $588 to $596 for SPY, with a bullish bias targeting $593 and $596. The analysis emphasized the need for caution around key resistance levels, urging traders to focus on long trades from support near $588 and $585. It correctly anticipated a sideways bias following a strong rally, with recommendations to capitalize on failed breakout and breakdown patterns for entry.

Market Performance vs. Forecast

SPY’s actual performance aligned with expectations, trading within the projected range of $588 to $596. The ETF opened above the $593 bias level but failed to sustain momentum, reflecting the anticipated consolidation phase. Key resistance at $595 briefly halted upward progress, and SPY closed just below the bias level at $591.69. There was one textbook failed breakdown at 1:48 pm ET which produced solid gains. The market's adherence to the projected levels provided actionable opportunities for traders, particularly in managing risk around resistance.

Premarket Analysis Summary

Thursday’s premarket analysis identified $593 as the critical bias level, with resistance targets at $595, $598, and $600. Support levels were outlined at $593, $588.25, and $584.75. The market showed an initial attempt to hold above $593 but failed to sustain gains, retreating to test lower levels. The cautious long bias was validated, though resistance proved formidable, guiding traders to approach entries with patience.

Validation of the Analysis

The premarket analysis accurately identified $593 as a pivotal level, with SPY respecting this bias throughout the session. The resistance at $595 held firm, while support at $590 provided stability during intraday declines. Traders who adhered to the analysis capitalized on predictable reversals around these levels, reinforcing the value of the premarket guidance.

Looking Ahead

As markets approach the weekend, no major economic releases are scheduled for Friday. With a holiday closure on Monday, attention will shift to next Thursday and Friday for significant economic updates. The lack of immediate catalysts may lead to subdued trading, though end-of-week OPEX positioning could introduce volatility.

Market Sentiment and Key Levels

SPY's close at $591.69 signals a cautious sentiment with a bearish tilt, as the market struggles to maintain momentum. Key resistance lies at $595, $598, and $600, while support is identified at $590 and $585. A break above $595 could revive bullish momentum, while a drop below $585 may increase bearish pressure toward $580.

Expected Price Action

For Friday, the model forecasts a trading range of $588 to $595, reflecting potential consolidation with sporadic trending moves. Resistance at $595 and $600 may cap gains, while support at $590 and $585 provides a buffer against steeper declines. Traders should anticipate two-way price action, favoring short-term strategies. OPEX days are notoriously choppy and given the strong move Wednesday, its likely the market needs more time to build a base to digest gains before attempting any push higher. Our model expects price to trend lower overnight but to find support at $588 and no lower than $585 where the bulls will step back in to support price. The bulls are in control of the market above $585 therefore the model’s general lean is further consolidation which will lead to a next leg higher.

Trading Strategy

Focus on long trades near $588 and $585, targeting $590 and $593. Short trades can be considered at resistance near $595 and $598, with potential reversals guiding entry. Employ failed breakout and failed breakdown patterns to confirm trades, using tight stop-losses to navigate potential reversals. The VIX suggests caution in sizing positions as volatility remains heightened. Two way price action is likely so trading from the edges and level to level is appropriate for Friday.

Model’s Projected Range

The projected maximum range for Friday of $586 to $599 highlights the potential for consolidation with periodic directional moves. The market is Put dominated and as long as SPY remains in a bear trend channel from December 18th, the upside is limited to $601 with support at $575. Above $595, price may challenge $600, while a drop below $585 risks further losses.

Market State Indicator (MSI) Forecast

Current Market State Overview:
The MSI is currently in a Bearish Trending Market State, with price closing midrange. The MSI range is narrow and there are no extended targets printing below, implying a weak bear trend for Friday. But with SPY closing near the day’s lows, price is likely to see some follow through lower overnight. Should SPY continue to fall we except the MSI to rescale lower. The day opened with the MSI in a very wide bullish state. Price had a hard time for most of the session moving to either MSI support or resistance given the size of the range, but at 1:30 pm the MSI rescaled lower to a bearish state which saw prices reach the day’s lows. The bearish range was quite narrow and while extended targets printed, they did so only briefly. As a result the MSI rescaled to a ranging state and just prior to the close, rescaled to the current narrow range, bearish state. MSI support is $590.87 and resistance is at $591.99.  
Key Levels and Market Movements:
Once again as forecast, SPY drifted higher overnight, reaching major resistance before the open at the $595 level identified by the model. By the open however, price had pullback and given there weren’t any extended targets printing above, we took the opportunity to short off the double top at $594 looking for price to reach major support at $593. In a choppy sideways market, taking an initial $1 profit target on SPY is wise. We got to $593 fairly easily and held our runner to see if price would reach MSI support at $590.67. But as we held our runner (we always take 75% of our trade off at an initial first target, 15% on a second and leave 10% to run), while the MSI rescaled to a bearish state, the MSI range was quite narrow and for the most part, without extended targets. Price put in a perfect failed breakdown at $591 so we reversed long, trading back to $593, which was resistance. When the MSI rescaled to a ranging state we closed our runners at this level after price made a double top and looked like it wanted to fall. While this is precisely what transpired, we did not short given it was after 3 pm ET and with OPEX on Friday, we did not want to hold any positions overnight. But with all the chop and narrow range of the day, we ended with another solid day going two for two 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 Wednesday; “Thursday the market will likely take a day to consolidate and digest gains before deciding how much more is left in today’s rally” and once again, the market delivered as forecast moving in a very tight range all day. With price closing once again above $590, the bulls continue to wrestle control from the bears. Above $585, the bulls clearly have the advantage. But watching the end of the day price action, it was clear the bears continue to hang around, hoping for another crack at lower prices. And with price trading in the bear trend channel from December 18th, expect price to find significant resistance the closer price gets to the upper channel, currently at $600. For Friday our model projects the market will take another day to consolidate to build a base before the bulls make another attempt at higher prices. As long as $585 does not give way, price will push toward $600 in time. For tomorrow our model sees major resistance at $595 and $598 with major support at $590 and $585. Friday is likely to be a choppy, whippy session given options expiry and a holiday on Monday. Like we stated yesterday when “markets consolidate, using failed breakout and failed breakdown patterns offer the highest probability set ups as triggers for entries” so once again, we 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 $601 to $605 and higher strike Calls while also buying $592 to $600 Calls implying the Dealers desire to participate in any rally on Friday. Dealers sold Puts yesterday effectively putting a floor in the market, which played out perfectly today. Dealers are no longer selling ATM Puts for tomorrow. To the downside Dealers are buying $591 to $560 and lower strike Puts in a 2:1 ratio to the Calls they are selling, implying a neutral outlook for Friday. This is unchanged from today reflecting Dealers belief that the relief rally will likely stall again on Friday, but may still have some legs left next week.
Looking Ahead to Next Friday:
Dealers are selling $601 to $605 and higher strike Calls while buying $592 to $600 Calls indicating their desire to participate in any market rally to as high as $605 by the end of next week. $605 appears to be the ceiling for next week. To the downside, Dealers are buying $591 to $550 and lower strike Puts in a 6:1 ratio to the Calls they are selling/buying, reflecting a bearish view by next Friday. This bearish positioning continues to grow to a more bearish posture. We stated all week that “Dealers continue to add significant quantities of protection which implies a fear of falling prices.” Once again today Dealers decided to increase their protection concerned that this current rally may just be 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 bearish Dealer sentiment continues to grow. Dealer positioning changes daily so it’s essential to monitor these updates each day for shifts in sentiment.

Recommendation for Traders

With a subdued, yet choppy trading day expected Friday, traders should focus on key levels of $590 and $595 for opportunities. Long trades are advised near support at $590 and $585, targeting resistance at $590 and $595, while short trades may be considered at $595 if the market rejects this level. Tight stop-losses and disciplined position sizes remain crucial in managing risk. The VIX suggests elevated caution as volatility persists. Remember to review the premarket analysis posted before 9 AM ET to account for any changes in the model’s outlook and Dealer Positioning.

Good luck and good trading!