Market Insights: Thursday, December 12th, 2024

Market Overview:

Wall Street faced a setback as fresh inflation data challenged the optimism of investors banking on continued rate cuts. The Dow Jones Industrial Average dropped 0.56%, the S&P 500 declined 0.51%, and the tech-heavy Nasdaq Composite fell 0.65%, signaling a pause in the recent rally. Concerns grew following the Producer Price Index (PPI) report, which exceeded expectations with a 0.4% monthly increase, highlighting persistent inflationary pressures. This overshadowed the previous day’s Consumer Price Index (CPI) data that had reassured markets of a likely December Federal Reserve rate cut. Among notable movements, Adobe faced a sharp sell-off, plummeting 14% after issuing a subdued revenue outlook amid struggles with AI investments. Treasury yields rose, with the 10-year yield closing at 4.335%, its highest since late November. Despite the broader market retreat, investors remained focused on key inflation metrics and Fed policy signals as the end of the year approached.

SPY Performance:

SPY slipped 0.51%, closing at $604.37 after hitting an intraday high of $607.16 and a low of $604.37. Trading volume rose slightly above recent levels, reflecting heightened market tension following the hotter-than-expected PPI data. The day marked a modest pullback as SPY traded within a tight range, with key support levels holding despite pressure.

Major Indices Performance:

The Russell 2000 experienced the sharpest decline, falling 1.41% as small-cap stocks struggled in a risk-off environment. The Nasdaq Composite followed, losing 0.65%, weighed down by tech-sector profit-taking. The Dow Jones Industrial Average and the S&P 500 posted losses of 0.56% and 0.51%, respectively, as broad-market sentiment turned cautious. Defensive sectors like utilities outperformed, reflecting the day's risk-averse tone, while growth sectors, particularly technology, saw notable declines.

Notable Stock Movements:

The Magnificent Seven stocks endured a tough session, with all except Microsoft and Apple declining. Profit-taking was evident, particularly in Adobe, which tumbled nearly 14% following its disappointing guidance. Tesla, Meta, and Amazon also experienced pullbacks, highlighting a shift in sentiment as markets reassessed the sustainability of recent gains. Apple’s resilience underscored a continued appetite for defensive tech plays amid broader market uncertainties.

Commodity and Cryptocurrency Updates:

Crude oil dipped 0.24% to settle at $70.11, as supply-demand dynamics stabilized. Gold fell 1.90%, closing at $2,704, driven by rising Treasury yields and a strengthening dollar. Bitcoin retreated 1.43%, ending just below the psychological $100,000 mark as risk-off sentiment extended to digital assets.

Treasury Yield Information:

The 10-year Treasury yield climbed 1.48%, reaching 4.335%. This rise renewed concerns about its impact on equities, especially as it breached the critical 4.3% level. The increase in yields underscored market apprehension following hotter-than-expected inflation data, creating a headwind for growth-sensitive assets.

Previous Day’s Forecast Analysis:

The forecast for Thursday predicted a trading range of $605 to $610 with a bullish bias above $605 subject to a favorable PPI report. SPY was expected to test $606 overnight which it did in the premarket and again in the morning session finding support at the major $605 level. The forecast highlighted cautious short trades at resistance from $609 and higher and long opportunities from $605 support. The model favored “longs so look for support @ $605 with failed breakdowns to initiate new long positions”. The analysis also pointed out that significant downside could unfold if SPY breached $605.

Market Performance vs. Forecast:

SPY’s performance on Thursday closely mirrored the prior day’s forecast. The ETF opened at $606.55, just above the key support zone of $605 and created a textbook failed breakdown long from this level. Shorts from higher resistance levels were not in the card given the market stalled at $607. A break of $605 in the afternoon session, however, played out as forecast, driving SPY lower to test support at $604.37 which marked the session's low. The predicted range of $605 to $610 held with the anticipated weakness below $605 dominating the day’s price action. Opportunities for traders arose as outlined, with short trades below $605 proving profitable and support near $605 offering rebound chances. The session underscored the forecast’s value in identifying actionable levels and directional biases that closely aligned with the market's actual behavior.

Premarket Analysis Summary:

Thursday’s premarket analysis, released at 8:08 AM, anticipated a bearish session with resistance at $608 and a maximum upside potential of $610. The analysis identified $605.45 and $604.25 as critical downside targets, with $601.50 highlighted as an extreme case. SPY encountering resistance just below $608 early in the day and gradually declining to test the forecasted support zones.

Validation of the Analysis:

The market’s behavior on Thursday confirmed the premarket analysis with remarkable accuracy. SPY tested the resistance level of $608 early in the session before reversing to approach the identified support near $604.25. The bearish sentiment outlined in the premarket report shaped the day’s trading dynamics, with downside momentum dominating after brief consolidations near $606. Traders who followed the premarket levels and adopted a cautious approach to upside scenarios benefited from predictable price action. The alignment between the analysis and the actual market movements further demonstrated the practical value of the provided insights, enabling effective trading decisions based on the identified levels and biases.

Looking Ahead:

With no major economic news on Friday, markets may stabilize after Thursday’s inflation-driven moves. Next week’s heavy calendar, including PMI, Retail Sales, and the FOMC statement, will dominate investor focus. Traders should prepare for increased volatility, particularly with GDP and Fed policy updates on the horizon.

Market Sentiment and Key Levels:

SPY closed at $604.37, leaning bearish as markets adjusted to persistent inflation concerns. Resistance at $606 and $610 will challenge any upward moves, while $603 and $600 serve as critical support levels. Bears hold the upper hand in the near term below $606, though bulls could regain momentum if SPY stabilizes above this pivot.

Expected Price Action:

The model forecasts a range of $602 to $608 for Friday, with a bearish bias given the close near the day’s lows. SPY may consolidate within this range, with downside pressure targeting $600 if support at $603 fails. A breakout above $606 could test $610, though sustained bullish momentum appears unlikely without external catalysts and there are none on the horizon for Friday.

Trading Strategy:

Traders should focus on short positions from resistance near $606, targeting $605 and $603 with tight stops above $608. Long trades from $602 and $600 could target $606 if support holds. Adjust position sizes to account for potential end-of-week volatility, prioritizing disciplined entries and exits. And continue to seek out failed breakout and failed breakdown patterns as triggers to entries. In a drifting, low volume market these patterns are extremely valuable and actionable.

Model’s Projected Range:

The projected maximum range of $603 to $610.50 indicates likely consolidation with periodic trends. Call dominance supports a slightly bullish outlook, though resistance at $610 will limit potential upside. The bull trend from September’s lows remains intact, though room for further declines exists. Expect more sideways trading on Friday but be advised, the next two weeks represent the third strongest of the year and if seasonality plays out as predicted, prices will find their footing and rally into the holiday.

Market State Indicator (MSI) Forecast:

Current Market State Overview:
The MSI is currently in a Bearish Trending Market State with price closing below support (now resistance) with extended targets printing below. Extended targets only printed at the end of the day as price closed near the day’s lows. The MSI range is quite narrow, which indicates a weak bear trend but with extended targets below, the trend may have more gas in the tank. The MSI rescaled today on the break of major support at $605 at 2:30 pm and continued to rescale several times into the close. The range on each rescale was extremely narrow indicating a weak bear trend which kept price within striking distance of the $605 pivot between bull and bear control. MSI resistance is currently $604.38 and higher at $604.73.
Key Levels and Market Movements:
Another small red day with SPY dropping 52 basis points which does nothing to dissuade the bulls from believing the market will move higher. But SPY is at a critical level for tomorrow hovering around the $605 pivot. Above the bulls control, below the bears certainly have influence which could lead to a test of a larger pivot at $600 and the largest of all at $595. These are not random levels or numbers. These are supported by institutional market participants and our model clearly identifies where these players want to engage the market. Today’s sell off as a result of a hotter than expected PPI keeps the bears interested but probabilities favor the bulls stepping up and buying the dip. As we stated yesterday we “continue to believe the bulls desire to trap shorts for liquidity” and therefore today is perhaps another attempt to pick up some liquidity from the bears. But time is running out for the bears and after tomorrow the clock officially starts on the Santa rally which lasts the next two weeks. This is a seasonally strong period and while we do not trade seasonality, it does add to the strength and potential for the bull trend for the next two weeks. At the open today SPY had moved lower on a hot PPI which saw price test our major support level of $605. Price put in a textbook failed breakdown and without extended targets below and the MSI in a Bullish Trending Market State we entered long. Very briefly extended targets printed above and we took profits above $606.50. While we were looking for $608 as indicated as a level to short in the premarket analysis, the market reached $607 and without a failed breakout, we decided to sit on our hands to look for a retest of MSI support at $605.77. Another less than perfect failed breakdown and we were long once again back toward $607. We decided two trades in a tight range was good enough for the day and called it quite around noon. Those how continued trading took the opportunity to short $605.30 for a quick scalp to the lows of the day. We advised yesterday to take quick profits on shorts given the strength of the bull trend. Once again the MSI gave us the confidence to enter our two long trades and kept us trading on the right side of the market, providing us levels to enter and to take profits with actionable intelligence to capture all that the market provided. We highly recommend incorporating the MSI into your trading toolbox to achieve your best results.
Trading Strategy Based on MSI:
The MSI's current state suggests a bear trend with herd participation. But the herd may walk away overnight given how narrow the MSI range is combined with the fact that extended targets only started printing in the last few minutes of the day. It’s probable the MSI rescales overnight to a Ranging Market State and from there price can move higher or lower. $605 will act as a pivot so above $605 the bulls take complete control and below the bears are present, but only in small numbers. Yesterday we advised “continuing to seek failed breakouts for shorts from $610 and failed breakdown longs from $606 and lower.” Today the two MSI longs off $605 followed this plan perfectly. For tomorrow should the MSI rescale to a bullish state we recommend longs from $605 to $607. We continue to favor shorts from $609 to $610 if price reaches these levels. But should price stay below $605 and should the MSI remain in a bearish state, we would short MSI resistance, currently at $604.45. Do not trade if the MSI is in a ranging state as the odds of success are no better than 50/50. Yesterday we said below “$605 we advise waiting for price discovery to determine if a move lower is a trap or the beginning of something more onerous.” Once again, the MSI kept us on the right side of the market and trading with the long trend. For tomorrow we recommend doing what we ask you to do daily which is to use the MSI to identify the trend and levels to buy and sell to ensure you are on the right side of the market…the key to long term success.   

Dealer Positioning Analysis:

Summary of Current Dealer Positioning:
Dealers are selling $607 to $610 and higher strike Calls while buying $605 and $606 Calls indicating Dealers wish to participate in any move higher on Friday. If price does move higher, it appears $610 is the ceiling for this week. To the downside, Dealers are buying $604 to $590 and lower strike Puts in a 2:1 ratio to the Calls they are selling/buying implying a neutral view of the market for Friday. This stance has not changed from today. We stated it “appears the complacency from last week has returned” and it’s very possible Dealers continue to believe and are positioned for the eventual Santa rally.  
Looking Ahead to Next Friday:
Dealers are selling $607 to $615 and higher strike Calls while also buying $605 and $606 Calls and also selling $603 Puts. As we state often, Dealers do not sell Puts close to the money unless they are convinced prices will move higher. Dealers are displaying a strong desire to participate in any rally that may develop next week to as high as $615. Dealers are certainly positioned for new all-time highs. To the downside, Dealers are buying $602 to $590 and lower strike Puts in a 1:1 ratio to the Calls/Puts they are selling/buying, implying a neutral to slightly bullish view of the market for next week. This has changed from slightly bearish to slightly bullish. As we stated Dealers believe dip buying will return and the market will move higher into the end of next week. We advise continuing to watch Dealer positioning for clues of what is likely to develop in the near term as Dealers can change their positioning on a dime so stay tuned for daily updates.

Recommendation for Traders:

Traders should remain cautious while navigating the current bearish tilt, focusing on $605 and $609 as critical levels. Long trades should target $608 if SPY holds above $605, while shorts near $605 should aim for $603, with stops above $606. We favor shorts from the all-time high given the low volume and likely two way trading which will develop on Friday. But we continue to believe the bulls control therefore we favor long trades over shorts and advise quick profits on any short trades while longs have the potential for larger gains. Adjust positions to minimize risk, especially with the potential for end-of-week volatility. And be sure to review the premarket analysis before 9 AM ET for updated guidance.

Good luck and good trading!