Market Insights: Tuesday, January 7th, 2025

Market Overview

U.S. stocks ended Tuesday with broad declines as cautious investors digested mixed economic data and a recalibration of Federal Reserve rate cut expectations. The tech-heavy Nasdaq suffered the steepest losses, plunging 1.9%, led by a sharp 6% drop in Nvidia following its record close the previous session. The S&P 500 also fell, down 1.1%, while the Dow Jones slid a milder 0.4%. The retreat came as the 10-year Treasury yield rose to just under 4.7%, gaining roughly 7 basis points, signaling renewed inflation concerns. Traders reacted to higher-than-expected JOLTS job openings and an increase in ISM Manufacturing PMI's prices paid index, which hit its highest level in almost two years at 64.4. These factors have dimmed hopes for near-term Federal Reserve rate cuts, with expectations now tilting toward the middle of the year. Nvidia’s pullback mirrored the broader cooling sentiment in Big Tech after initial optimism surrounding AI momentum. Market participants are now turning their attention to Friday’s critical December jobs report, which is expected to shed light on labor market conditions and the Fed's monetary stance​​.

SPY Performance

SPY closed at $588.71, marking a 1.12% decline on the day. After opening at $597.63, the ETF reached an intraday high of $597.74 before falling to a low of $586.78. Trading volume was average at 45.49 million shares. SPY's inability to hold above $590 underscores growing bearish sentiment as elevated Treasury yields and inflation concerns weigh on market optimism​.

Major Indices Performance

The Nasdaq led the declines with a 1.80% drop, primarily driven by sharp losses in semiconductor stocks. The S&P 500 followed with a 1.1% loss, pressured by Big Tech's retreat. The Russell 2000 shed 0.83%, reflecting weakness in small-cap stocks, while the Dow Jones saw a modest 0.51% decline as defensive sectors provided some cushioning. The market's pullback was fueled by concerns over inflation and a recalibration of rate cut timelines, highlighted by Tuesday’s economic data. Defensive sectors outperformed relative to their growth-oriented counterparts, signaling a shift in investor sentiment toward caution​​.

Notable Stock Movements

Within the "Magnificent Seven," Nvidia stood out with a sharp 6% decline, erasing gains from its prior record-setting session. Tesla followed closely with a 4% drop, while other tech leaders also finished in the red. These losses highlighted broader investor caution toward high-growth stocks amid rising Treasury yields. Nvidia’s CES keynote showcasing its AI superchip failed to sustain momentum as broader market sentiment shifted toward risk aversion. The performance of Big Tech stocks served as a bellwether for the day’s market weakness​.

Commodity and Cryptocurrency Updates

Crude oil gained 1.02%, closing at $74.31, supported by easing recession fears and robust demand outlooks. Gold advanced 0.65% to settle at $2,665, benefiting from its safe-haven appeal as investors navigated volatile market conditions. Bitcoin plunged 5.62%, closing just above $96,500, as risk aversion and profit-taking dominated the cryptocurrency market following recent rallies. The pullback in digital assets underscored the sector's sensitivity to shifting macroeconomic dynamics​. Our models find buyers of Bitcoin between $77K and $83K and sellers above $102K.

Treasury Yield Information

The 10-year Treasury yield climbed 1.69% to close at 4.694%. Yields above 4.5% continue to challenge equity markets, particularly growth sectors, as higher borrowing costs and inflation expectations weigh on valuations. Yields reaching or exceeding 5% will seriously damper equity markets. The rise in yields underscores lingering concerns about the Federal Reserve's policy trajectory, with traders now pricing in a delay in rate cuts​​.

Previous Day’s Forecast Analysis

Monday's forecast predicted a trading range of $592 to $600, emphasizing the likelihood of resistance near $600 and support at $592. The recommendation to target $595 for long trades held merit, as SPY tested key levels before succumbing to broader market pressures. The strategy of shorting near $600 proved accurate, with the ETF unable to maintain momentum beyond its opening levels. Below $591 we stated $587 was a viable downside target. The analysis effectively highlighted the bearish conditions that characterized the session​.

Market Performance vs. Forecast

Tuesday’s performance closely adhered to the forecasted range, with SPY opening at $597.63, testing resistance near $597.74, and ultimately closing below $590. This movement validated the expectation of bullish price action overnight leading to bearish price action from overhead resistance. A perfect failed breakout at the open set up a short from $597 which played out well while a long from $591 on a failed breakdown also worked extremely well. The forecast identified the range correctly, providing multiple trading opportunities for those following the outlined strategy. The forecasted bias toward downside risks materialized as SPY breached support, aligning with the analysis' emphasis on elevated volatility​.

Premarket Analysis Summary

In today’s premarket analysis, issued at 8:40 AM, SPY was expected to encounter resistance at $596.65 and $600, with downside targets at $592 and $590. Once again the premarket and post market analysis aligned and readers of this newsletter know this increases the probability of success exponentially. When this confluence occurs, trade heavy and expect to reach larger targets. Once again today’s analysis accurately captured the day’s movement, with SPY rejecting resistance before descending toward its extreme downside target of $585. The recommended strategy to fade edge levels yielded actionable opportunities throughout the day​.

Validation of the Analysis

Tuesday’s trading adhered to the premarket analysis, as SPY struggled to breach resistance at $596.65 and reversed sharply toward $590. The projected trading range and key levels were respected, with traders successfully capitalizing on opportunities to short near resistance and buy near support. The forecast once again demonstrated its utility in navigating volatile market conditions​.

Looking Ahead

The upcoming economic calendar features Wednesday’s ADP Non-Farm Employment Change and FOMC minutes, with Friday’s December jobs report looming large. The markets are closed on Thursday. These events are expected to influence market sentiment significantly, with particular focus on labor market trends and their implications for Federal Reserve policy. Traders should prepare for heightened volatility and remain vigilant for any shifts in market dynamics​.

Market Sentiment and Key Levels

SPY’s close at $588.71 suggests bearish sentiment is gaining traction, with resistance at $590 and $591, and support at $586 and $585. Should SPY breach $585, further downside to $580 becomes likely. Conversely, a push above $591 could target $595, though sentiment appears skewed toward bearish control heading into Wednesday​.

Expected Price Action

Our model forecasts a trading range of $581 to $591, with a bearish bias as resistance levels remain firmly in place. Should SPY fall below $585, expect a sharp move to $580. Conversely, a breakout above $591 may attempt to reclaim $595, though sustained momentum appears unlikely without positive macro catalysts. The bears are in control and short squeezes will get sold. The bulls need to recover $595 to regain any control from the bears. This forecast represents actionable intelligence for traders​​.

Trading Strategy

Traders should focus on shorting near resistance at $590 and $591, targeting $586 and $585 on the downside. Long trades are favorable near $585, with upside targets at $590. We recommend continuing to look for failed breakout and failed breakdown patterns as triggers to entries. If you do not know this pattern review prior posts for details on how to effectively trade these patterns. There were several today from a failed breakout at the open to a failed breakdown long at 12:50 pm ET. Tight stop-losses are recommended when using these patterns ($1.5 to $2) due to elevated volatility and the nature of a mean reversion trade. The VIX at 17.82 highlights the need for disciplined risk management​​.

Model’s Projected Range

The model projects a maximum range of $581.50 to $595, with resistance dominating at $590 and $591. The range is expanding in a Put dominated market implying trending, bearish price action for Wednesday. The market remains in a bearish trend channel, suggesting further downside unless $595 is reclaimed with the channel high at $602.50 and low at $576.25 for Wednesday. Monitoring these levels is critical as external factors could drive sudden price swings​.

Market State Indicator (MSI) Forecast

Current Market State Overview:
The MSI is currently in a Bearish Trending Market State, with prices near resistance. The range is wide, which implies the bearish trend is likely to continue. The MSI opened the day in a very narrow bullish state with extended targets above. These quickly ceased printing when ISM Services PMI was released and the market fell with the MSI rescaling lower several times, printing extended targets below price. While the market held major support at $590 for several hours, with the MSI sporadically printing extended targets, eventually with an expanding MSI range which continued to rescale lower, price broke major support and fell to another major support level of $587. The MSI stopped printing extended targets, leading to price rising to close just below MSI resistance. MSI support is $586.93 and resistance is $589.49.  
Key Levels and Market Movements:
As forecast SPY rallied overnight with the MSI rescaling to a bullish state prior to the open, printing extended targets for most of the rally. But these stopped printing just after the open with a narrow MSI range and with MSI resistance at the premarket resistance level of $596.65, we were short prior to ISM planning to trade to $595. Once ISM tanked the market, we held for our first target at $590, a major level identified in the post market report yesterday. The MSI range was large and with extended targets printing on and off, we waited for the failed breakdown at 12:50 pm to enter long from $589, taking profits at MSI resistance at $$591.50. The MSI rescaled to a wide ranging state and we waited for the MSI to rescale to a bearish state to enter a second short from $59150, closing out our long runners. Users of this tool know the odds of price moving from one MSI trend level to another are 70% so we were comfortable entering this trade and holding to MSI support at $589.50. Once again extended targets began printing so we held our runner to the post market newsletter’s next level of $587 where we took final profits. While there was another quick long trade from this level, after three highly profitable, winning trades, and given the late hour and a less than perfect failed breakdown pattern, we decided to call it a day and protect profits to fight another day. Another 3 for 3 day with the MSI once again doing 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 forecasts the possibility of a continuation of the bear trend on Wednesday. The bears are in control and the bulls have lots of work to do to change that situation. Clearing $590 on volume may start a bounce, but any real short squeeze doesn’t start until price clears $595. Otherwise market participants will sell every rally as the market struggles with the thought of persistent inflation and higher for longer interest rates. For Wednesday once again price is in no man’s land where above $590 price could rally to $595 where it is likely to sell off. Or price may fall below $587 which opens the door to $585 and $580. Like today, between $586 and $591, price will move in a choppy, sloppy manner which should be traded from the extremes and from one level to the next. We stated yesterday “$592 must hold otherwise the bears will push prices lower quickly with little to keep SPY from falling to $587” and that is exactly what transpired today. We continue to favor leaning bearish and recommend rallies be faded. We mentioned yesterday the large head and shoulders pattern forming on the daily chart and should $580 fail, the algos that trade these patterns will kick in and push price lower quickly. The gap at $576.50 remains open and will close should $580 break. There is more economic news due out tomorrow premarket, with FOMC minutes due out at 2 pm ET. The market is closed Thursday, so Friday will be pivotal in defining the direction of the market for the rest of January. We suggest watching these events as they present and to be prepared to trade what you see. Absent these external catalysts, Wednesday will likely see price retest today’s lows, perhaps overnight, and attempt a rally to as high as $595 where we forecast it will once again fail. Price will have a difficult time moving beyond $591 in this scenario. Should price move lower to $585, expect price to fall to $580. We continue to recommend watching 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 $596 to $605 and higher strike Calls while buying $589 to $595 Calls in some size. This implies Dealers believe a short squeeze is likely on Wednesday to as high at $598, which looks to be the ceiling for Wednesday. To the downside Dealers are buying $588 to $565 and lower strike Puts in a 2:1 ratio to the Calls they are selling/buying, implying a neutral outlook for Wednesday. This has changed slightly from slightly bullish to neutral reflecting the Dealers increasing concerns about lower prices. That said, their positioning is not overly bearish.      
Looking Ahead to Friday:
Dealers are selling $596 to $605 and higher strike Calls while buying $589 and $595 Calls indicating their desire to participate in any market rally to as high as $605 by Friday. $602 appears to be the ceiling for this week. To the downside, Dealers are buying $588 to $560 and lower strike Puts in a 3:1 ratio to the Calls they are selling/buying, reflecting a slightly bearish view for the week. This positioning is unchanged from today. Dealers continue to add significant quantities of out of the money protection which implies some fear of falling prices. Dealers are certainly ready for any drop that may develop. But again similar to tomorrow, this positioning is not overly bearish. Dealer positioning changes daily so it’s essential to monitor these daily updates for shifts in sentiment.

Recommendation for Traders

Traders should maintain a balanced approach, focusing on opportunities at key levels. Long trades are favorable from $585 to $583, targeting $590, while shorts at $590 to $591 offer compelling setups targeting $586. Failed breakout and failed breakdown patterns continue to work exceptionally well in this environment. Understanding why is important and we suggest all traders learn why patterns work so they can adjust their strategy as market conditions change. And traders are reminded to review premarket analysis posted before 9 AM ET for updates on the model’s outlook and Dealer Positioning.

Good luck and good trading!