Market Insights: Friday, November 22nd, 2024

Market Overview:

US stocks closed Friday on a strong note, with the Dow Jones Industrial Average surging nearly 400 points to a new record high. The S&P 500 rose 0.3%, while the Nasdaq Composite added a modest 0.2%. These gains capped off a solid week for equities, buoyed by optimism around economic resilience and the Federal Reserve's cautious stance on further rate hikes. Nvidia’s earnings report dominated earlier in the week but left unanswered questions about AI-driven growth momentum. The tech sector faced additional headwinds as Alphabet continued to grapple with antitrust concerns, leading to uneven performances among the "Magnificent Seven." Bitcoin approached $100,000 as confidence in crypto markets surged following SEC Chair Gary Gensler’s resignation announcement, further fueled by expectations of a pro-crypto regulatory environment under the incoming administration. Markets remained sensitive to geopolitical and fiscal policy shifts as Wall Street eyed potential announcements on the new Treasury secretary.

SPY Performance:

The SPDR S&P 500 ETF Trust (SPY) advanced 0.31%, closing at $595.51, above the key #595 level. Intraday, SPY traded between $593.15 and $596.15, maintaining a tight range while flirting with key resistance levels all day. Trading volume was notably below average at 31.52 million shares, reflecting tempered activity ahead of next week's economic data. SPY’s movement signals consolidation at elevated levels, with traders closely watching for a breakout above $600.

Major Indices Performance:

Small-cap stocks led the day as the Russell 2000 soared 1.84%, benefiting from renewed risk appetite and positive earnings surprises. The Dow followed with a 0.99% gain, setting a new record as industrials and financials drove momentum. The S&P 500 added 0.3%, marking another step in its climb toward all-time highs, while the Nasdaq eked out a 0.06% increase amid mixed performance in tech. Defensive sectors like utilities underperformed, highlighting a shift toward risk-on sentiment.

Notable Stock Movements:

Tesla shone among the "Magnificent Seven," surging over 3% to lead the group, while Nvidia faced a 3% decline as investors reassessed its valuation following supply chain warnings. Alphabet also struggled, weighed down by ongoing regulatory challenges. Meanwhile, Meta and Amazon also posted modest losses. The varied performance across this elite group underscores market indecision amid sector rotations and extremely lofty valuations.

Commodity and Cryptocurrency Updates:

Crude oil rose 1.53% to close at $71.20 per barrel, driven by forecasts of tightening supply in the coming months. Gold climbed 1.25% to settle at $2,705 per ounce as traders sought safe-haven assets amid geopolitical tensions. Bitcoin edged closer to the landmark $100,000 level with a 0.99% gain, bolstered by increasing institutional interest and regulatory optimism. The cryptocurrency market’s robust sentiment points to sustained momentum in the near term. Our model believes Bitcoin will exceed $100K to perhaps $105K to trap FOMO traders at the $100K level. Its highly probable at that time Bitcoin pulls back significantly.

Treasury Yield Information:

The 10-year Treasury yield slipped 0.43%, closing at 4.413%. This retreat eased pressure on interest-sensitive sectors like technology and real estate. Despite the decline, yields remain above the critical 4.3% threshold, a level that continues to challenge equity valuations. Investors are carefully monitoring bond markets for signs of further softening, which could provide a tailwind for stocks.

Previous Day’s Forecast Analysis:

Thursday’s forecast anticipated a trading range of $589 to $597 with a slightly bullish bias, highlighting key levels at $590 and $595. The day unfolded as expected, with SPY respecting the forecasted range and closing near its upper bound at $595.51. The strategy of favoring longs near support levels around $590 proved effective, as SPY rebounded strongly after testing intraday lows. Our model also favored shorts from $595 and $597 which too, proved effective.

Market Performance vs. Forecast:

SPY’s performance aligned closely with Thursday’s forecast, trading within the projected range of $589 to $597. The ETF’s ability to hold support at $590 and approach $596 validated the bullish bias outlined in the forecast. Traders who positioned for a breakout above $590 were rewarded, while resistance at $595 tempered further gains. The forecast’s emphasis on cautious optimism proved prescient, guiding profitable trades in a controlled market environment.

Premarket Analysis Summary:

In Friday’s premarket analysis posted at 7:55 AM, the bias leaned bullish above $594, with upside targets at $595 and $596.45. The analysis advised caution below $594, suggesting a short bias with targets at $591 and $590. Actual market behavior mirrored these insights, with SPY testing and holding $593.45 before rallying to close at $595.51. The premarket’s identification of $594 as a pivotal level was instrumental in framing the day’s trading opportunities in an otherwise extremely narrow and choppy day.

Validation of the Analysis:

Friday’s trading adhered closely to the premarket roadmap. SPY respected the key levels outlined, consolidating around $594 before pushing higher toward $596. The bullish bias was validated as SPY maintained momentum above support levels. Traders following the analysis could capitalize on both long and short setups, particularly around the $594 to $596 range. The session’s dynamics underscored the precision and utility of the premarket guidance.

Looking Ahead:

Next week’s trading will be influenced by key economic reports on Tuesday and Wednesday, including PMI data and housing statistics. Markets will also monitor Federal Reserve commentary for clues on future rate moves. As Thanksgiving approaches, reduced liquidity may heighten volatility, presenting opportunities and risks for traders.

Market Sentiment and Key Levels:

SPY closed at $595.51, signaling bullish sentiment and the first time the bulls have had a strong upper hand in some time. But it may be short lived as the bulls face major resistance at $600. Key support levels now include $595, $593, and $590, with $595 now acting as a pivot. A sustained break above $595 has little stopping price from reaching $600, while a failure to hold $593 may lead to a test of $590. Below $590 the door is open to much lower prices. Traders should watch for momentum shifts around these critical levels.

Expected Price Action:

For Monday, the model forecasts a very tight range of $592 to $597, with a bias toward consolidation. Bulls must defend $595 to maintain upward pressure, while a break above $600 could ignite a fresh rally. However, failure to hold $595 may see SPY retrace to $590. Expect choppy trading as markets digest gains from the past week, especially with no real news due until Tuesday and a shortened holiday week.

Trading Strategy:

Long trades near $593 with targets at $595 and $597 are favored, provided the market holds support. Shorts near resistance at $597 and $600 may aim for pullbacks to $595 and $593. In this environment failed breakout and failed breakdown trades are your best friend so look for these patterns to trigger entries. Today just after the open the market provided a solid failed breakout at major resistance and another at 10:28 am solid (not perfect) failed breakdown. Both worked perfectly. There were several other lower quality set ups today but these two stand out as the two of the day. For Monday tight stop-losses are crucial, given the likelihood of sudden reversals. VIX continues to fall, suggesting little fear the market will retreat anytime soon. We continue to advise maintaining smaller position sizes and remaining vigilant for abrupt shifts in sentiment.

Model’s Projected Range:

The model projects a maximum trading range of $590.25 to $600.25 on Monday, narrowing from today indicating choppy, sideways price action. The market is Call dominated indicating a bullish bias. SPY is firmly within a bull trend channel, with the potential for new highs as the Christmas rally season unfolds. Resistance at $600 and support at $595 will shape trading opportunities for some time.

Market State Indicator (MSI) Forecast:

Current Market State Overview: The MSI is currently in a Bullish Market State with price closing just below MSI resistance. The size of the range is average, implying a bullish bias for Monday. There are no extended targets above, indicating a weak bull trend without the herd participating. The MSI rescaled higher once today, reinforcing the bull trend. There were a few extended targets which drove price higher at the open and after noon. MSI support currently is $592.35 and resistance is $596.15.
Key Levels and Market Movements: Just after the open with price breaking above MSI resistance, extended targets printed and a long off MSI resistance (with price above this becomes support) at $594 per the premarket report was a solid trade to take to major overhead resistance at $595. Extended targets stopped printing quickly and a so so failed breakout set up with a double top. The MSI cleared the way once again and the trade provided a quick short to MSI support at $594. Then a better failed breakdown at 10:28 am just below MSI support set up another long to $595. While there were several other bounces off MSI support at $594 that one could have traded, as well as a short from MSI resistance after the rescale at 1:10 pm, our day was done after three good trades and solid profits. Typically we do not like to trade after 11 am unless our morning had a losing trade. If we lose in the morning session, we look for set-ups after 2 pm in an attempt to get square on the day. We recommend the same for our readers. Trading should be boring with 1 or 2 trades per day and by 11 am most days you should be done for the day and use the rest of your time to plan the next day’s trades. Three more solid trades this week in an otherwise choppy and very tight rangebound session capped off a strong week without any losing trades. Again this is all we need to earn and to showcase how the MSI supports our model and vice versa. The MSI provides traders the necessary information to know when to enter, in what direction and where to take profits. High reward to risk trades for the MSI is the norm and most are fairly easy to take and easy to let play out. This is how you build material wealth over time. 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 a bull trend with price closing just below major resistance. This implies the market may attempt to move higher on Monday but given price is at the $595 pivotal level, the market can move either way on Monday. We would like to see a few daily closes above $595 before sounding the all clear to new highs. $.50 cents above $595 with today’s close is a little too close for comfort and given next week is shaping up to a low volume holiday week with lots of economic news. We expect volatility to increase with larger swings in price than we have experienced the last two days. That said, Monday is still likely a consolidation day with brief periods of trending action. We mentioned yesterday that moves above $595 would likely be met with heavy selling and this proved to be the case six times today. $595 is sufficiently weakened now that it’s likely the market has enough energy to test higher toward $600. Our models sees little to stop this from happening next week. But again, expect more sideways price action than heavily trending behavior. Probabilities suggest once the bulls hold above $595, the market will push to $600 and possibly higher. We continue to favor mean reversion shorts from overhead resistance in the $597 to $600 range and longs from $593 on a failed breakdown pattern. The bulls have taken complete control and its likely they will completely dominate the market until we test higher levels. The next few days will likely provide the information our model needs to forecast the market’s most likely path with the MSI showing us the way once again.

Dealer Positioning Analysis:

Summary of Current Dealer Positioning: Dealers are selling $596 to $600 and higher strike Calls implying any move higher on Monday is likely limited to $600 with $595 as the pivot between higher and lower prices. We advised yesterday that price might pop above $595 today but would not stay there and six times today this was the case. To the downside, Dealers are buying $594 to $580 and lower strike Puts in a 3:1 ratio to the Calls they are selling, implying a neutral to slightly bearish view of the market for Monday. This is slightly more bearish from today but once again this implies more sideways, choppy price action for Monday.
Looking Ahead to Friday: Thanksgiving is next week so Dealer positioning is likely to change and not be as reliable as it might be otherwise. Dealers are selling $601 to $605 and higher strike Calls while buying $596 to $600 Calls implying a desire to participate in any rally next week which could see prices reach new all-time highs. To the downside, Dealers are buying $594 to $575 and lower strike Puts in a 3:1 ratio to the Calls they are selling/buying, implying a neutral to slightly bearish view of the market for next week. This has changed to slightly more neutral from today. The Dealers own plenty of downside protection but believe the market will push higher, likely topping @ $605. Again Dealers are not selling Puts so they are not bullish. But with a 3:1 Puts to Call ratio they are mostly neutral. We continue to be of the view that Dealers need to see price hold above $595 before they materially adjust their positioning. We continue to advise watching Dealer positioning closely for clues of what is likely to develop in the near term.

Recommendation for Traders:

For Monday, focus on trades around major levels of $593 and $595. Longs are favored near $593, targeting $595 and $597 if the market maintains its bullish trajectory. Shorts near $597 and $600 can target $595 and $593 on pullbacks. Holiday weeks are notoriously choppy on low volume so moves are exaggerated, setting up traps for unskilled traders. We recommend using tight stop-losses to manage risk, especially given potential volatility around next week’s economic releases. Be prepared for sudden reversals at resistance or support levels. Review the premarket analysis posted before 9 AM ET for updated insights and any shifts in the model’s outlook.

Good luck and good trading!