Market Insights: Friday, January 3rd, 2025

Market Overview

U.S. markets ended the week on a high note as a robust rebound in technology stocks led to gains across major indices. The Nasdaq soared by 1.8%, propelled by sharp rallies in Tesla and Nvidia, while the S&P 500 advanced 1.3%, and the Dow Jones Industrial Average climbed 0.8%. Tesla surged 8% following record-breaking sales in China, and Nvidia rose over 4% amid continued optimism in the semiconductor space. The gains helped offset losses earlier in the week, although the S&P 500 and Dow posted weekly declines exceeding 1%, and the Nasdaq dropped 2% for the week. Market sentiment was further buoyed by better-than-expected ISM Manufacturing data, signaling slight improvement in the U.S. manufacturing sector. However, the reading still indicated contraction, reflecting persistent economic headwinds. As traders digested mixed economic signals and grappled with questions about Federal Reserve policy, the tech-heavy rally provided a welcome reprieve, setting a cautiously optimistic tone for next week.

SPY Performance

SPY closed at $591.95, gaining 0.9% on the day. After opening at $587.45, it touched an intraday low of $586.43 before climbing to a high of $592.60. The ETF's performance showcased resilience as it broke through resistance at $590, aligning with broader tech-driven gains. Trading volume was subdued at 34.59 million shares, slightly below the average, indicative of lingering caution among traders.

Major Indices Performance

The Nasdaq led Friday’s rally with a 1.8% gain, driven by strong performances in technology stocks. The Russell 2000 followed closely with a 1.49% increase, signaling renewed investor interest in small-cap equities. The Dow Jones climbed 0.8%, while the S&P 500 rose by 1.3%, recovering from earlier losses this week. Defensive sectors lagged, as investors rotated back into growth and cyclical names. The rally highlighted a shift in sentiment, spurred by robust gains in Tesla and Nvidia, although concerns about elevated Treasury yields continued to temper optimism.

Notable Stock Movements

Tesla and Nvidia stole the spotlight, with Tesla climbing over 8% on record China sales and Nvidia gaining more than 4% on persistent semiconductor optimism. Other "Magnificent Seven" stocks rallied, with the exception of Netflix and Apple, which experienced marginal declines. Tesla’s rebound came after a steep drop earlier in the week, highlighting the market’s volatility and the sector’s influence on broader sentiment. These moves reinforced the tech sector’s pivotal role in market direction as 2025 gets underway.

Commodity and Cryptocurrency Updates

Crude oil climbed 1.19%, closing at $74.00, reflecting optimism about demand recovery amid easing recession fears. Gold declined 0.68% to settle at $2,650, pressured by rising Treasury yields and a stronger dollar. Bitcoin rose 1.05%, ending above $98,200, as renewed bullish sentiment buoyed cryptocurrency markets heading into the weekend.

Treasury Yield Information

The 10-year Treasury yield rose to 4.601%, marking a 0.52% increase for the day. Yields above 4.5% remain a significant headwind for equities, particularly growth-oriented sectors. The interplay between rising yields and equity valuations is expected to remain a focal point for investors, as the Federal Reserve's next moves come under increasing scrutiny.

Previous Day’s Forecast Analysis

Thursday’s forecast anticipated a trading range of $580 to $591, with key support at $580 and resistance at $591. It suggested a bearish tilt unless SPY reclaimed $590. The recommendation to short near resistance and buy dips proved accurate, as SPY broke through $590 to close higher. The cautious approach to long trades above $590 was validated by the day’s price action, which tested the level before rallying further. We stated yesterday if “any Santa Rally is to develop it needs to happen tomorrow” and its “likely overnight price once again drifts higher, perhaps testing $590 before deciding if the rally will materialize.”

Market Performance vs. Forecast

SPY exceeded the forecasted range of $580 to $591 slightly, closing at $591.95 after reaching an intraday high of $592.60, rallying overnight to open at $587.53. The resistance at $590 was initially tested but eventually breached, aligning with the bullish bias highlighted in the premarket analysis. Trading opportunities around $590 were profitable for those following the forecast, as the level provided a clear signal for a breakout.

Premarket Analysis Summary

Today’s premarket analysis, issued at 8:09 AM, projected a bias above $587, with resistance targets at $590 and $592. Downside targets included $584 and $580.50. The analysis accurately predicted the bullish consolidation, as SPY broke above $587 early in the session and sustained its upward trajectory to close near the day’s high.

Validation of the Analysis

SPY adhered closely to the premarket analysis, respecting the key levels of $587 and $590. The rally toward $592 validated the bullish bias, while the holding of $587 as initial support provided opportunities for profitable long trades. Traders who followed the outlined strategy capitalized on the market’s predictable movements, confirming the reliability of the analysis.

Looking Ahead

Next week will feature pivotal economic data, including ISM Services and JOLTS on Tuesday, ADP Non-Farm Employment and FOMC Meeting Minutes on Wednesday, and the delayed monthly Jobs Report on Friday. These releases will provide critical insights into labor market dynamics and economic activity, shaping expectations for Federal Reserve policy and market direction. We anticipate increased volatility and more sustained trends to develop as these economic data points are released to the market.

Market Sentiment and Key Levels

SPY’s close at $591.95 sets key support at $590 and $585 with resistance at $595 and $600. Sentiment leans cautiously bullish, with the potential for further gains if SPY sustains levels above $590. However, a failure to hold this level could see a retest of $580. Broader market dynamics, including Treasury yields and tech sector performance, will play crucial roles in determining direction.

Expected Price Action

The model forecasts a trading range of $588 to $595. A bullish bias prevails above $590, targeting $594 and $595. Below $589, downside targets include $585 and $580. After a short squeeze like today, trading on Monday becomes more complex. The model is leaning toward some continuation on Monday but perhaps not beyond $595 where price is likely to stall and retest the breakout above $590. Traders should prepare for choppy price action within this range, with periods of trending behavior likely around major economic releases.

Trading Strategy

Long trades are favored from $589, with upside targets at $595. Shorts near $595 may target $590, with stops above $598. Our model suggests heightened caution, with a focus on failed breakouts or breakdowns as triggers for entries at these levels. With a slew of economic data due to be released, next week has the potential to produce violent price swings. Traders should monitor economic data for potential catalysts and manage risk carefully in the current volatile environment.

Model’s Projected Range

The model’s maximum projected range of $586 to $596.50 reflects a narrowing market, suggesting periods of consolidation with breakout potential. The market is Call dominated, yet SPY remains in a bear trend channel, with resistance at $603 and support at $577. A sustained move above $590 could target $595 and $600, while a breakdown below $588 could accelerate declines to lower levels. The market closed 2024 and entered 2025 with the four losing days in a row, the worst year end since 1966. While this in itself is not a predictor of future price action, there was no Santa Rally and perhaps the market is warning us that 2025 will not be another 25%, straight up year. Perhaps a much more muted 10% year is in store and if so, it’s likely to develop in the first half of the year with the second half being much more challenging.

Market State Indicator (MSI) Forecast

Current Market State Overview:
The MSI is currently in a Bullish Trending Market State, with prices closing at resistance. There are extended targets above price which started printing during the afternoon session. The MSI rescaled overnight from a ranging state to a bullish state, which held throughout the day. The MSI range is average and with extended targets above, probabilities favor some follow through to higher prices on Monday. MSI support is $589.08 and resistance is $591.76.  
Key Levels and Market Movements:
SPY rallied overnight with the MSI rescaling to a bullish state by the open. After testing $590 several times, the ETF finally broke out and to the day’s highs. A long from MSI support at $589 to MSI resistance at $591.80 was the single trade of the day given the somewhat choppy, early morning price action which was followed by a strong trend that lasted just two hours. Readers know we do not favor trading in a MSI ranging state so we waited for the breakout to develop to get us long for a relatively small trade. Once at $591.82, extended targets started printing above giving us some hope the market would move higher, but these extended targets were inconsistent implying a weakening bullish state. But this was not a bullish state we were interested in fading given the strength of the rally from the overnight lows. One trade is enough to pay the bills and 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 bullish day for Monday which could reach extended targets at $594.63. The MSI did not rescale higher but once all day, which suggests a possible top for SPY once price reaches this level. We favor seeking failed breakouts to trap longs at the $594 to $595 level with a retest of $590 and perhaps lower. Longs from the close are not advised without a retest first of lower levels. Below $588 we may consider looking for failed breakdowns to trigger long entries, but it will depend on the speed of any decline and whether or not SPY tests $595 first. We stated yesterday for today, “expect a muted day with periods of trending behavior” and while wee favored the bears with price below $590, this “ 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.” Today we got the break of $590 as forecasted. Probabilities continue to suggest price is likely decline in January but as we stated yesterday, “the bulls may have one more push above $595 before the market closes the gap at $576 and retests lower levels.” Next week our model will look for a catalyst to break the $580 to $600 range to determine what is likely to develop longer term. The bears lost more control today and $590 has become the new pivot between higher and lower prices. The bulls will wrangle more control from the bears above $590 but will not be free of the bears influence without a sustained break above $595. The bears and bulls will battle it out unless there is a sustained decline below $580 where the bears have complete control. It’s a messy and complex outlook for Monday until this large range breaks. We recommend being prepared for both higher and lower prices and use any rally to set up shorts and or protection for a more significant sell off due to develop in January. 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 $592 to $601 and higher strike Calls. They are not buying Calls nor selling Puts implying they do not believe there is much more upside for Monday…certainly the upside appears limited to $598. To the downside, Dealers are buying $591 to $580 and lower strike Puts in a 1:1 ratio to the Calls they are selling, implying a neutral to slightly bullish outlook for Monday. This shift in positioning from neutral to slightly bullish reflects what Dealers see as perhaps one more push by the bulls toward $600. Dealers were positioned well for today’s rally.     
Looking Ahead to Next Friday:
Dealers are selling $598 to $603 and higher strike Calls while buying $592 to $597 Calls indicating their desire to participate in any market rally to as high as $602 by next Friday. $602 continues to look like the ceiling for next week. To the downside, Dealers are buying $590 to $560 and lower strike Puts in a 2:1 ratio to the Calls they are selling/buying, reflecting a neutral view for next week. This positioning is unchanged from today. Dealers are neutral for next week but have added significant quantities of cheap out of the money protection which implies some fear of falling prices. Dealers are ready for any decline that may develop, although they may anticipate another week of sideways to slightly up price action before anything material develops. 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 $585 and $595. Long trades remain favorable from $588, targeting $590 and beyond, while shorts at $595 could offer compelling opportunities targeting $590. Elevated VIX at 16.13 warrants cautious positioning, particularly in anticipation of sharp market swings. To minimize risks, traders are advised to monitor failed breakout and failed breakdown patterns and remain agile in their approach. Review 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!