Market Insights: Tuesday, December 17th, 2024

Market Overview

The Dow Jones Industrial Average marked its ninth straight losing session on Tuesday, falling 0.6% as markets awaited the Federal Reserve's decision. This drop extended the Dow's longest losing streak since February 1978, when it also fell for nine consecutive days. The S&P 500 mirrored the weakness, slipping 0.4%, while the Nasdaq Composite retreated 0.3% after setting a record high on Monday. Sentiment remained cautious as Fed policymakers began their final meeting of 2024, with an expected 0.25% rate cut widely priced in. Investors are now focused on clues regarding the rate path for 2025 amid persistent inflation concerns. Meanwhile, November's retail sales exceeded forecasts, rising 0.7% versus the anticipated 0.6%, signaling consumer resilience during the holiday season. Nvidia remained in focus, declining over 1%, and is now down more than 10% from its November highs. Bitcoin continued its impressive rally, briefly surpassing $108,000 before settling near $106,500.

SPY Performance

SPY closed the session at $604.21, reflecting a 0.43% decline after trading within a range of $602.89 to $605.17. Trading volume was average, suggesting subdued sentiment as investors braced for the Fed's announcement. SPY remains near key support at $603, and a break below this level could lead to further downside pressure toward $600.

Major Indices Performance

The Nasdaq held up better than its peers, slipping 0.33% amid tech weakness, while the S&P 500 followed with a 0.4% loss. The Dow was the worst performer, shedding 0.61% as defensive sectors lagged again. The Russell 2000 experienced the sharpest drop, falling 1.15%, reflecting renewed risk aversion among small-cap stocks. Overall, the markets were pressured by anticipation of the Fed's decision and cautious trading behavior ahead of economic data later this week.

Notable Stock Movements

The "Magnificent Seven" stocks presented a mixed picture. Tesla continued its strong performance, rallying more than 3%, while Apple and Microsoft saw marginal gains. Nvidia declined over 1%, continuing its correction and highlighting lingering concerns in the semiconductor space. The others also suffered from profit taking heading into the holiday. Investors focused on Tesla's rally as a sign of robust optimism in the EV sector, which helped offset weakness elsewhere.

Commodity and Cryptocurrency Updates

Crude oil fell 1.36%, closing at $69.77, as supply concerns eased and traders focused on potential demand headwinds. Gold slipped 0.34%, ending the session at $2,660.69, weighed down by a stronger dollar and rising Treasury yields. Bitcoin saw modest gains of 0.58%, closing just above $106,000 after briefly touching $108,000. The cryptocurrency remains in focus amid expectations of favorable regulatory developments but at these levels we advise extreme caution.

Treasury Yield Information

The 10-year Treasury yield rose slightly to 4.403%, a 0.16% increase, remaining above the critical 4.3% threshold. Above 4.5% we expect the broader markets to pullback between 8 and 12%. This upward movement signaled renewed caution for equities, as higher yields could pressure growth stocks and broader risk assets. Investors continue to monitor yields closely for any signs of increased volatility or economic slowdown.

Previous Day’s Forecast Analysis

Monday’s forecast anticipated a bullish bias with SPY trading between $605 and $610, identifying $605 as a pivotal support level. We suggested a break of $605 would prompt a retest of $600. The forecast also stated the market would be sensitive to economic news and traders should brace for volatility but that Tuesday would likely trade sideways as market participants wait for the FOMC statement. The strategy favored failed breakout and failed breakdown trades near $605 while caution was advised for quick reversals.

Market Performance vs. Forecast

SPY’s actual performance remained largely in line with Monday’s forecast, opening at $604.19 and finding support near $603. The session saw resistance capped near $605.17, falling short of the upper targets. Below $605 we favored short to support given we stated below $605 will interest the bears who will exert some influence. Long trades were not in the cards today given price spent the entire day below $605. Those who own our MSI indicator benefited from solid short trades from overhead resistance to major support. But today was a difficult and challenging day to trade given the narrow range. Staying short from $605 was the only trades available which set up well after the open and again before noon to the last hour of the day. These trades validated the forecast’s cautious bullish bias above $605, while highlighting continued choppy price action.

Premarket Analysis Summary

In today’s premarket analysis posted at 7:31 AM, a bearish bias was noted unless SPY could reclaim levels above $607. Key downside targets were identified at $604, $602.50, and a maximum of $599.50. Traders were advised to sell rallies, targeting $602.50, with caution around weak momentum for upward moves toward $608.

Validation of the Analysis

SPY’s intraday performance adhered closely to the premarket analysis. Early selling pressure tested $603 and aligned with the forecasted downside bias. Resistance near $605 limited any upward momentum, validating the premarket range expectations. Traders following the bearish outlook were rewarded, with opportunities for short trades on rallies toward resistance levels, precisely as forecast. Today is a perfect example of the rationale of providing two newsletters. The post market newsletter forecast a more bullish case for today, while the premarket forecast a bearish case. While there are times both can be right, the premarket, being closer to market movements differed materially from the post market. When this happens you are advised to follow the advice provided in the premarket as it has the benefit of overnight price action which often does influence the day.  

Looking Ahead

This week’s major event is Wednesday’s FOMC statement, which will set the tone for year-end market performance. Thursday’s GDP data and Friday’s PCE release will also provide clarity on the economy and inflation trends. Expect volatility to heighten as investors digest these key reports. Should the Fed be a bit more hawkish given the risk of inflation appears to be rising, the market could easily sell off $10 or more. The market has been trading on the Fed lowering rates. If and when they signal this is likely to slow, the market can only find higher prices from multiple expansion. Given valuations are already stretched, this is unlikely to move the markets more than 10 to 15% higher in 2025. That said, 10% or more is still much higher than the average S&P return. But we are in the camp that the market will sell off 8 to 10% at some point in the first quarter which will allow investors the opportunity to double these returns. We suggest holding cash to deploy at a more opportune time while also selling upside Calls on long term positions. We will do our best to advise when we think the pullback is over but again, we expect this to develop sometime in early 2025 and to represent a solid buying opportunity.

Market Sentiment and Key Levels

SPY currently trades near $604, with a bearish tilt dominating sentiment. Major resistance stands at $606, $607, and $610, while support lies at $603 and $600. A break below $600 could trigger further downside to $595, while bulls must reclaim $606 to reverse the current trajectory. We anticipate FOMC and PCE will break SPY out of the current $602 to $608 range its been in for more than two weeks.

Expected Price Action

Our model projects a range of $600 to $608 for Wednesday, with slightly bearish bias suggesting further downside testing. If SPY breaks below $603, expect a move toward $600. However, a push above $606 could lead to a test of $610. Traders should remain flexible, as post-FOMC volatility could cause sharp reversals in either direction. The market is likely to stagnate by noon awaiting the FOMC statement. After 2 pm we advise trading what you see given our model does not have access to this information in its forecast.

Trading Strategy

Short trades are favored from resistance at $605 targeting $603 and $600 with stops above $606. Long entries near support at $600 offer upside toward $605, provided there’s a failed breakdown pattern. We will be cautious with longs above $605, although after FOMC this may be a trade worth considering. It really depends on the Fed’s statement. Traders should focus on key levels, maintaining disciplined stops and smaller position sizes ahead and after FOMC.

Model’s Projected Range

The model projects the maximum range for SPY’s of $597.50 and $609, with Put dominance indicating potential downside pressure. SPY remains in its bull trend channel but is testing major support levels. Resistance at $606, $607, and $610 will determine the next move, while $600 serves as critical downside support. A break of $600 and the bull trend channel in place from the September lows could break and lead to much more significant downside. A move above $608 and the market will see new highs.  

Market State Indicator (MSI) Forecast:

Current Market State Overview:
The MSI is currently in a Bearish Trending Market State with price closing below MSI resistance. There are no extended targets printing below however extended targets did print for much of the day indicating herd participation in today’s 50 basis point decline. Overnight the MSI rescaled lower and printed extended targets indicating a fairly strong bear trend. The MSI range was and remains extremely narrow, which weakens the strength of the bear trend. MSI resistance is $604.87 and higher at $605.19.
Key Levels and Market Movements:
With SPY opening below $605 our lean for the day was bearish. After a double top at MSI resistance and with extended targets below, we shorted at 9:55 am to support at $603.50. While the market tried to set up a failed breakdown, with extended targets printing we weren’t having any part of it and waited for the retest of MSI resistance at $605.19. The MSI held virtually to the penny which led to the best trade of the day to $603. We took two trades and avoided the reversal in the last hour given extended target printed until 3:42 pm. With 15 minutes left in the day, we were not chasing any trades after being solidly profitable. We state often, one or two trades a day is all you need to make a living and once you are green on the day, protect profits. That is exactly what we did today. We stated above “$605 the bulls are in complete control while below the bears will have some influence which could lead to a test of a larger pivot at $600.” Knowing who controls the market and when is one of the most important aspects of trading. Don’t fight the forces who control the market’s trajectory. Currently our model’s lean is still to defer to the broader trend, which is long. But $605 needs to be recovered and hold. Above $605, SPY will work toward $610. If $605 fails the market will test major support at $600. Another two for two day supported by the MSI and our model’s price levels with the MSI giving us the confidence to enter our short trades and keeping us trading on the right side of the market. MSI levels to enter and to take profits are actionable, allowing traders to capture all that the market provides. 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 weak bear trend without herd participation. We stated yesterday it’s “likely the market will move more violently on Wednesday after FOMC and Tuesday is likely to have more sideways price action on low volume where selling the high and buying the low makes sense.” 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. With FOMC in the wings, having the MSI update in real time is a major advantage and a key to long term success.   

Dealer Positioning Analysis:

Summary of Current Dealer Positioning:
Dealers are selling $607 to $612 and higher strike Calls while buying $605 and $606 Calls indicating the Dealers’ desire to participate in any move higher on Wednesday. Dealers are no longer selling Puts. Dealers were wrong on Tuesday with their aggressive long positioning and are taking a more cautious approach on Wednesday. If price does move higher, it appears $612 is the ceiling for tomorrow. To the downside, Dealers are buying $604 to $591 and lower strike Puts in a 2:1 ratio to the Calls they are selling/buying implying a neutral view of the market for Wednesday. This stance has changed from bullish to neutral. The small red days has done little to change the Dealers’ belief that the market will rally and that the Santa rally will materialize.   
Looking Ahead to Friday:
Dealers are selling $607 to $615 and higher strike Calls while also buying $605 and $606 Calls. Again Dealers are no longer selling Puts but are positioned for higher prices. To the downside, Dealers are buying $604 to $595 and lower strike Puts in a 2:1 ratio to the Calls they are selling/buying, implying a neutral view of the market for this week. This has changed from bullish to neutral. Dealers continue to be positioned for higher prices for the rest of the week, but are less bullish than they were today. 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 exercise heightened caution ahead of Wednesday’s FOMC statement. Focus on short trades near $605 and $607, targeting $603 and $600. Long trades may materialize near $600 and above $605, but risk management is essential given potential volatility. Review the premarket analysis for updated key levels and outlook before 9 AM ET.

Good luck and good trading!