Market Insights: Friday, November 15th, 2024

Market Overview:

US markets experienced sharp declines on Friday, as post-election rally optimism waned and Federal Reserve Chair Jerome Powell reaffirmed a cautious stance on interest rate cuts. The S&P 500 sank 1.3%, the Dow Jones Industrial Average dipped 0.7%, and the tech-heavy Nasdaq Composite led losses, plummeting 2.2%. Powell's comments have cast a shadow on market sentiment, with investors re-evaluating the Fed's policy trajectory amidst resilient consumer data. October retail sales beat expectations, rising 0.4%, alongside an upward revision for September to 0.8%. Despite these signs of economic strength, markets are recalibrating rate cut probabilities, with December and January odds now significantly reduced. Furthermore, uncertainty surrounding the incoming administration’s policies, such as potential shifts in healthcare and clean energy, added to market jitters. As a result, the S&P 500 has already retraced a third of its post-election rally, while the Nasdaq logged a weekly loss exceeding 3%.

SPY Performance:

The SPDR S&P 500 ETF Trust (SPY) fell by 1.28%, closing at $585.75. Trading volume surged to 63.83 million, above the average, as SPY moved between a high of $590.20 and a low of $583.86. The decline reflects the broader market’s pullback from recent highs, fueled by Powell’s comments and persistent inflation concerns. The bearish tilt was evident as SPY broke below key support levels, underscoring heightened caution among investors.

Major Indices Performance:

The Nasdaq Composite led the day's losses with a 2.25% drop, reflecting severe weakness in tech stocks. The Russell 2000 followed, declining 1.49%, as riskier small-cap equities faced pressure. The Dow Jones Industrial Average fell 0.70%, while the S&P 500 registered a 1.3% loss. Defensive sectors provided limited refuge amidst widespread declines. The market's sharp downturn marked the end of a turbulent week, with inflation concerns and Powell’s statements as the central drivers.

Notable Stock Movements:

Among the "Magnificent Seven," Tesla was the sole gainer, rising over 3% as strong vehicle delivery numbers from China buoyed investor confidence. The rest of the group faced losses, with Microsoft, Nvidia, and Alphabet each recording declines that mirrored the tech sector's broader struggles. The divergence highlights investors’ selective positioning, as Tesla’s gain stood out against otherwise negative sentiment across high-growth equities.

Commodity and Cryptocurrency Updates:

Crude oil prices plunged 2.53%, reflecting bearish sentiment as demand concerns mounted amidst global growth uncertainty. Gold edged lower by 0.26%, with reduced demand for safe-haven assets despite the broader equity market decline. Bitcoin rose 3.9%, closing above $91,000. The cryptocurrency market remains highly volatile, with price swings influenced by shifting regulatory narratives and macroeconomic policy expectations. But $100K is clearly in sight and likely to be reached in short order.

Treasury Yield Information:

The 10-year Treasury yield inched up by 0.56%, closing at 4.447%. Remaining above the critical 4.3% level that weighs on equity valuations, today’s slight increase reflects investor caution amidst ongoing inflation and rate uncertainty. Elevated yields continue to pressure interest-sensitive sectors, reinforcing the negative sentiment in equities. Should the 10-year reach 5%, the equity market will likely experience a significant pullback between 10 and 20% from its highs.

Previous Day’s Forecast Analysis:

Thursday's forecast projected SPY to trade within the $591 to $597 range, with support near $590 and resistance at $594. A slightly bearish sentiment was anticipated, with a bias toward downside momentum if SPY failed to hold above $590. Long trades near support and short positions at resistance were recommended. These scenarios emphasized caution around Retail Sales data as a potential catalyst.

Market Performance vs. Forecast:

SPY’s actual performance closely aligned with the forecast, breaking below the critical $590 support, and extending losses to close at $585.75. The forecast’s call for a bearish bias and caution around key levels proved accurate, providing clear trading opportunities. Traders who entered short positions at resistance levels or followed the downside momentum captured significant moves, demonstrating the forecast’s precision in identifying actionable levels.

Premarket Analysis Summary:

Today’s premarket analysis, published at 8:06 AM, identified $590 as the bias level, with support targets at $587.85 and upside resistance at $593 and $594.20. It forecasted an initial rebound to $591.75, potentially extending to $593, provided buyers maintained momentum. A failure to hold above $590 signaled bearish opportunities targeting $587.85. The session unfolded in line with these projections, as SPY breached $590 and tested downside targets with minimal recovery attempts.

Validation of the Analysis:

Friday’s trading validated the premarket analysis as SPY adhered closely to the outlined key levels. The failure to sustain above $590 triggered sharp declines toward $587.85, reinforcing the bearish bias. Short positions initiated at rejection points near resistance levels yielded substantial returns, underscoring the analysis's accuracy and effectiveness.

Looking Ahead:

Next week’s economic calendar is light until Thursday when Unemployment Claims are released. On Monday Fed Member Goolsbee speaks, which could lead to further clarification regarding upcoming rate cuts. With limited catalysts early in the week, market focus may shift to technical levels and any unexpected developments.

Market Sentiment and Key Levels:

SPY’s close near $585 suggests bearish sentiment dominates, with resistance identified at $590 and support at $580. Bulls face significant hurdles in regaining control, as elevated Treasury yields and hawkish Fed commentary weigh heavily. A break above $590 could spark a short-term rally, but sustained momentum appears unlikely under current conditions.

Expected Price Action:

The model forecasts SPY to trade within a $580 to $590 range on Monday. The bearish tilt favors downside momentum, with potential support tests at $578 if $583 fails. Upside moves above $590 would target $593 but require strong buying interest to hold, which is highly unlikely. The most likely path is for SPY to work back toward $590 and fail, selling off once again. Another day of price pressure before an overdue short squeeze pushes prices back up above $590. Below $585, $583 is a level heavily defended by the bulls. But should this fail, $580 is next up. These projections provide actionable intelligence for Monday's session.

Trading Strategy:

Traders should monitor $585 as a critical support level for potential long entries. Enter on a failed breakdown long with target exits near $590 where we favor a mean reversion short to $585. Short positions from $590 should target $585. There is a wall of support from $585 to $580 which will likely slow the market’s decline on Monday, should this selloff continue so we would be cautious shorting below $583. Elevated volatility necessitates tight stop-loss management to mitigate risks. The VIX remains moderate, suggesting manageable but still notable price swings.

Model’s Projected Range:

The maximum projected range for Monday is $579.75 to $590.75, with Put dominance signaling bearish sentiment with an expanding range implying trending price action on Monday. SPY remains within its bull tend channel with room to test lower levels. The model redrew the channel today to include the sell off from the end of October. Key support lies at $580, while resistance is near $590. External factors, including Fed commentary and geopolitical developments, could influence price action.

Market State Indicator (MSI) Forecast:

Current Market State Overview:
The MSI is currently in a Bearish Trending Market State with price closing well below MSI support. The size of the range is narrow, implying a weak trend. The MSI rescaled lower several times overnight, printing extended targets below indicating a strong bear trend with the herd participating. The MSI did not rescale all day but did print extended targets for much of the day. This is what pushed price lower with market participants piling into the short trade. Extended targets stopped printing in the last hour, which led to a move off the day’s lows into the close. MSI support is now resistance at $589.97 and higher at $592.03.
Key Levels and Market Movements:
The MSI entered the day in a Bearish Trending Market State which carried over from yesterday. It was clear from the open when extended targets starting printing that price was moving lower and $590 was a good spot to initiate a short, targeting the extended targets at $587.91. Price continued to move to major support at $585 before reversing late in the session. A short at the open and a long on a failed breakdown at major support in the last hour provided two solid trading opportunities for the day. Two trades a day is all you need to make a living at trading. We highly recommend incorporating the MSI into your arsenal to achieve the best results.
Trading Strategy Based on MSI:
The MSI's current state suggests the bears are in control in the short term. But with a narrow range and without a rescale lower, or without extended targets below, probabilities favor a short squeeze which pushes price back to MSI resistance at $589.97. We favor longs on any test of today’s lows or on a failed breakdown pattern. We also favor shorts from MSI resistance again, looking for a failed breakout pattern near $590 major resistance. We mentioned yesterday the bears didn’t get an “elevator down” day so today they tried again and were successful. We stated all week to expect SPY to sell off $10 at some point and that it would come without warning. Today was the day we warned of. There is still room to the downside should the bears want to push price to $580. But the market has not had more than two or three days of hard selling since September so on Monday, while it’s entirely possible the market continues lower, it’s also probable bulls trapped enough bears at today’s lows to push price up toward $590. We see this level as a hard ceiling for the bears and one they will defend on Monday. Volume today was double yesterday and while this happens on monthly options expiry, it also supports today’s weakness. How much more is left to sell before we see a return to the bull trend? No one knows but as we stated yesterday, it’s likely the market pulls back 5% or more at some point which is perfectly normal after such a monster move. The bulls need to get back above $590 before they resume short term control. The bulls still control the broader market until SPY reaches much lower levels. But short term, bears have the edge and will do all they can to close the gap from 11/5 at $575. All gaps close and there is certainly a better than even chance the bears will close this gap next week. This may not happen on Monday but our model does not believe the selling is over or overdone. Our model continues lowering the levels of major support and major resistance and until that stops, the bears have the edge.

Dealer Positioning Analysis:

Summary of Current Dealer Positioning:
Dealers are selling $586 to $594 Calls while buying $595 to $600 Calls implying a belief that any rally is likely to stall at $594. However should $594 break, Dealers want to participate up to $600. This is due to low cost of OTM Call options so the Dealers add some exposure in case the market reverses hard. To the downside, Dealers are buying $577 to $570 and lower strike Puts while also selling $584 to $578 Puts. Dealers only sell Puts when they believe prices will move higher. This implies Dealers believe a short squeeze will ensue on Monday, pushing price back to at least $590. Dealers are buying/sells Puts in a 2:1 ratio to the Calls they are selling/buying, implying a neutral view of the market for Monday. Again like today where we cautioned reading too much into yesterday’s positioning, today many of the Dealers options were also ITM so it’s more likely this ratio is greater than 2:1 and is more bearish. We told you yesterday Dealers use Futures to hedge when their options are ITM and its very likely Dealers own more protection with Futures than it appears from today’s Vanna Exposure.
 Looking Ahead to Next Friday:
Dealers are selling $595 to $600 and higher strike Calls while also buying $586 to $594 Calls, implying the Dealers' belief the market is likely to rally next week back to at least $595. To the downside, Dealers are buying $584 to $575 and lower strike Puts in a 1:1 ratio to the Calls they are selling/buying, implying a bullish view of the market for next week. Again like today, it’s very likely exposure shifted due to today’s selling and Dealers will adjust their positioning on Monday. But as of today it looks like Dealers think prices have bottomed and will move higher into next Friday. We advise watching Dealer positioning closely over the next few days as price returns to a more orderly range. Dealers will provide clues of what is likely to develop in the near term.

Recommendation for Traders:

Approach Monday’s market with a balanced, cautious perspective. Look for long entries near support at $580 and on failed breakdowns at $585 targeting the next level up. Short trades are recommended near resistance at $590, targeting $585  on a failed breakout. A break of $585 may look like a good short as well but we would cover quickly at $583 unless selling pressure increases significantly. Manage trades closely, especially with the light economic calendar early in the week. Utilize tight stop-losses around key levels to protect against sudden reversals, particularly in volatile conditions. As always, review the premarket analysis posted by 9 AM ET for updated guidance.

Good luck and good trading!