Market Insights: Wednesday, November 27th, 2024

Market Overview:

Markets slid on Wednesday as fresh economic data revealed faltering progress on inflation, reviving concerns about the Federal Reserve's monetary policy direction. The S&P 500 retreated by 0.4%, the Dow Jones Industrial Average shed 0.3%, and the tech-heavy Nasdaq Composite fell 0.6%, extending a cautious mood ahead of the Thanksgiving holiday. Core Personal Consumption Expenditures (PCE), the Fed's preferred inflation gauge, rose 0.3% month-over-month in October, consistent with forecasts but flat compared to prior months. Annually, core prices rose 2.8%, slightly above September's 2.7%, raising doubts about the Fed achieving its 2% target. Meanwhile, weekly jobless claims dropped to 213,000, signaling continued labor market strength. Economic growth also held steady, with Q3 GDP growth at 2.8%. However, cautious sentiment prevailed as traders reassessed Federal Reserve policy and the implications of President-elect Trump's trade agenda. Corporate earnings headwinds further dampened the mood, with Dell and HP both posting sharp declines.

SPY Performance:

The SPDR S&P 500 ETF Trust (SPY) fell 0.30% on Wednesday, closing at $598.83. After reaching an intraday high of $600.85, SPY retreated, reflecting subdued market sentiment. Trading volume of 30.21 million shares was slightly below average for a holiday-shortened week. Key resistance at $600 proved challenging, capping upward momentum.

Major Indices Performance:

The Russell 2000 managed a modest 0.14% gain, standing out as the day's strongest performer. In contrast, the Nasdaq dropped 0.91%, leading declines among major indices as profit-taking hit tech stocks. The Dow and S&P 500 saw losses of 0.31% and 0.30%, respectively, amid lackluster trading. Defensive sectors like utilities showed relative resilience, while growth and technology sectors bore the brunt of selling pressure. Wednesday’s economic data provided little impetus for risk-on sentiment, as investors braced for subdued trading ahead of the holiday.

Notable Stock Movements:

The "Magnificent Seven" faced widespread selling, reflecting investor caution. Google and Netflix eked out small gains, bucking the trend, while Dell and HP suffered steep losses, down more than 12% and 11% respectively, on weaker-than-expected earnings. Bitcoin's 4.72% surge to close above $96,000 stood in stark contrast, reflecting continued bullish sentiment in cryptocurrency markets.

Commodity and Cryptocurrency Updates:

Crude oil edged down 0.26% to $68.33 per barrel, extending its retreat amid global demand concerns. Gold rose 0.11%, underscoring safe-haven demand as inflation data clouded the economic outlook. Bitcoin defied broader market trends, rallying 4.72% to close just above $96,000, driven by renewed speculative interest as it approaches the psychologically significant $100,000 mark. Our model continues to forecast Bitcoin to break the $100,000 mark before retreating more materially.

Treasury Yield Information:

The 10-year Treasury yield fell 0.98% to close at 4.263%. The pullback eased pressure on equity valuations but failed to ignite risk-on behavior as inflation data weighed heavily on sentiment. The retreat below the critical 4.3% threshold reflected investor uncertainty about the Fed's next steps.

Previous Day’s Forecast Analysis:

Tuesday’s forecast projected a trading range of $598 to $602 with a bullish bias above $598. Key resistance at $601 and $602 was highlighted as potential upside targets. Support levels at $598 and $596.40 were expected to provide a floor for the market. The bias toward a narrow range reflected expectations for consolidation amid reduced liquidity ahead of the holiday. Traders were advised to sit out the afternoon session as it was likely to move in a very narrow range.

Market Performance vs. Forecast:

SPY’s actual performance adhered virtually to the penny to Tuesday’s forecast, trading within the projected range of $598 to $602. The ETF tested $600 resistance but failed to sustain momentum, retreating to close at $598.83. The market’s subdued behavior validated the forecast’s caution around resistance levels and its emphasis on cautious trading strategies amid holiday-induced volume declines. The forecast proposed trading both long and short from the model’s levels, which proved to be profitable for the day.

Premarket Analysis Summary:

In Wednesday’s premarket analysis, SPY was projected to target $601.20 to $605 if it broke above $601, with a floor at $596.40. The analysis cautioned against ambiguous trading within the $598 to $601 range and favored trading at the extremes. SPY’s inability to hold above $600 aligned with the forecast, underscoring the value of patience in low-volume trading environments.

Validation of the Analysis:

Wednesday’s trading affirmed the premarket analysis, with SPY failing to hold key levels above $600 and trading within the expected range. Support at $598 proved reliable, and traders capitalized on resistance near $600 for short trades. The forecast’s emphasis on risk management around key levels was validated by the day’s choppy price action.

Looking Ahead:

With markets closed on Thursday and an early close Friday, light trading is expected. Economic reports slated for next week, including ISM Manufacturing and November’s Non-Farm Payrolls, will take center stage. As holiday trading volumes subside, traders should prepare for increased volatility in the week ahead.

Market Sentiment and Key Levels:

SPY closed at $598.83, with critical support at $598 and $593. Resistance remains at $600, $601, and $605. Market sentiment leans cautiously bullish, but subdued volume and mixed economic signals suggest a consolidation phase and a potential looming pullback. Traders should monitor key levels closely, as a break below $598 could signal further downside toward $593.

Expected Price Action:

Friday is a half day which will produce low volume and few set ups worth trading. The model projects a narrow range of $598 to $601 for Friday, reflecting likely consolidation amid reduced liquidity. A bullish bias above $598 targets $600 and $601, while a drop below $598 could lead to further weakness toward $593. There is little to hold up price should it break below $598 on volume. Traders are advised to exercise caution and trade selectively.

Trading Strategy:

Long trades are favored above $598, targeting $600 and $601. Short trades near $601, and $602 offer downside targets of $600 and $598. Tight stop-losses are recommended in this low-volume environment. VIX remains muted, reflecting restrained volatility. There will be little volume to move the market and as such, our recommendation is to enjoy the holiday and sit on your hands until Monday.

Model’s Projected Range:

The model forecasts a maximum range of $595.25 to $602.75 for Friday, with Call dominance signaling a bullish outlook. Resistance at $600, $601, and $605 aligns with the market’s upward bias, while support at $598 and $593 provides downside protection. SPY remains in the middle of the bull trend channel from the September lows. This channel is getting long in the tooth and is likely to break by the end of December. December is seasonally strong so we expect higher prices to continue into year end. But January could pose serious challenges for the broader market, particularly if the Fed does not continue to reduce interest rates during its December meeting.

Market State Indicator (MSI) Forecast:

Current Market State Overview:
The MSI is currently in a Ranging Market State with price closing just above MSI support. The range is large and rescaled from a Bearish Trending Market State in the afternoon session. This implies uncertainty for Friday with the market likely continuing its ranging behavior. The MSI rescaled lower several times today after the open and printed extended targets reinforcing the markets’ move lower. Extended targets stopped printing at noon which signaled the all clear and a likely bottom at MSI support. MSI support currently is $598.25 and resistance is $600.20.
Key Levels and Market Movements:
At the open with price trading mid-range and with the MSI in a Bullish Trending Market State, price tested major resistance at $601and failed to move higher. There were no extended targets above and our traders knew seek a mean reversion short from the $601 level. Several attempts in the premarket to break this level failed and double top was all we needed to get short riding it to our first MSI target of $599.68. The MSI quickly moved through a Ranging State to a Bearish Trending Market State and printed extended targets below which gave us the confidence to trail our remaining position to lower support levels. $598 was identified in the post market as major support and price quickly moved to this level exactly at MSI support. Price then set up a textbook failed breakdown pattern taping shorts just below $598 and the squeeze was on with price moving back up to MSI resistance at $598.25. This is our favorite pattern to trade in choppy markets and without extended targets below, the MSI gave the all clear to reverse and go long. Once the MSI rescaled to a ranging state it was time to close this trade, ending the day two for two. Once again, the MSI did its job telling when it was safe to go both short and long from our model’s major levels. Two winning trades on the day before Thanksgiving is a gift, thanks to our model’s highly accurate and actionable levels and the visuals provided by the MSI. We highly recommend incorporating the MSI into your arsenal to achieve your best results.
Trading Strategy Based on MSI:
The MSI's current state suggests a level of uncertainty heading into Friday’s half day session. $600 remains the pivot between higher and lower prices. $595 is a line in the sand for the bears below which they will begin to exert more pressure. While the broader trend remains bullish, the week after Thanksgiving is often bearish with a better than 75% chance of a decline. Our model sees this seasonality holding up next week. We would be extremely careful initiating any long positions heading into next week. We recommend waiting to see how the week plays out, looking for longs at lower prices. December should see higher prices and new all-time highs so this outlook is for Friday and perhaps Monday. Our model is not tuned to predict prices further out than a few days. The risk of a rug pull for longs is still present and shorts continue to pose risks given the strength of the bull trend. We suggest giving the market time to consolidate, keeping your powder dry for next week. But again, for those of you who insist on trading on Friday, we favor longs from support at $598 and mean reversion shorts from $601 and higher as long as the MSI is not printing extended targets. We suggest continuing to look for failed breakout/breakdown patterns for entries.

Dealer Positioning Analysis:

Summary of Current Dealer Positioning:
Dealers are selling $600 to $601 and higher strike Calls while also buying $602 Calls. They are also selling $603 to $605 Calls. Dealers are no longer selling Puts. Holiday weeks have less information available from the options market as we saw today where Dealers were selling Puts which ended ITM. Therefore take this positioning information for Friday with a dose of skepticism. Positioning for Friday implies Dealer’s belief that should price break $601 it will likely work its way toward $605. Certainly this is the ceiling for Friday. To the downside, Dealers are buying $598 to $580 and lower strike Puts in a 12:1 ratio to the Calls they are selling/buying, implying an extremely bearish view of the market for Friday...again be skeptical. This once again is a complete change from today’s bullish stance. It seems Dealers are leaning more on seasonality than anything else with the market likely to drift higher early Friday morning.
 Looking Ahead to Next Friday:
For next week Dealer positioning should return to normalcy and provide more accurate information. Dealers are selling $599 to $610 and higher strike Calls implying the market may approach $605 next week…it’s unlikely it visits $610 without an outside catalyst. To the downside, Dealers are buying $598 to $585 and lower strike Puts in a 2:1 ratio to the Calls they are selling/buying, implying a neutral view of the market for next week. This has moved from bearish to neutral. With Friday being a half day we expect Dealers to adjust their positioning on Monday to reflect their beliefs more accurately. We continue to advise watching Dealer positioning closely for clues of what is likely to develop in the near term.

Recommendation for Traders:

For Friday, we recommend sitting out the session given low volume will drive price. If you insist on trading look for longs from support levels of $598 targeting $600 and shorts from $601 with a bias to take profits at $599. Given holiday conditions, tight stops and smaller position sizes are essential. Be cautious of reduced liquidity, which could amplify market swings. Review the premarket analysis before 9 AM ET for any adjustments to the model’s guidance.

Good luck and good trading!