Market Insights: Thursday, January 2nd, 2025

Market Overview

Stocks began the new year with a muted performance, struggling to maintain early session gains as Wall Street returned from its holiday break. The S&P 500 declined by 0.2%, while the Dow Jones Industrial Average shed 0.3% or roughly 150 points. The Nasdaq Composite dropped less than 0.2%. Despite a promising start, markets failed to rally, burdened by Tesla’s sharp 6% drop following disappointing delivery figures and Apple’s 2.5% decline amidst aggressive pricing moves in China. Treasury yields edged higher, with the 10-year yield nearing 4.57%, adding pressure to equities. Meanwhile, the US Dollar Index climbed above 109, reflecting global risk aversion. The subdued market performance underscores investor caution as the year unfolds amidst elevated valuations and persistent macroeconomic concerns​​.

SPY Performance

SPY closed at $584.61, marking a 0.25% decline, with an intraday high of $591.13 and a low of $580.50. Trading volume was average at 41.68 million shares. Resistance at $591 proved insurmountable, while support at $580 was tested but held firm. The ETF's performance reflected a market grappling with mixed sentiment and year-end positioning unwinds​​.

Major Indices Performance

The Russell 2000 outperformed with a slight gain of 0.08%, followed by the Nasdaq’s modest 0.16% decline. The Dow Jones Industrial Average fell 0.36%, while the S&P 500 lost 0.25%. Defensive sectors were a bright spot, reflecting a risk-averse environment. Tech-heavy names struggled, weighed by weak showings from Tesla and Apple. Broader sentiment remained cautious as investors assessed mixed economic signals and rising Treasury yields​​.

Notable Stock Movements

Tesla led the declines among the Magnificent Seven stocks, dropping over 6% after missing delivery targets. Apple slipped 2.5% amid reports of price cuts in China to counter competition from local smartphone makers. Other tech giants, including Microsoft and Netflix, also declined, although Nvidia bucked the trend with a modest gain. These movements reinforced the market's wary outlook on tech as the new year begins​​.

Commodity and Cryptocurrency Updates

Crude oil rose 1.95%, settling at $73.12 as optimism around demand growth countered recessionary fears. Gold advanced 1.13%, closing at $2,671, buoyed by its safe-haven appeal. Bitcoin climbed 2.4%, ending just above $97,000, signaling renewed bullish interest as the cryptocurrency space starts the year on a strong note​​.

Treasury Yield Information

The 10-year Treasury yield eased slightly to 4.563%, a 0.31% decline for the day. While this dip offered brief respite to equities, yields above 4.5% remain a considerable headwind for growth-oriented sectors. The interplay between bond yields and equity valuations will remain a focal point for traders in the coming sessions​​.

Previous Day’s Forecast Analysis

The prior forecast anticipated SPY to trade within a range of $583 to $592, with $590 as a critical resistance level. A bearish tilt was suggested unless SPY managed to reclaim and sustain above $590. Key support was identified at $583 to $580, with a potential drop to $578 if breached. The strategy emphasized short trades from resistance near $590 and cautious longs at $583 on failed breakdowns​​. We stated, “for Thursday we continue to favor long trades on a failed breakdown on the next move to $585 but would avoid long trades from this level on any subsequent tests of this level.”

Market Performance vs. Forecast

SPY's actual trading range of $580.50 to $591.13 closely aligned with the forecasted range of $583 to $592. Resistance at $590 held firm, validating the short bias from this level, while support at $580 provided a solid floor. Traders who followed the recommendation to short near $590 capitalized on the subsequent decline to $585, while taking the long from $585 early in the session and avoiding any second attempts to long from $585 we suggested this level, once tested would not hold. The market’s price action today resoundingly confirmed the accuracy and utility of the forecast in navigating market dynamics​​.

Premarket Analysis Summary

Today’s premarket analysis, issued at 8:09 AM, projected a bullish bias above $587.70, with resistance targets at $594 and $596. Downside targets included $585.75 and $582.25, should the bias level fail to hold. Early optimism faltered as SPY struggled to maintain levels above $591, reflecting the underlying weakness highlighted in the premarket outlook​​.

Validation of the Analysis

SPY's performance validated the premarket analysis, with resistance at $591 acting as a ceiling. A rejection from this level triggered selling pressure toward the bias level of $587.70, which briefly provided support before succumbing to bearish momentum. The premarket and post market resistance levels aligned and once again, our readers know when this confluence exists to trade heavy and with confidence. And once again today, the analysis effectively identified actionable levels, allowing traders to execute profitable trades​​.

Looking Ahead

Upcoming economic releases include ISM Manufacturing and JOLTS data on Friday, providing critical insights into labor market dynamics and economic activity. Thin trading volumes may amplify reactions, making these events pivotal for market direction heading into next week​​.

Market Sentiment and Key Levels

SPY’s close at $584.61 positions $582 and $580 as key support, with resistance at $587 and $590. Broader sentiment continues to lean bearish, with a potential test of $577 if $580 fails to hold. A sustained move above $590 could target $592, although significant resistance above this level dampens bullish prospects​​.

Expected Price Action

The model forecasts a trading range of $580 to $591, favoring a bearish bias below $590. A break above this level could push SPY to $594, while a decline below $580 may lead to $577. If any Santa Rally is to develop it needs to happen tomorrow given this is the last day attributable to a Santa rally. Its likely overnight price once again drifts higher, perhaps testing $590 before deciding if the rally will materialize. Traders should prepare for choppy price action with periods of trending behavior amidst heightened volatility​​.

Trading Strategy

Long trades are favored from $580, targeting $590 with stops below $578. Shorts from $590 to $592 offer opportunities targeting $582. Everything between these levels should be considered chop and rallies should be faded. Elevated VIX at 17.93 suggest cautious positioning. Watch for failed breakouts or failed breakdowns as triggers for entries​​.

Model’s Projected Range

The model projects a maximum range of $578 to $591.75, with a bearish tilt in a Put dominated market. Resistance at $587 and $590 will be critical, while $582 and $580 serve as pivotal support levels. Price is trading below the bull trend channel in place from the September lows and remains in the new bear trend channel. This channel has a high of $603.50 and a low of $577 for Friday. Price has been unable to renter the bull channel and as we stated without a material rally, price will resume its move lower in January. Market conditions remain bearish within the current trend channel​​.

Market State Indicator (MSI) Forecast

Current Market State Overview:
The MSI is currently in a Ranging Market State, with prices closing in the lower third of the range. There were extended targets below price in the afternoon session as $585 gave way to lower prices. But by the close, the market had recovered and the MSI rescaled to a wide ranging state implying a trading range with no clear directional bias. The MSI rescaled lower four times during the morning session while printing extended targets forecasting price to reach major support at $580. MSI support is $583.76 and resistance is $589.08.  
Key Levels and Market Movements:
SPY rallied strongly overnight with the MSI rescaling higher several times with extended targets printing above. Once the ETF reached $591.85 in the premarket, these extended targets ceased printing and with a narrow bullish MSI on a double top at major resistance at $591, we were short to $585, expecting price to hold and bounce one more time from this level. We stated yesterday we felt there was one more bounce left from this level and as such we reversed long from MSI support at $585.18 for a quick trade back to $589 which was the midpoint of the MSI’s Ranging State. Readers know we do not favor holding onto trades in this state as the odds of price moving from support to resistance and vice versa in a ranging state are less than 50%. So we exited this scalp long and once the MSI switched back to a bearish state with extended targets below we shorted $587 and held for the break of $585. Price quickly fell to $581 which was MSI support, taking first profits to see if price would all further. But once extended targets stopped printing at 1:35 pm ET, on a less than perfect failed breakdown from this level, we once again reversed long and traded back to MSI resistance at $583.76. After taking first profits and with three solid winners already in the bank, we went into profit protection mode and locked in our gains on this last trade making it a four for four day, starting the New Year with a bang! Once again, the MSI did its job, showing us the strength of the trend and where we would find major support and resistance. The MSI continues to provide actionable information and levels to assist traders in staying on the right side of the market. We highly recommend integrating the MSI into your trading toolbox to maximize long-term success.
Trading Strategy Based on MSI:
The MSI currently suggests a sluggish, range bound day on Friday. The MSI range is quite wide implying price could move with a range of $583 to $589 and still not have a real direction or trend. As such we look at this zone as nothing but chop which should be avoided. The market is likely to pick up steam next week as funds and institutional traders return from their holiday so for Friday expect a muted day with periods of trending behavior. We continue to favor the bears as long as price is below $590 and advise shorting any rallies to this level. But like $585 today, the $590 level has been tested several times and as such, the bears will start to walk away from this level which will allow price to break higher. While we favor trading the extremes, be careful at these levels until there is more volume and therefore price discovery available to our models. Probabilities continue to suggest price is likely decline further and that January will see a 10% or better correction. But the bulls may have one more push above $595 before the market closes the gap at $576 and retests lower levels. We stated yesterday our “model suggests there may be one more squeeze left to drive prices higher on Thursday and perhaps on Friday, but it’s likely once price reaches major resistance at $590, the bear trend will resume. One more test of $585 is likely to hold but any further attempts to test this level are unlikely to contain price and therefore lower prices are forecast for January.” This played out exactly as forecast but now the picture is a bit less clear given the $585 level has already given way and the $590 level has been tested several times. Our model is looking for a new catalyst to feed a break of this large $580 to $600 range to determine what will develop longer term. The bears still maintain more control of the market than the bulls but the bulls are still present and may simply be waiting for the right time to push prices back to higher levels. But if they fail to do so on Friday, we recommend being prepared for a more significant sell off at some point this month. The bulls resume control of the market above $595, but below $590 the bears are still in charge. Watch the MSI for clues to help you identify the trend and key levels to trade to ensure alignment with prevailing market conditions.

Dealer Positioning Analysis

Summary of Current Dealer Positioning:
Dealers are selling $588 to $600 and higher strike Calls while also buying $585 to $587 Calls indicating a desire by the Dealers to participate in the last potential day of a Santa Rally that develops on Friday. The upside appears limited to $600. To the downside, Dealers are buying $584 to $570 and lower strike Puts in a 2:1 ratio to the Calls they are selling/buying, implying a neutral outlook for Friday. This shift in positioning from bullish to neutral reflects what Dealers see as the last potential day for the Santa Rally. We suggested yesterday Dealers perhaps had ”a bit of wishful thinking” that prices would rally today.     
Looking Ahead to Next Friday:
Dealers are selling $599 to $603 and higher strike Calls while buying $585 to $598 Calls indicating their desire to participate in any market rally to as high as $602 by next Friday. $602 looks to be a ceiling for the week. To the downside, Dealers are buying $584 to $560 and lower strike Puts in a 2:1 ratio to the Calls they are selling/buying, reflecting a neutral view for week. This positioning is unchanged from today although Dealers are starting to build quite a large cache of Put options are significantly lower levels. While Dealers are overall neutral, adding cheap far out of the money protection tends to imply some fear and concern prices may fall. Dealers are ready for further declines, even though they may be anticipating another week of sideways price action first. Dealer positioning changes daily so it’s essential to monitor these daily updates for shifts in sentiment.

Recommendation for Traders

Traders should focus on executing trades at extreme levels such as $580 and $590. We continue to favor two way trading but advise leaning into short trades more than longs. If SPY breaks below $580, short trades targeting $577 are likely viable. Due to chop and more rangebound price being forecasted, we highly recommend waiting for failed breakout and failed breakdown patterns as triggers to entry. These have a higher probability of success and will keep most traders out of trouble. An elevated VIX implies the market could move violently without notice so be prepared for large swings to develop at any time. Be mindful of Dealer positioning as it suggests a constrained upside. Review premarket analysis posted before 9 AM ET for any shifts in strategy.

Good luck and good trading!