Market Insights: Monday, December 9th, 2024
Market Overview:
US stock markets pulled back from record highs on Monday as Nvidia faced pressure amid a Chinese antitrust probe, and investors braced for this week’s critical consumer inflation report. The Dow Jones Industrial Average dipped 0.54%, extending its losing streak from last week. The S&P 500 dropped 0.6%, while the Nasdaq matched the decline, reflecting profit-taking after recent highs. Nvidia shares fell over 2.5% following news of a Chinese investigation into potential anti-monopoly violations. The company’s pivotal role in AI chips has placed it at the center of US-China tensions, weighing on sentiment. Meanwhile, US-listed Chinese stocks, including Alibaba and XPeng, rallied on Beijing's announcement of bold monetary stimulus—the first in over a decade. In corporate headlines, the arrest of a suspect in the fatal shooting of a UnitedHealth executive added a grim note to an otherwise busy news day. Investors are now looking ahead to Wednesday's Consumer Price Index (CPI) report, which is expected to shape the Federal Reserve's rate decision next week.
SPY Performance:
SPY declined 0.53% on Monday, closing at $604.80. Trading volume reached 30.81 million, below the average but better than recent days, as investors adopted a cautious stance ahead of the CPI report. SPY traded within a narrow range, peaking at $607.86 and hitting a low of $604.08. The close below $605 signals waning bullish momentum but maintains the broader upward trend for the time being.
Major Indices Performance:
The Nasdaq and S&P 500 both retreated by 0.6%, led lower by losses in major tech names, while the Dow was down 0.54%, reflecting continued softness in cyclical stocks. The Russell 2000 edged down 0.51%, marking a subdued session for small caps. Defensive sectors such as utilities and healthcare outperformed, partially offsetting broader market weakness. The pullback reflects investor caution ahead of Wednesday's CPI data, which could recalibrate rate-cut expectations.
Notable Stock Movements:
Among the Magnificent Seven, Apple emerged as a bright spot, gaining over 1.5%, bolstered by reports of strong iPhone sales in China. Tesla, Alphabet, and Microsoft also eked out modest gains. However, Nvidia and Netflix saw sharp declines of more than 2%, with Nvidia weighed down by news of the Chinese antitrust probe. These mixed performances underscore the market’s skittishness, with profit-taking dominating the session.
Commodity and Cryptocurrency Updates:
Crude oil climbed 1.4%, closing at $68.14 per barrel as OPEC's commitment to supply cuts bolstered prices. Gold rose 0.83% to settle at $2,681, benefiting from safe-haven demand amid inflation concerns. Bitcoin suffered a steep decline, falling 4.94% to close just below $95,000, as risk-off sentiment spread through the cryptocurrency market.
Treasury Yield Information:
The 10-year Treasury yield increased by 1.09%, closing at 4.194%. This modest rise reflects investor caution as they await the inflation data. Yields remain just shy of the critical 4.3% level, above which equity valuations could face significant pressure.
Previous Day’s Forecast Analysis:
Friday’s newsletter anticipated a trading range for Monday of $606 to $610, with a bullish bias above $607 and pivotal resistance at $609. The analysis warned of limited upside momentum unless SPY sustained a decisive break above $609 which was stated as a “formidable barrier” to higher prices. We stated there was an elevated risk of a rug pull with price dropping through multiple support levels as the bulls push prices lower hunting for more liquidity to fuel higher prices. $605 was highlighted as a critical support level, with a breach potentially leading to a test of $603 or lower with $607 providing a floor to higher prices. The guidance favored long trades near $606 and cautioned against aggressive shorting near resistance, emphasizing the importance of quick profit-taking given the range-bound nature of the market. The forecast also stated the “gap from December 4th at $604.14 was likely to close at some point” this week. Finally we stated to keep an eye on volume which if increased, would provide fuel to expand the markets recent narrow range. We acknowledged the potential for subdued movement early in the week, setting expectations for a session dominated by consolidation and light volume. These projections provided a structured roadmap for navigating Monday’s trading environment.
Market Performance vs. Forecast:
SPY’s performance closely mirrored Friday’s forecast, demonstrating the utility of the projected trading range and key levels. Opening at $607.72, the ETF initially tested resistance at $607.86 before retreating below the $607 level, ultimately closing at $604.80. This validated the forecasted downside scenario once $607 support was breached. The predicted narrow trading range played out, with opportunities for short trades materializing near resistance levels, while long positions faced challenges as SPY failed to sustain momentum above $607. As $607 failed, the gap at $604.14 was in play and virtually to the penny, SPY traded to this level. Traders who adhered to the forecast capitalized on these movements with the outlined support and resistance levels providing clear boundaries for entries and exits. The day’s price action reinforced the importance of disciplined trading in a cautious market environment.
Premarket Analysis Summary:
Monday’s premarket analysis, issued at 7:40 AM ET, set a bias level at $608, emphasizing the importance of sustained momentum for a bullish move. Resistance was outlined at $610.50, with a maximum upside target of $613 in the event of high intraday volume. On the downside, the analysis pinpointed $605.50 as a pivotal support level, with a projected low near $604 in the case of further selling. The guidance advised traders to focus on entries near the edges of the range, favoring long trades at $605.50 and shorts on failed breakouts above $608. The market’s failure to breach $608 confirmed the anticipated consolidation, providing actionable opportunities within the defined levels.
Validation of the Analysis:
The premarket analysis proved highly accurate in mapping Monday’s market dynamics. SPY stalled below the $608 bias level and tested the lower edge of the projected range, aligning with the outlined expectations. Key levels such as $608 resistance and $605.50 support were respected, offering traders clear reference points for decision-making. The dip below $605.50 validated the caution around long positions, while the consolidation between $605 and $604 presented opportunities for short trades, as anticipated. The alignment of actual performance with the premarket guidance underscored the reliability of the analysis, equipping traders with the tools to navigate a challenging session effectively.
Looking Ahead:
Market attention now turns to Wednesday's CPI report, which will shape rate cut expectations. With no significant data releases on Tuesday, trading is likely to remain subdued until an external catalyst triggers a deeper pullback or a resumption of the bull trend.
Market Sentiment and Key Levels:
SPY’s close at $604.80 suggests mixed sentiment on a rare red day for the bulls. While small in absolute terms, today was the largest pullback since November 15th questioning whether traders be wary of a deeper pullback or will the dip get bought? At $605 the market trades in no man’s land. Above $605 the market will attempt to move higher. Below $605 much lower levels come into play. Resistance at $609 remains crucial for bulls, while support at $603 and $600 could be tested if selling persists. The CPI report is expected to inject volatility, potentially driving SPY toward $610 or lower to $600. The bulls are still in control even after today’s pullback and probabilities favor the bulls coming back to the table above $605, pushing price to $608. Below $605 the door is open to $600 with $595 as a line in the sand for the bulls, above which they continue to control the narrative. Below the bears will exert much more influence and push prices significantly lower.
Expected Price Action:
Our model forecasts a trading range of $603 to $607 for Tuesday, with a bearish bias below $605. Long trades near $603 targeting $605 remain actionable, while short trades from $607 and $608 should aim for $605. The absence of major catalysts early in the week favors range-bound trading, with the CPI report likely to define market direction later this week.
Trading Strategy:
Overnight look for a retest of today’s lows. Should the retest hold with price opening above $605, traders are advised to focus on long entries near $605, targeting $607, with stops below $603. Should the market open below $605, traders should seek short positions on retests of $607 and $608 targeting $605 with stops above $609. Tight risk management is essential as volatility may continue to rise. We favor failed breakout/failed breakdown trades and point you to the two textbook entries today at 11:10 am and 1:50 pm ET to understand how these patterns work. After an established local high or low with a break of this level by $.20 or more (up to $1) near major support/resistance, set up two highly profitable trades. Learn this pattern so understand how to trade it for material profits. The VIX rose 11.12% today, which while low, could spike further with upcoming data releases. Use the VIX to gauge shifts in sentiment.
Model’s Projected Range:
The model projects a maximum range of $601 to $608 for Tuesday, reflecting a cautious outlook. The market remains Put dominated and narrow, signaling apprehension among traders which typically leads to sideways consolidation, therefore two way trading is favored for Tuesday. Resistance at $609 aligns with recent price action, while $605, $603, and $600 serve as a critical support within the broader bullish trend. SPY is trading in the middle of the bull trend channel from the September lows with room both higher and lower.
Market State Indicator (MSI) Forecast:
Current Market State Overview:
The MSI is currently in a narrow Bearish Trending Market State with price closing below extended targets and support. Extended targets printed for several hours today, indicating the herd was participating in today’s move lower. Early in the session the MSI moved from a ranging state to a bearish state, rescaling lower several times in rapid succession. This implies a strong trend, especially when accompanied by extended targets. At 10:15 am extended targets starting printing at the pivotal $607 level which gave way and once it did, it opened the door to much lower prices. By 11 am the MSI stopped rescaling but continued to print extended targets off and on for the rest of the session. Into the close these extended targets kept printing, pushing price to close near the day’s lows. MSI resistance is $605.47 and higher at $606.22.
Key Levels and Market Movements:
After a new all-time high on Friday, the market finally took a breather today. We stated for several days the rally was ”parabolic and is therefore unsustainable” and that the “market will find a day or two to sell off to trap shorts into thinking the bull run is over.” Today is perhaps the start of this push by the bulls to find liquidity. A 50 basis point pullback isn’t very material and with price resting at major support at $605, it’s a coin toss for which way the market will move on Tuesday. With the bulls still in control, we continue to cautiously favor longs. But given the tight range, we are open to two-way trading from major levels. Just after the open today as SPY fell and the MSI rescaled lower, we shorted major resistance at $607 looking for $605 as a possible first target. The MSI rescaled lower quickly with extended targets below so we held our short until the MSI stopped rescaling and the market put in a failed breakdown at 11:15 am. We took profits and waited for the extended targets to stop printing to initiate a long trade to MSI resistance at $606. This trade took some time to develop but once extended targets stopped printing, the market did move higher and we reached our target. In the afternoon session, once again our favorite failed breakout pattern at $606.38 and we were short knowing the odds of reaching MSI support at $605.47 were 70%. This trade worked well as the MSI began printing extended targets once again giving us the confidence to hold onto runners for lower levels. We finally closed our trade at the extended target at the end of the day and with three winning trades in the books, called it a day. Normally we don’t continue trading after two successful trades but given the recent rarity of pullbacks, we wanted to participate in today’s move to see how far the market would take price. And once again the MSI kept us trading on the right side of the market, providing us levels to take profits and informing us with actionable intelligence to stay in our trades 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 the herd participating. That could simply be our model finally seeing some volume return to the market. But we respect the MSI so when it tells us not to go long with extended targets below, we don’t go long. Therefore we will seek shorts from overhead resistance until the MSI tells us otherwise. While today added a bit of liquidity to the market, much more is needed to move price. We continue to believe “the bulls will seek more liquidity to fuel higher prices and will push the market lower to trap unsuspecting shorts” before attempting to break $610. It’s probable on Tuesday the market moves more sideways than trends lower, as participants will likely await CPI on Wednesday which could lead to much larger moves and either reestablish the trend or lead to a deeper and more meaningful pullback. Remember December typically sees a rally into month end which remains likely. We stated on Friday “Given there are only three weeks left for December, any pullback to fuel a Santa rally needs to happen soon” and today we got a day of selling in all major markets. We advise continuing to seek failed breakouts for shorts from $609 and failed breakdowns for longs from $605. Below $605 we recommend only initiating longs with a failed breakdown from lower levels such as $603. Below $600 caution is certainly warranted as SPY will likely push to test the bull’s line in the sand at $595. Use the MSI to identify the trend and levels to buy and sell to keep yourself on the right side of the market in real time. This is critical in day trading because when market dynamics change, the MSI will also change to keep you trading with the market and not against it…the key to long term success.
Dealer Positioning Analysis:
Summary of Current Dealer Positioning:
Dealers are selling $609 to $611 and higher strike Calls while buying $605 to $608 Calls indicating Dealers wish to participate in any move higher on Tuesday. If price does move higher, it appears $609 is the ceiling for tomorrow. 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 Tuesday. This stance has shifted from slightly bearish to neutral. Dealers continue to own substantial quantities of downside protection and are prepared for a deeper pullback to set up a stronger Santa rally. While there remains little to indicate this will occur on Tuesday, today’s close near the lows with the return of a bit of volume could lead to lower prices on Tuesday.
Looking Ahead to Friday:
Dealers are selling $609 to $615 and higher strike Calls while also buying $605 to $608 Calls implying the Dealers desire to participate in any rally that may develop this week to as high as $610. Dealers are no longer selling Puts. To the downside, Dealers are buying $604 to $580 and lower strike Puts in a 3:1 ratio to the Calls they are selling/buying, implying a slightly bearish view of the market heading into the end of the week. This has changed from neutral to slightly bearish. Again perhaps Dealers see any pullback as a buying opportunity and the market will continue to buy dips. That said Dealers are no longer selling Puts therefore their conviction for higher prices is weak at best. A neutral to slightly lower market is what Dealers appear to be preparing for this week. Last week we advised long books purchase inexpensive short-dated Puts to protect from a deeper pullback as if it does come, “it should arrive within the next week or so.” Heading this advice taken in large part from Dealer positioning would have served you well today. We advise continuing to watch Dealer positioning for clues of what is likely to develop in the near term.
Recommendation for Traders:
Traders should monitor the key levels of $605 and $609 closely. Long trades remain favorable above $605, targeting $608, while short trades from $608 should aim for $605, with disciplined stops. Market sentiment may remain subdued ahead of Wednesday’s CPI release, so patience and caution are advised. Risk management is crucial, especially in light of potential volatility. At $605 the market could move either way and a two or three day pullback is certainly overdue. But pullbacks have been far and few between so until the market proves to us that control has shifted to the bears, it’s still a bull market and therefore longs are favored over shorts. Traders are reminded to review the premarket analysis posted before 9 AM ET for updated strategies and actionable insights.
Good luck and good trading!
