Market Insights: Monday, January 27th, 2025
Market Overview
The Nasdaq took a heavy hit today, plunging over 3% as fears surrounding U.S. dominance in AI shook investor confidence. The drop was led by Nvidia, which saw a staggering 17% decline after a Chinese startup, DeepSeek, claimed its AI model outperformed U.S. competitors while being cheaper and more efficient. The broader S&P 500 fell 1.39%, weighed down by tech-heavy losses, while the Dow Jones Industrial Average defied the tech rout to climb 0.52%, buoyed by strength in defensive sectors and select outperformers like Apple and Salesforce. DeepSeek's announcement has raised concerns over future profitability for AI-dependent U.S. firms, with broader implications for Big Tech as earnings season gets underway. Investors also navigated revived geopolitical tensions and ahead-of-schedule rate discussions by the Federal Reserve, further compounding market volatility. Safe-haven assets, including Treasury bonds and the yen, benefited as the market sold off.
SPY Performance
SPY closed at $599.52, down 1.39% for the day, reflecting broader market jitters and heavy selling in tech names. The ETF hit a session low of $594.67 before recovering some losses to close near its highs of $599.69. Trading volume was notably above average, underscoring investor reactions to the AI-driven news and a risk-off sentiment heading into the week.
Major Indices Performance
The Dow Jones Industrial Average was the best-performing index today, gaining 0.52% as defensive and diversified components such as Apple and Salesforce provided a buffer against the tech-driven selloff. The S&P 500 dropped 1.39%, reflecting widespread losses, while the Nasdaq bore the brunt of the damage, falling 3.09%. The Russell 2000 underperformed relative to its historical averages, slipping 0.95% as small-cap stocks failed to attract support amid heightened risk aversion. Tech, semiconductor, and growth-oriented sectors experienced the steepest losses, while defensive sectors like utilities and healthcare managed to stabilize.
Notable Stock Movements
The "Magnificent Seven" had a turbulent day, with Nvidia leading declines, dropping over 16% in response to DeepSeek’s AI claims. Other chipmakers, including ASML (-6%) and Broadcom, faced similar struggles. Microsoft shed more than 2%, reflecting broader unease about Big Tech’s exposure to AI-driven investments. Apple, Meta, and Amazon outperformed their peers, with modest gains attributed to relative investor confidence in their diversification. The divergent performance among these bellwether stocks underscores market fragility amid heightened competition concerns.
Commodity and Cryptocurrency Updates
Crude oil fell 2.18% to close at $73.03 per barrel as energy markets contended with risk-off sentiment and concerns over slowing global growth. Gold dropped 1.26% to settle at $2,771, driven lower by profit-taking and a slightly stronger dollar. Bitcoin was not immune to today’s selloff, declining 3.21% to close just above $101,600 as speculative assets faced headwinds from a flight to safety and liquidity concerns.
Treasury Yield Information
The 10-year Treasury yield slid 2.01%, closing at 4.530%. Falling yields typically support equity valuations, but today’s market reaction suggests growing unease about broader economic conditions and AI-driven volatility. Persistent yields above the critical 4.5% level remain a headwind for equities, while a climb to 5% could trigger a more significant market correction.
Previous Day’s Forecast Analysis
On Friday, SPY was forecasted to trade within a range of $604 to $610, with a bullish bias supported by strong earnings momentum. Resistance was identified at $610 and $612, while support was expected at $606 and $604. The analysis anticipated trading opportunities near major support and resistance levels, with long trades favored above $606.
Market Performance vs. Forecast
SPY's actual performance deviated significantly from the prior day’s bullish expectations, closing well below the projected range at $599.52. Resistance levels at $610 were never tested, as selling pressure dominated. Friday’s analysis failed to anticipate the weekend’s disruptive AI-related news, which sent SPY below key support at $604. However, support at $595 did hold intraday, providing opportunities for cautious dip-buying. Models do not have the benefit of news before they are released to the market which is why we often state trade what you see when this occurs. Our models are better than 70% accurate but that still leaves 30% to the unknown. Today was one of those days.
Premarket Analysis Summary
Today’s premarket analysis, posted at 8:36 AM, projected SPY to trade within $591 to $600, with selling rallies expected as long as SPY remained below the bias level of $597. The analysis identified $591 as likely intraday support, with $585 as an extreme downside target in the event of heavy selling pressure. Upside was capped at $600 due to the prevailing bearish sentiment and AI-related concerns.
Validation of the Analysis
The premarket analysis accurately captured today’s market dynamics. SPY respected the bias level of $597, rejecting it multiple times before stabilizing just below $600 at the close. The projected downside target of $591 was briefly tested before buyers stepped in. Traders following the guidance capitalized on short trades during intraday rallies and secured profits near support levels. The mornings analysis had information the post market did not have and as such, provided actionable insights despite the day’s heightened volatility. This is a very good example why we offer a newsletter twice daily. Make it a habit to read both and you will gain a material edge.
Looking Ahead
This week promises to be pivotal, with CB Consumer Confidence data scheduled for release on Tuesday. Wednesday’s FOMC meeting and earnings reports from heavyweights Microsoft, Meta, and Tesla will be key drivers of market sentiment. Thursday brings GDP data and Unemployment Claims, alongside earnings results from Apple and Amazon, while Friday’s PCE inflation data could shift expectations for Fed policy. Additionally the new administration may impose tariffs on China, Mexico, and Canada on February 1st. As more is learned about these policies, the market will incorporate this information into its bias. Traders should brace for sharp moves and stay flexible as economic data unfolds.
Market Sentiment and Key Levels
SPY is trading near $599, with resistance at $600, $602, and $605. Support lies at $595 and $590, with $585 serving as critical downside protection. $585 has been a level in that past that represented the battle ground between the bulls and the bears. The market leans bearish, driven by AI-related disruptions and geopolitical tensions, however a late in the day rally to $600 could quickly reverse today’s sell-off. A breakout above $600 could target $605, while sustained pressure below $595 risks a move to $590 or lower. Above $605 the door is open to $610. With rising volatility expected, traders must stay alert and prepared for swift reversals.
Expected Price Action
Our model projects SPY to trade between $590 and $605 on Tuesday, with a bearish bias likely to persist. A failure to hold $595 could see SPY slide toward $590, while a breakout above $600 may open the door to $605. Typically a day like today will have at least one test of the day’s lows to see if there are buyers at that level. These “liquidity grabs” often happen in the overnight session. If price does not test lower overnight, it may be all clear for price to move to $605. Our model sees the current market environment as no better than a 50/50 bet, meaning price could go either higher or lower. Traders should prepare for a choppy session, with potential for sharp intraday swings driven by earnings and economic news.
Trading Strategy
While last night’s meltdown moved the market to a heavily bearish bias, at 6 am ET there was a textbook failed breakdown at $590 which reversed much of the damage. This textbook long is still in play at the close given the market spent the rest of the premarket and the entire day session trading sideways between $596 and $600. There was little to trade in the regular session given the market did nothing for several hours. Therefore the long off the premarket lows is still active given market participants are still holding runners looking for price to move back toward $605. For tomorrow our general lean is the market can continue to move higher overnight, back testing $603 to $604 initially before pushing to $605. That said, should $595 fail on any retest, the market will head to new lows as $590 is not likely to stop price from falling to as low as $585. For tomorrow traders will need to observe overnight action to make the proper assessment for Tuesday’s trades. Our model suggests traders should focus on short trades near $605, targeting $600 and $595, with stop-losses above $607. Long trades are favored at $595 targeting a rebound toward $600 but only on a failed breakout. If you want to see a perfect failed breakout, look at 5:52 am today. Be very careful with longs below $595 given a second test of $590 may fail with price falling hard to $585. Should this transpire we would cautiously look for longs at $585. Tight stops are essential in the current environment, and position sizes should be reduced to manage risk effectively. Monitor VIX, which remains elevated near 18, signaling the potential for volatile price action with day trades preferred over longer term positions.
Model’s Projected Range
The model anticipates SPY to trade within a broad, maximum range of $592.75 to $606, suggesting potential for both consolidation and trending behavior. Puts dominate, reinforcing the bearish outlook. The market remains within a broader bull trend channel, with room to move lower toward $580 or higher toward $620 depending on macro developments. Key support lies at $595 and resistance at $605. Traders should monitor these levels closely and be prepared for all of the economic news due out this week.
Market State Indicator (MSI) Forecast
Current Market State Overview:
The MSI is currently in a Ranging Market State, with price closing mid-range. The MSI range is wide. Overnight the MSI rescaled lower after price gapped down on news out of China. The MSI entered a Bearish Trending Market State and printed extended targets until 6 am when they stopped printing with price creating a textbook failed breakdown. Price reversed hard off MSI support and rallied into the open where the MSI entered its current state. While the MSI flip flopped a few times to a bearish state but there were no extended targets at any time and all session price failed to move significantly lower than MSI support at $596.62. MSI support is currently $596.62 with resistance at $605.37.
Key Levels and Market Movements:
Price gapped close to $12 lower at the open due to news out of China that the AI race between the US and China is far from over. Tech stocks and related infrastructure stocks sank as much as 20%, which moved the MSI to a bearish state well before the open. By the open the MSI was in a very wide trending state which gave little for us to trade. Long time readers of this newsletter know we do not favor trading in an MSI Ranging State given the odds of success are no better than 50%. As such, while price kept bouncing off MSI support at $596.62, we were not inclined to fight the day’s bear trend and were not loving shorts given the absolute perfect failed breakout and V bottom at 6 am ET. We spent the entire day hoping for another failed breakdown which never came so we did not take any trades today. It happens. Remember the MSI is designed to keep you trading with the proper bias and from major levels. Today there was no edge after price fell $17 so we passed on shorts and were not willing to risk longs. Trading is like hunting…if you want to eat well you need to wait for your prey to come to you before taking a shot. There were no shots today worth taking. We state often knowing who controls the market with the MSI as your knowledge base, it becomes very clear what you should and should not do to maximize profits and probabilities of success. Today this is exactly what the MSI provided. The MSI keeps users out of trouble with actionable information to assist traders in staying on the right side of the market, trading with the 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 “bears are now in the mix once again, trying to push price lower”. We also said price “could fall $20 and the bulls would still be in control”. So the question is are the bulls still in control after a $17 sell-off? The answer is still yes. Price continues to trade in a bull trend channel and while today the bears certainly had a good day, a single test of $590 leads us to believe the bulls stepped in and supported price. Above $585 the bulls have the advantage and will push the market back toward $605. Today’s selloff may simply be a one day event which reverses course with the market resuming its push higher. As of the writing of this newsletter, our model sees price moving higher overnight. That said, with so much news due out the next few days, and with an administration ready to introduce chaos at any time in order to achieve its goals, you MUST be prepared to trade what you see as new information is introduced to the market. Having a tool that updates in real time, like the MSI is critical to trading success. Without it you are trading blind and simply guessing at what may come next. Given the MSI’s current state, we favor sitting on your hands until the picture becomes clearer. Should the MSI rescale to a bullish state, we would favor longs off MSI support, especially if extended targets print above. These can be at levels the model projects as support OR resistance if price moves above resistance levels. This includes $595, $600, and $602. At $605 we tend for favor mean reversion shorts over longs given markets do not move in a straight line. That said there is a gap above that will close so price could move all the way back to $607 before selling off. The point is, be careful for a day or two until the market shows you a clear direction. Trade with the trend, only fading major levels. Use the MSI to guide you in this process given it updates in real time. 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 $608 to $615 and higher strike Calls while buying $600 and $607 Calls implying the Dealers desire to participate in any rally on Tuesday to as high as $610. Dealers see $610 as a ceiling for Tuesday. To the downside Dealers are buying $599 to $579 and lower strike Puts in a 3:2 ratio to the Calls they are selling/buying, implying a neutral outlook for Tuesday. Dealers were heavily bearish coming into today which proved to be the perfect set up…perhaps they anticipated today’s decline? Dealers have now shifted from heavily bearish to neutral, which implies a possible relief rally on Tuesday.
Looking Ahead to Friday:
Dealers are selling $608 to $620 and higher strike Calls while buying $600 to $607 Calls implying the Dealers desire to participate in any rally that may develop this week. Dealers appear to be signaling a ceiling in the current rally at $615. To the downside, Dealers are buying $607 to $570 and lower strike Puts in a 5:1 ratio to the Calls they are selling/buying, reflecting a bearish view for the week. Dealers have become slightly less bearish than today but are still positioned for lower prices. We would like to see this ratio drop to below 3:1 to signal the all clear for higher prices. Given Dealer bearish positioning reduced only slightly today, we would caution against being overly optimistic. We stated early last week and on Friday, at “ these levels, we recommend taking cues from Dealers and adding some downside protection to any long book” This advice was clearly quite timely. We stated our firm was hedged so today was a solidly profitable day for us given our hedge. We continue to advise reviewing Dealer positioning for clues to the market’s direction. Dealer positioning changes daily so it’s essential to monitor these updates each day for shifts in sentiment.
Recommendation for Traders
For Tuesday, focus on long trades near support at $595 and possibly $600, targeting $600 and $605. Short trades are advisable near resistance at $605, with tight stop-losses above $607. We are lightening up a bit on our hedge, taking profits, even going long on the Dow. We do not believe the bull trend is over, but will remain cautious as rising volatility and AI-driven concerns demand disciplined risk management. Use failed breakout and breakdown patterns to find optimal entries. Remember to review the premarket analysis posted before 9 AM ET for updates to the model’s outlook and Dealer Positioning.
Good luck and good trading!
