Market Insights: Wednesday, December 18th, 2024

Market Overview

Stocks faced steep losses on Wednesday following the Federal Reserve's announcement of a 25 basis point rate cut, paired with a more cautious projection for rate reductions in 2025. The Dow Jones Industrial Average dropped 2.6%, shedding over 1,000 points, marking its tenth consecutive decline—the longest streak since 1974. The S&P 500 tumbled 3%, while the Nasdaq fell over 3.5%, weighed down by rising Treasury yields and the Fed’s updated projections. Chair Jerome Powell emphasized that the slower rate cut trajectory aligns with persistently higher inflation and solid economic conditions. Newly appointed Cleveland Fed President Beth Hammack dissented, opting against a rate cut, further signaling internal caution. The Russell 2000 suffered the worst, plunging 4%, as rate-sensitive sectors like real estate and small caps bore the brunt of selling pressure. With a hawkish Fed dampening enthusiasm for risk assets, markets signaled concerns over stretched valuations and economic headwinds heading into 2025.

SPY Performance

SPY plummeted 2.98%, closing at $586.28 after trading within a wide range of $585.89 to $606.41. The trading volume was double the average, reflecting significant sell-side pressure after the Fed’s announcement. The sharp decline broke SPY’s key support levels, raising concerns of further downside in the near term. Bears took control of the session, capitalizing on the broader sell-off while bulls were unable to defend the pivotal $600 level.

Major Indices Performance

The Russell 2000 led losses with a 4.42% drop, signaling heightened risk aversion among small-cap stocks. The Nasdaq shed 3.62%, hit hard by its heavy reliance on technology, as rate-sensitive growth names declined sharply. The S&P 500 lost 3%, pressured by across-the-board selling in both defensive and cyclical sectors. The Dow followed with a 2.58% decline, extending its historic losing streak to ten sessions. Real estate and technology sectors were among the worst performers, reflecting broader concerns about higher interest rates and economic resilience.

Notable Stock Movements

The "Magnificent Seven" stocks ended in the red, led lower by Tesla’s dramatic 8% drop as risk-off sentiment gripped the market. Other members of the group posted declines of 3% or more, except for Apple and Nvidia, which were relatively resilient with losses of 2% and 1%, respectively. The heavy selling in Tesla highlighted broader concerns in the EV sector, while profit-taking across other major tech names underscored the waning bullish sentiment. The group’s weakness mirrored the broader market’s struggles, as investors rotated out of high-growth stocks amid rising yields.

Commodity and Cryptocurrency Updates

Crude oil slipped 0.32%, settling at $69.49, reflecting subdued demand expectations. Gold suffered a sharp 2.31% decline, ending at $2,584.57, as the dollar strengthened and Treasury yields rose. Bitcoin dropped 5.32%, closing just above $100,000, erasing recent gains as regulatory uncertainty while profit-taking weighed on sentiment. The pullback in cryptocurrencies signaled broader risk aversion in the wake of the Fed’s announcement. We warned yesterday that Bitcoin above $100K would lead to a pullback. We continue to advise caution at these levels. 

Treasury Yield Information

The 10-year Treasury yield surged 3.17%, closing at 4.524%, its highest level in weeks. This rise reflected investor concerns over the Fed's indication of fewer rate cuts in 2025, amplifying fears of prolonged tight monetary conditions. The yield’s move above the critical 4.5% threshold exacerbated selling in equities, particularly growth-oriented sectors, while pressuring broader risk assets. With treasuries above 4.5%, expect further market weakness.

Previous Day’s Forecast Analysis

Yesterday’s forecast projected a range of $600 to $608 for SPY, with a bearish tilt if SPY broke below $603. The analysis suggested cautious short trades below key resistance at $605 and longs at $600 on failed breakdown patterns. We stated 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” and today the market sold off $18. The market move was driven by the Fed’s hawkish stance.

Market Performance vs. Forecast

SPY’s actual performance until FOMC followed the forecast perfectly. On major news days we advise trading what you see and given yesterday we forecast a $10 or greater sell off on a hawkish Fed, market delivered as predicted. While the market closed nearly $15 below the lower projected range, as we state often, throw out the model’s projections after a news release and TRADE WHAT YOU SEE. With SPY opening near $603 suggested initial adherence to the analysis, but the Fed-induced sell-off caused a breach of critical support levels, leading to a close at $586.28. Traders who positioned for a bearish break below $603 were rewarded and the forecast’s bearish lean and levels to seek support and resistance played out as advertised.

Premarket Analysis Summary

Today’s premarket analysis, posted at 7:51 AM, indicated a bullish bias with potential resistance at $606.25 and targets as high as $609.75. It anticipated FOMC-driven volatility but favored long trades above $606.25 prior to the release of the FOMC statement. The analysis acknowledged risks of a sell-off if $604 failed, yet the intensity of the downward move following the Fed’s announcement was far greater than anticipated. The sharp rejection of resistance levels underscored the market’s shift toward bearish sentiment.

Validation of the Analysis

The premarket analysis correctly identified $604 as a critical pivot, while the day’s events rendered the bullish expectations moot. SPY’s inability to hold above $604, coupled with the Fed’s hawkish tone, led to a cascade of selling well below the identified downside targets. This reinforces the reason we state when new information is released to the market, trade what you see and trade with the trend. Having access to our MSI indicator is extremely helpful on days like this as this tool kept our traders short into the close. This session highlighted the unpredictable nature of post-FOMC moves, emphasizing the need for flexibility in trading strategies and the value of the sophisticated tools we make available to our clients.

Looking Ahead

This week concludes with key economic data, including GDP figures on Thursday and the PCE inflation report on Friday. Both releases are expected to provide clarity on economic trends and the inflation outlook, potentially impacting the Fed’s trajectory. With the market now on edge, these data points could fuel further volatility and recalibrate sentiment heading into year-end.

Market Sentiment and Key Levels

SPY closed at $586.28, well below major support levels, indicating a strong bearish sentiment. Immediate resistance lies at $590 and $595, while support rests at $585. Below $585 there is a gap at $576 which is likely to close as the bulls lose all control of the market below $585. The bulls need to reclaim $590 to reverse the downward momentum, while bears aim to push SPY toward $576. With yields climbing and sentiment deteriorating, the market remains vulnerable to further declines.

Expected Price Action

Our AI model forecasts a wide range on Thursday of $580 to $600, suggesting trending price action driven by external catalysts. The bearish bias implies potential downside testing, with $585 as a key support. A break below this level could lead to $580 and further to close the gap at $576.50. Conversely, a recovery above $590 may lead to a test of $595 or higher, contingent on favorable economic data or easing rate concerns.

Trading Strategy

Short trades are preferred from resistance at $590. Shorts are also favored on a break below $585, targeting $580 and $576. Long trades could emerge above $590 on a failed breakdown, with resistance levels at $595 and $597.50 as targets. Given elevated volatility, traders should use smaller positions and tight stop-losses to manage risk effectively. The VIX, reflecting heightened uncertainty, advises caution in navigating sudden reversals and sharp moves, jumping over 74% today.

Model’s Projected Range

The model projects a maximum range of $576.50 to $597.50 for Thursday, indicating a Put-dominated, trending outlook. Get and stay with the trend on Thursday. SPY has decisively broken its September bull trend channel, suggesting the emergence of a potential downtrend. Resistance at $590 and $595 will determine any upward moves, while support at $585 and $580 provides critical downside levels. External factors, particularly economic data, will drive sentiment within this range.

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 extended targets printing below. Extended targets printed both above and below price today with the am session rallying overnight. Once the FOMC statement was released, the market sold off and extended targets began printing below indicating the herd was actively participating in today’s decline. Overnight the MSI rescaled higher with price rallying in the premarket while a sharp selloff prior to the open caused the MSI to rescale to a bearish state with extended targets printing below. By 10:04 am ET extended targets stopped printing and the narrow MSI bearish range was breached with price moving higher. The MSI then flipped flopped through all states in a very narrow range indicating no real trend prior to FOMC. This is typical when the market awaits important economic news like FOMC and CPI. These narrow ranges finally gave way a 2 pm ET and the MSI expanded significantly with price breaking below major support at $600 fairly quickly. The MSI then rescaled lower several times which indicated a strong bear trend. At the close the MSI remained in a Bearish Trending Market State with extended targets below indicating a strong bear trend with further declines likely. MSI support is $583.13 and resistance is $588.75.
Key Levels and Market Movements:
With SPY opening just below $604 our lean for the day was bearish. We have stated for several days $605 was the pivot between higher and lower prices. In the morning session SPY managed to pop higher given the narrow range of MSI and retest $606. But another very narrow range bullish MSI was an indication of a weak bull trend with extended targets printing only sporadically above price. A triple top at $606 at 12:30 pm ET got us short to MSI support at $605. We closed this trade quickly and waited for the Feds statement. A hawkish statement caused the market to sell off and as price broke $605, the MSI rescaled lower and printed extended targets which was all we needed to jump on the short trend. Given price was below extended targets we waited for MSI to rescale lower to take first profits at MSI support at $586 at the close. An absolutely perfect short trade that provided a huge payday for those with the MSI. While there was a textbook failed breakdown at 2:30 pm ET which looked like the perfect long, the MSI was printing extended targets so we knew better than to take this long. And sure enough, the market collapsed into the close. As we often state, one or two trades a day is all you need to make a solid living and if today isn’t proof enough you should consider another profession. We stated yesterday don’t “fight the forces who control the market’s trajectory…$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.” Today this played out exactly as forecast and as a result, another two for two day, supported by the MSI and our model’s price levels. The MSI once again gave us the confidence to enter our short trades and kept us trading on the right side of the market. MSI levels provide spots to enter trades and take profits which are highly actionable, allowing traders to capture all that the market provides. We 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 strong trend with herd participation. We restated yesterday it’s “likely the market will move more violently on Wednesday after FOMC”. We also stated a few days ago the $602 to $608 range was likely to break after FOMC. We have the break and its lower therefore the bears are now in control as the bulls attempt to hold $585. This is a major pivot above which the bulls have some control. Below the bears take over completely and the market will move significantly lower. For tomorrow we advise looking for the MSI to rescale to short any rally at MSI resistance. We may consider longs from a retest of $585 on failed breakdowns but only if the MSI is no longer printed extended targets below price. Be sure 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. Having the MSI update in real time is a major advantage and a key to long term trading success.   

Dealer Positioning Analysis:

Summary of Current Dealer Positioning:
Dealers are selling $606 to $612 and higher strike Calls while buying $587 to $605 Calls indicating the Dealers’ desire to participate in any move higher on Thursday. If price does move higher, it appears $610 is the ceiling. To the downside, Dealers are buying $585 to $570 and lower strike Puts in a 1:1 ratio to the Calls they are selling/buying implying a neutral to slightly bullish view of the market for Thursday. This stance has changed from neutral to slightly bullish. We do not trust the positioning tonight given most of the Dealer’s options ended ITM and therefore they hedged with Futures to profit their book. There is little to learn from tonight’s positioning as it will likely be completely different tomorrow. If you were to look only at this information you would be inclined to believe the Dealers still believe the market will rally into the holiday. While technically the Santa rally starts next week, today’s information does little to inform which way the Dealers are positioned.    
Looking Ahead to Friday:
Dealers are selling $606 to $615 and higher strike Calls while also buying $587 and $605 Calls. To the downside, Dealers are buying $585 to $560 and lower strike Puts in a 2:1 ratio to the Calls they are selling/buying, implying a bearish view of the market for this week. This has changed from neutral to bearish. Dealers are no longer positioned for higher prices into Friday. Again like the positioning for tomorrow, this could change quickly. As such, 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

The market has changed in just one day to bullish to bearish. Below $585 the bears are in complete control and the market will move lower. The 50 DMA did little to slow today’s decline but there should be at least a short squeeze which will test overhead resistance at $590. If the bulls cannot move above $590 the market will sell off and at least retest today’s lows. This can happen overnight. Below $585 the market will declined further to $580 and perhaps $575, closing the gap from the election. This will effectively erase the Trump rally. There is much more economic news due tomorrow and Friday so Traders should trade with the market, riding the trend. For the near term and until $590 is reclaimed, favor shorts over longs. Traders should continue to exercise caution ahead of releases due the next two days and trade what you see. We favor short trades near $590, targeting $585 and potentially long trades just below $585 on a failed breakdown pattern. This will be a bear trap and could lead to a violent short squeeze at some point and it could come at any time. Markets do not travel in a straight line so expect every break of a major level to be a potential trap set by the other side. We continue to believe the 8 to 10% sell off is coming, which will be an opportunity to add to long positions. Effective risk management is essential given potential volatility and we highly advise reviewing the premarket analysis for updated key levels and the broader outlook before 9 AM ET.

Good luck and good trading!