Market Insights: Tuesday, January 21st, 2025

Market Overview

Markets soared on Tuesday as traders returned from the holiday weekend, with the Dow Jones Industrial Average gaining over 500 points to surpass 44,000. The S&P 500 climbed nearly 0.9% to close above the psychological 6,000 level, while the Nasdaq posted modest gains, advancing 0.6%. The rally followed President Trump’s decision to delay anticipated tariffs on Mexico and Canada, alleviating immediate fears of trade disruption. Earnings from industrial giant 3M Company boosted sentiment, highlighting resilience in key sectors.

Technology stocks showed mixed performance as Apple declined due to weak iPhone sales projections, while Nvidia advanced more than 2% after a shaky start. Energy markets experienced turbulence, with oil prices sliding after President Trump’s executive order declared a national energy emergency to deregulate the industry. With investors bracing for tariff announcements potentially affecting North American trade, volatility is expected to persist in the coming sessions.

SPY Performance

SPY rose 0.92% on Tuesday, closing at $603.05. After opening at $600.79, the ETF reached an intraday high of $603.05, showcasing steady upward momentum throughout the day. Trading volume, however, remained below average, reflecting cautious optimism as markets navigate uncertain geopolitical developments. SPY remains poised near key resistance at $607, signaling a potential test of new highs if bullish sentiment persists.

Major Indices Performance

The Russell 2000 led gains with a 1.92% surge, reflecting strong performance among small-cap stocks due to a decline in bond yields. The Dow climbed 1.24%, driven by robust earnings and optimism surrounding potential policy clarity. The S&P 500 rose 0.92%, while the Nasdaq posted a more subdued gain of 0.64%, as weakness in Apple and Tesla tempered broader tech gains. The divergence among sectors highlighted the market's selective risk appetite, with energy and technology stocks underperforming while industrials and consumer discretionary sectors led the rally.

Notable Stock Movements

Among the "Magnificent Seven," Nvidia stood out with a gain exceeding 2%, rebounding from early session volatility. Amazon also advanced solidly, reflecting strength in consumer sentiment. Apple, however, dropped over 3% due to concerns about declining iPhone sales. Tesla and Microsoft experienced marginal losses, while the remaining tech giants managed modest gains. These mixed performances highlight the nuanced investor response to sector-specific risks and opportunities.

Commodity and Cryptocurrency Updates

Crude oil tumbled 1.77% to $76.02 per barrel, pressured by concerns over demand amid potential trade tensions and regulatory shifts in energy policy. Gold saw a modest uptick of 0.27%, closing at $2,756 per ounce, as investors balanced risk-on sentiment with safe-haven demand. Bitcoin rose 2.14%, closing just below $106,000, buoyed by continued institutional interest and optimism surrounding cryptocurrency's expanding role in portfolio diversification and a favorable administration.

Treasury Yield Information

The 10-year Treasury yield fell by 0.98%, ending the session at 4.566%. Despite the decline, yields remain above critical thresholds, with 4.5% acting as a key inflection point for equities. Continued declines in yields could support equity markets, while any reversal above 5% would likely signal increased risk of a market correction.

Previous Day’s Forecast Analysis

Friday’s forecast anticipated a trading range of $595 to $604, with a bullish bias targeting resistance levels at $600 and $604. The analysis suggested that SPY would test resistance at $600, with strong support at $595 serving as a springboard for upward momentum. Strategies favored long trades above $595 and $598, with caution advised around key resistance levels.

Market Performance vs. Forecast

SPY adhered closely to the forecast, opening at $600.79 and trading within the anticipated range. The ETF tested resistance at $600 early in the session and pushed toward $603, with the day’s high aligning with forecasted resistance levels. Traders who followed the recommended strategies capitalized on opportunities to go long above $595, while resistance at $603 offered an excellent profit-taking zone.

Premarket Analysis Summary

Today’s premarket analysis, posted at 8:12 AM, projected SPY would remain above key support at $596, with upward targets at $605. It highlighted potential for consolidation and profit-taking amid volatility stemming from tariff announcements. The analysis accurately forecasted support at $599.50, which held firm, guiding the market upward to test $605.

Validation of the Analysis

The premarket analysis proved accurate as SPY respected the identified levels. The ETF opened above $600 and maintained its upward trajectory toward $605, validating the anticipated bullish bias. Traders who used the analysis benefited from predictable movements, particularly the support at $599.50 providing a stable entry point.

Looking Ahead

Thursday’s Unemployment Claims and Friday’s PMI data will be pivotal in shaping market sentiment, potentially impacting Federal Reserve policy expectations. The absence of significant releases on Wednesday suggests a quieter session, though geopolitical developments could introduce unexpected volatility.

Market Sentiment and Key Levels

SPY’s close at $603.05 underscores bullish momentum, with resistance at $604, $606, and $607 in focus. Key support levels are identified at $599, $598, and $596, with bulls firmly in control above $599. A breakout above $604 could pave the way for further gains, while a drop below $599 would test the market’s resilience.

Expected Price Action

Our model forecasts a trading range of $599 to $606 for Wednesday, favoring a bullish bias. Resistance at $604 will be critical, with potential for new highs if momentum persists. However, failure to hold above $599 could lead to a retracement toward $596 or lower.

Trading Strategy

For Wednesday, consider long trades above $599 from failed breakdowns, targeting $604 and higher, while short trades near resistance at $604 may also be considered on failed breakouts. Both should be managed with tight stop-losses. Increased volatility may present opportunities for entries at key levels. Traders should remain cautious, adjusting positions based on market behavior.

Model’s Projected Range

The model projects SPY to trade in a maximum range between $598.75 and $607.75 on Wednesday, with a Call-dominated market favoring bullish outcomes. Resistance at $604, $606, and $607 will test the rally’s strength, while support at $598 and $596 provides a base. The current breakout from the bear trend channel suggests potential for sustained upward momentum. Below $596 there is little to keep price from falling to $590 and lower. Above $607 the door is open to $610 and potentially new all-time highs. Price is trading below the bull trend channel from the September lows and is currently breaking out above the bear trend channel from December 18th. This channel has a high of $600.50 and a low of $574.50 for Wednesday. This channel will be redrawn in a few days if price continues its current trajectory.

Market State Indicator (MSI) Forecast

Current Market State Overview:
The MSI is currently in a Bullish Trending Market State, with price closing well above support, and at extended targets. The MSI range is wide and extended targets printed much of the session, including into the close, indicating a strong bull trend. With SPY closing above support and with extended targets printing, price is likely to experience more follow through Wednesday. The MSI rescaled higher several times in rapid succession in the premarket, leading to today’s rally. We stated Friday there would be follow with higher prices on in the overnight session given MSI’s posture and certainly we saw that yesterday and today. While $600 was major resistance as forecast, and MSI resistance did hold early in the session, the bulls pushed price above MSI resistance and this major level and as such, $601 is now MSI support and lower at $598.46.  
Key Levels and Market Movements:
SPY continued to move higher overnight, breaking above major resistance at $600 early in the session. We stated Friday our “model for Tuesday sees some follow through to today’s rally with a retest of today’s highs with SPY perhaps reaching $600.” We also stated while “there is also support at $598, we would only consider longs from this level on a failed breakdown”. And today we had a textbook failed breakdown just above the $600 level at 10:12 am ET. Our least favorite time to trade is after a day or two of a strong rally given markets like to retrace and test breakout levels. We are not inclined to fight the trend unless very specific conditions exist, but we are also hesitant to go long. Instead we seek patterns at major levels to initiate entries. Today just after the open was one such pattern, our favorite failed breakout, presented with price trading just above major resistance at $600. The MSI did print extended targets above which keeps us out of mean reversion trades. But it did so only briefly so we took a crack at a short just below $601 on this failed breakout pattern, seeking a first target at MSI support at $598.46. Price didn’t quite reach this level, but while we were short, price printed a textbook failed breakdown at $599.11. We flipped long, exiting our short with a nice profit to get trading with the trend, taking first profits at MSI resistance at $601. We reached this level before noon and with extended targets printing above, knew to hold onto our runners and look for higher prices. The MSI continued to print extended targets so we knew not to fade the day’s rally. As price reached $602, while not perfect, price plotted a failed breakout so we exited with final profits at $602.75, near the day’s highs, and waited to see if the MSI would allow us to enter short on a retrace toward $600. This trade did not develop so by 3:30 pm we called it a day with two winners. It wasn’t the easiest day to trade but with the MSI, it was clear what we should and should not do to maximize our profits and probabilities. 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:
For Wednesday we feel much the same as we did on Friday. Another rally and another day where we must respect the bulls and favor longs, but where we are also a bit nervous about a rug pull coming without notice. There is no material economic news on Wednesday so the catalysts to the market for Wednesday are likely only to come out of the White House regarding tariffs. The market will punish tariffs but reward no tariffs. Should they get announced, the market could pull back substantially. Right now market participants have nothing but love for the new administration, but that can change in a heartbeat. We will be cautious until we get more clarity on economically sensitive administration policies. For Wednesday our model sees more follow through to today’s rally, pushing above today’s highs. It’s probably SPY pulls back to $601 before moving higher. SPY tried to break $603 three times today without success and then finally at the very end of the session, pushed to close at the day’s highs of $603.05. As price pushes to a level, liquidity at this level is absorbed, making it weaker on subsequent attempts. This is precisely what transpired today with the last break of major resistance. Think of it like a suit of armor that gets poked repeatedly. Eventually a hole develops and the pike gets through. With $603 giving way, price is likely to push to $604. Above $604, $606, and $607 will present challenges for the bulls. The bears did little today to keep price contained below $600 so perhaps they are holding out for $607. Only time will tell but like Friday, our model suggests a first or second test of $604, $606, and $607 will fail which will provide an opportunity for a mean reversion short. We continue to favor failed breakouts at these major levels. But because the bulls are in complete control, traders should focus on finding spots to get long to ride the trend higher. Price just broke out of the bear trend channel that has been in place since the end of December. Probabilities suggest price will retest the upper trend channel at $600 before moving materially higher. Therefore we favor longs from $599, particularly on failed breakdowns with the goal of moving toward $604. The model correctly projected trending behavior for today but for Wednesday the model projects a day of consolidation with more two way trading. The market needs time to consolidate and digest gains before deciding where to go next but at least for the foreseeable future, the bulls control the narrative and will likely close out January strong. $607 may become the battleground for the bulls and bears so we advise two-way trading from the edges, trading level to level, while watching the MSI to 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 $603 to $610 and higher strike Calls while also selling $600 to $602 Puts implying the Dealers believe the market has nowhere to go but up on Wednesday. Dealers do not sell Puts unless they are supremely confident of higher prices. While they are not selling massive quantities, given the thin volume, there is enough selling to imply Dealers see higher prices on Wednesday, to as high as $607 with price remaining above $599. To the downside Dealers are buying $598 to $588 and lower strike Puts in a 1:1 ratio to the Calls they are selling, implying a bullish outlook for Wednesday. This has changed from neutral to bullish reflecting Dealers’ belief that the relief rally will likely continue on Wednesday. 
Looking Ahead to Friday:
Dealers are selling $603 to $610 and higher strike Calls indicating their desire to participate in any market rally to as high as $610 by the end of the week. $608 appears to be the ceiling for the week. Dealers are not selling Puts heading into Friday expiry. To the downside, Dealers are buying $602 to $580 and lower strike Puts in a 7:1 ratio to the Calls they are selling, reflecting a strongly bearish view for the week. This bearish posture continues to increase. Above 5:1 Dealers are indicating material concern over lower prices. Dealers increased their protection today reloading their book after OPEX expiry last Friday. This weekly view is in conflict with the view for Wednesday, perhaps due to fears of a hot PMI later in the week. We would take heed of this positioning given Dealers are certainly prepared for any market decline. We suggest any long book take the opportunity add protection like the Dealers given how this positioning has changed. Dealer positioning does change daily so it’s essential to monitor these updates each day for shifts in sentiment.

Recommendation for Traders

Focus on trading long above $599 targeting resistance at $604 and $606. For short trades, resistance at $604 may offer opportunities with stop-losses to limit risk. Elevated VIX levels suggest increased caution, favoring smaller position sizes. Review premarket analysis before 9 AM ET for updated insights.

Good luck and good trading!