Market Insights: Friday, December 20th, 2024

Market Overview

U.S. markets closed on a high note Friday, rebounding from earlier losses as fresh inflation data painted a somewhat brighter picture of economic conditions. The Dow Jones Industrial Average rose 1.26%, the S&P 500 gained 1.15%, and the Nasdaq Composite climbed 0.93%, all driven by a deceleration in November's core Personal Consumption Expenditures (PCE) index. The data offered a glimmer of hope, showing slower-than-expected price increases and raising optimism about the Federal Reserve's efforts to control inflation. However, the major indices ended the week in the red, with the Dow and S&P 500 down roughly 2% and the Nasdaq off by 1.8%. A mix of investor caution over Fed policy, a looming government shutdown, and renewed tariff threats on Europe from former President Trump added volatility to the session. Meanwhile, a short squeeze in global chip stocks and a sharp decline in Novo Nordisk stock after disappointing drug trial results underscored the fragility of the market's recovery.

SPY Performance

SPY gained 1.15%, closing at $590.83, after trading in a range between $580.91 and $595.75. The ETF's recovery followed a mid-session rally, with trading volume surging to over double the average, signaling heightened activity during a volatile week of quad witching. Despite the positive move, SPY remains below key resistance levels, reflecting persistent market caution.

Major Indices Performance

The Dow led the charge with a 1.26% gain, boosted by defensive sector strength and optimism following the PCE data. The S&P 500 rose 1.15%, driven by a balanced recovery across most sectors, while the Nasdaq lagged slightly, advancing 0.93%. The Russell 2000 added 0.98%, recovering some of the ground lost earlier in the week. Market sentiment was buoyed by easing inflation concerns, although uncertainty around Fed policies and broader economic risks kept gains in check.

Notable Stock Movements

The Magnificent Seven stocks staged another mixed performance, with most rebounding on a continued short squeeze. Nvidia, Amazon, and Apple posted notable gains, showcasing resilience in growth-oriented sectors. However, Tesla, Meta, and Microsoft failed to join the rally, highlighting ongoing challenges for certain tech giants. Tesla's underperformance reflected broader concerns about its growth trajectory amid rising borrowing costs.

Commodity and Cryptocurrency Updates

Crude oil dipped 1.53% to close at $69.50, weighed down by persistent demand concerns and an easing geopolitical premium. Gold climbed 1.34%, finishing at $2,643, as investors sought safe-haven assets amid market volatility. Bitcoin edged up 0.18%, closing just above $96,000, stabilizing after recent sharp declines but still vulnerable to regulatory scrutiny and risk-off sentiment. We continue to advise caution buying Bitcoin at these levels.

Treasury Yield Information

The 10-year Treasury yield inched up by 0.41%, settling at 4.527%. While below the week's peak, yields remain at levels that challenge equity valuations, particularly for growth sectors. The yield's elevated position reflects ongoing inflationary pressures and cautious Fed signals, which continue to cast a shadow over the market's longer-term outlook.

Previous Day’s Forecast Analysis

Thursday’s forecast anticipated a trading range of $584 to $592, with a bearish bias and a preference for short trades below $590. Resistance levels at $590, $592, and $594 were highlighted as significant hurdles for any recovery. The analysis also projected downside tests toward $580 should key support at $584 fail to hold. Traders were advised to “remain flexible, focusing on intraday trends” and to avoid counter trend trades given the likelihood of trending price action after PCE.

Market Performance vs. Forecast

SPY's performance adhered to the prior forecast, trading just outside the projected range, and testing key resistance at $594 and key support at $580. The ETF’s failure to sustain momentum above $594 validated the bearish outlook, while its eventual recovery demonstrated resilience at pivotal support zones. Longs from $580 on a favorable PCE to resistance at $590 and above proved the model’s accuracy while short trades around $594 on failed breakout patterns offered actionable opportunities for traders, consistent with the analysis provided. Guidance aligned closely with the day’s price action, reinforcing the utility of the forecast in navigating a volatile session.

Premarket Analysis Summary

Friday's premarket analysis, released at 7:50 AM, identified a bearish bias below $580, with expectations of limited recovery attempts and downside targets as low as $565. Resistance levels at $580 and $589.60 should cap early gains, while initial support at $575 was projected to hold firm.

Validation of the Analysis

The premarket analysis was provided prior to PCE and as such the model did not have the benefit of the dovish PCE data. We state often, when new information is introduced to the market, adjust all expectations and trade what you see. Today was no exception as the analysis prior to PCE was bearish as was evidenced by the overnight selloff to $577.60. The $575 level was projected to hold firm which it did and by the open, the market was in full short squeeze mode and ripped straight up. There were long opportunities after the open at $580, a level identified in the post market report, which proved highly accurate. While $589.60 provided resistance mid-morning and represented a good level to bank profits from longs, SPY moved beyond the model’s targets to major resistance at $595. When price moves beyond projected support and or resistance, these levels flip and become resistance or support. Economic or other new information introduced intraday requires you the trader, to adapt to the market and use the projected levels appropriately. Had you done this today, the market offered multiple trading opportunities, validating the premarket’s cautious bias, reinforcing the importance of adhering to the analysis in navigating volatile conditions.

Looking Ahead

With the core PCE inflation report behind us, market focus shifts to next week’s CB Consumer Confidence data, a key indicator of economic sentiment. The data, coupled with reduced trading activity over the holidays, is likely to influence market direction in the short term. Traders should prepare for potential surprises in consumer-related sectors and remain alert to shifts in sentiment. Volume is expected to disappear next week and while the expected range is still projected to be quite large, we expect this to taper off while the market consolidates with a slow drift higher into the new year.

Market Sentiment and Key Levels

SPY’s close at $590.83 leaves resistance at $595 and $600 as immediate hurdles for the bulls, while support at $586 and $580 provides critical downside protection. The bears are battling it out with the bulls as long as price remains above $585. Below $585 the bears remain in control while above $585 the bulls will continue to push price higher. Certainly above $595 and the bears will step away until the new year. Any break below $586 will likely leading to further declines. Elevated VIX levels continue to underscore the need for caution, particularly as traders adjust to shifting sentiment post-quad witching.

Expected Price Action

Our AI model projects a maximum range of $586 to $600 for Monday in a Call dominated market with resistance at $595 likely capping gains absent a major catalyst. Today was classic short squeeze price action on dovish PCE which had the bears scrambling for cover. While next week will likely see higher prices, our model is not projecting new all-time highs or that this bearish bias no longer remains prevalent. Instead it suggests further tests of support near $586 and $580 is possible but perhaps not likely until after the new year. Our model updates daily so this view can change, which is why we post these twice daily. We recommend avoiding a fixed market position and instead review these reports daily for the day’s bias. We have extensive tools and massive amounts of data which are used to make these determinations and our accuracy exceeds 70%. For Monday sustained momentum above $595 could challenge $600, but broader market caution suggests a rangebound session with heightened volatility.

Trading Strategy

Short trades remain favored below $595 on a failed breakout, targeting $586 and $580 on continued weakness. Failed breakdowns near $586 may offer long opportunities, with tight stop-loss management advised. Elevated VIX levels necessitate smaller position sizes to manage risk effectively. Traders should remain flexible, monitoring market reactions to key levels while avoiding overexposure ahead of the holidays. The week is destined to slow to a grind. With Monday being the last full day of trading before the holiday the market should work higher with a bullish bias. The market remains in a relief rally and a short squeeze that will likely come to an end near SPY $600. There is little evidence to suggest the sell off is over and the bottom is in. We continue to advise caution and wait for price discovery next week to determine how January will unfold.

Model’s Projected Range

The model anticipates a range of $586 to $600, with SPY trading within a Call-dominated environment that suggests continued upward momentum. Resistance at $595 and $600 will challenge bulls, while support at $586 and $580 remains pivotal. Broader market sentiment, influenced by inflation data and perhaps macroeconomic shenanigans out of Washington will dictate price action within this range. SPY tested the lower bull channel in place from the September lows and failed to move back into the trend channel. As a result next week this channel will be redrawn to a bear channel which could lead the way to lower prices. While the market got close to a gap fill today, the gap in our view remains open and will likely close within the next two weeks.

Market State Indicator (MSI) Forecast:

Current Market State Overview:
The MSI is currently in a wide Ranging Market State with price closing mid-range. There were no extended targets printing above or below price today as SPY spent most of the day in this ranging state. The size of the range is quite large indicating confusion and uncertainty about the market’s next move. Market uncertainty creates trading ranges. Overnight the market fell with the MSI rescaling lower several times and printing extended targets below. But once PCE was released extended targets stopped printing and the MSI recalled to a ranging state where it remained for the day. MSI ended the day where it started with support is $585.84 and resistance is $599.21.
Key Levels and Market Movements:
With SPY opening above our model’s major level of $580 and without any extended targets printing below, we went long on the retest of $580.90 after the open to MSI resistance at $585.84. The market continued higher and we held our trailer to see how much was left in today’s textbook short squeeze. After a violent and large sell-off, the market almost always puts in a relief bounce or short squeeze of equal aggression. This does not infer a bottom. Probabilities favor a bounce to be just that…an attempt by the bulls to shake out weak shorts but pushing price up. Once they are out the bulls exit their longs at a major level which turns them into sellers and the market resumes its trend lower. While this is unlikely to transpire during the seasonally strong Santa rally, there is still a higher probability that the selling continues once Santa is back at the north pole. Given we were open to both long and short trades today and knew the day would trend, we exited our long on a failed breakout at 12:26 pm ET and reversed short at our major resistance level of $595 for a second winning trade, holding the short into the close. The set up was textbook and we ended the week once again without any losing trades. We stated yesterday on “a hawkish PCE should $585 fail price would free fall to close the $576 gap. Above $585 to as high as $594, we continue to favor shorts over longs given the scale of the current pullback. Above $594 the bulls will resume control and push prices higher. But the odds of this happening on Friday appear to be quite low”. And sure enough $594 was the spot to find shorts today while $580 set up the perfect long after PCE. Once again, the MSI gave us the confidence to enter our trades and kept us trading on the right side of the market. MSI levels provide levels to enter trades and levels to take profits. This information is 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 ranging market with both sides having an equal opportunity to move the market in their direction. Given price is sitting just below major resistance at $595, Monday price may drift higher but only slightly. We continue to favor shorts from $595 and higher as long as the MSI is not printing a strong bull trend or extended targets. We will also look for longs from a retest of $585 but only in a failed breakdown to trap shorts. Above $595 the bulls will assume more control and push prices higher but it’s unlikely they breach $600. We advise watching to see if the MSI rescales to a trending state and recommend avoiding trading within an MSI Ranging State unless it’s from a major level. The probabilities of moving from one side to the other in an MSI Ranging State are less than 50% so caution is advised until this state changes one way or the other. 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 $597 to $603 strike Calls while buying $594 to $596 strike Calls. Dealers are also buying ITM $592 to $593 strike Puts which indicates a fear that the selloff will resume on Monday. This is unusual positioning. Dealers are also buying $604 to $608 strike Calls to participate in any major move higher should $603 break. This multi layered positioning is complex and reflects the “Vanna Squeeze” that transpired today which drove prices higher. Should price move higher, it’s likely to stall at $603, while a break of $603 could see price rally to $610. We see this as a low probability for Monday. But Dealers are not taking may changes given they own ITM Puts as well. To the downside, Dealers are also buying $590 to $582 and lower strike Puts in a 1:1 ratio to the Calls/Puts they are selling/buying implying a bullish view of the market for Monday. This stance is unchanged from today. While we didn’t trust the Dealer positioning for today, certainly Dealers were right once again. Dealers were positioned long and the market rewarded them handsomely.     
Looking Ahead to Next Friday:
Dealers are selling $592 to $610 and higher strike Calls while also buying $598 to $602 Calls. To the downside, Dealers are buying $591 to $577 and lower strike Puts in a 3:2 ratio to the Calls they are selling/buying, implying neutral to slightly bullish view of the market for next week. This has changed from bullish to slightly bullish. Dealers appear convinced the Santa rally will materialize next week and are positioned for higher prices into next Friday. This positioning could change quickly on Monday due to today’s rally so we advise continuing to watch Dealer positioning for clues of what is likely to develop in the near term. Dealers change their positioning on a dime so stay tuned for daily updates.

Recommendation for Traders

Traders should remain cautious as the market continues to digest mixed economic signals and the fallout from recent quad witching. Short trades below $595 are advised, with targets at $585 and $580. Failed breakdowns near $585 could provide limited long opportunities, but these should be approached conservatively. VIX remains elevated, emphasizing the importance of managing risk through reduced position sizes and disciplined stop-loss strategies. Monitoring premarket analysis and real-time updates will be critical in adapting to evolving market conditions. Today’s rally may only be a pause and while this next week is likely to have higher prices, they may not last long given current market conditions.

Good luck and good trading!