Market Insights: Thursday, December 19th, 2024

Market Overview

The Dow Jones Industrial Average ended its longest losing streak in 50 years, closing slightly above the flat line on Thursday. This modest gain came as markets attempted to recover from the prior day's sharp sell-off triggered by the Federal Reserve's hawkish stance on interest rates for 2025. While the Dow edged up 0.22%, the S&P 500 and Nasdaq Composite dipped about 0.1%, with the latter underperforming as rising Treasury yields pressured technology stocks. The 10-year Treasury yield climbed seven basis points to 4.57%, its highest level since May, extending its pressure on equities. Economic data released Thursday provided a mixed picture, with third-quarter GDP revised upward to 3.1% from 2.8%, signaling stronger-than-expected growth. Weekly unemployment claims fell to 220,000, a decrease from the prior week's 242,000. Despite the positive data, markets remained cautious amid concerns about tighter monetary conditions and their implications for 2025.

SPY Performance

SPY posted a fractional decline, closing at $586.14, down 0.02% from the previous session. The ETF traded in a range of $586.61 to $593, opening near $591.36. Volume remained elevated at nearly double the average, reflecting lingering uncertainty in the wake of the Fed's comments. SPY struggled to reclaim key resistance at $590, with bears maintaining control as buyers lacked conviction to sustain a meaningful recovery.

Major Indices Performance

The Dow led major indices with a modest 0.22% gain, snapping a 10-day losing streak and providing a glimmer of optimism for investors. The Nasdaq fell 0.12%, weighed down by its reliance on tech stocks, while the S&P 500 declined 0.1%. The Russell 2000 lagged, losing 0.42%, as small-cap stocks continued to struggle amid higher interest rates and risk-averse sentiment. Across sectors, the market displayed mixed performance, with defensive sectors holding relatively steady while growth-oriented areas faced renewed selling pressure.

Notable Stock Movements

The "Magnificent Seven" stocks saw mixed performance as a short squeeze propelled most names higher, except Tesla, Meta, and Microsoft. Despite this, the group remains under pressure as investors assess the impact of higher rates on growth stocks. Tesla faced the steepest decline, highlighting investor concerns over the electric vehicle sector's vulnerability to rate hikes. Meanwhile, Nvidia, Apple, and Amazon rebounded slightly, benefiting from the short-term buying interest in a challenging market environment.

Commodity and Cryptocurrency Updates

Crude oil dropped 2.03%, settling at $69.15, as demand concerns overshadowed geopolitical risks. Gold fell 1.57%, closing at $2,611.55, pressured by a stronger dollar and rising yields. Bitcoin suffered another sharp decline, losing 4.68% to close just above $96,000. The cryptocurrency's drop reflects continued profit-taking and heightened regulatory scrutiny, signaling a broader risk-off sentiment across speculative assets.

Treasury Yield Information

The 10-year Treasury yield rose by 1.56%, ending at 4.568%, maintaining levels that pose a significant challenge for equities. The sustained upward pressure in yields reflects growing caution around inflation and the Fed's signaling of fewer rate cuts in 2025. As yields hover above 4.5%, the equity market faces increasing headwinds, particularly for growth sectors that are sensitive to borrowing costs.

Previous Day’s Forecast Analysis

Wednesday’s forecast anticipated a range of $580 to $600, with a bearish bias below $585 and a potential test of $590 resistance. “Short trades” were “preferred from resistance at $590.” $585 was noted as major support, a break of which would lead to lower prices.

Market Performance vs. Forecast

SPY’s performance aligned closely with expectations, as it failed to reclaim $590 and fell to below $586 intraday, testing key support at $585. The anticipated bearish lean materialized as selling pressure dominated the session. Traders who capitalized on short opportunities near $590 found the forecast highly actionable. SPY’s intraday performance mirrored the previous forecast, as SPY’s inability to sustain gains above $590 validated the bearish bias outlined in the analysis. A textbook failed breakdown at the open led to material profits for those who traded with our model’s bias. The session’s tight range reflected a market still digesting the Fed’s hawkish signals and preparing for upcoming economic data.

Premarket Analysis Summary

Today’s premarket analysis, posted at 7:50 AM, projected resistance at $591.25 and targets above at $595 and $598.50. Support was identified at $589.75, $586.75, and $583.75, with a cautious outlook favoring small risk exposure given the likelihood of muted recovery attempts. The analysis was validated as SPY rejected resistance at $591.25 and struggled to hold above key levels, offering limited opportunities for both long and short trades.

Validation of the Analysis

SPY adhered closely to the premarket analysis, with resistance at $591.25 capping the session’s highs. The lack of sustained recovery above this level underscored the bearish sentiment. The $590 post market level was confirmed in the premarket. Long term readers of this newsletter understand that when there is a confluence of levels in the post and premarket reports, traders are free to trade in larger size and with greater confidence as the probability of success increases. Short trades below $589.75 aligned with these analyses, providing traders three solid short opportunities. Traders were advised to manage risk tightly amid uncertain conditions and this cautious approach proved prudent, as the session’s price action remained constrained within the projected range.

Looking Ahead

Friday brings the PCE inflation report, a critical gauge for the Federal Reserve’s policy considerations. With markets on edge following this week’s events, the report is expected to significantly influence sentiment and trading behavior. PCE is the Fed’s favorite indicator and as such, we expect significant volatility surrounding this report. On Monday’s CB Consumer Confidence data will provide further insights into the economic outlook with little else next week to move the markets. Traders should prepare for heightened volatility tomorrow and adjust strategies accordingly given Friday is the last major trading day of the year as well as quad witching with trillions of dollars changing hands in the last few hours. This will further exaggerate volatility on Friday.

Market Sentiment and Key Levels

SPY’s close at $586.14 reflects persistent bearish sentiment, with resistance at $590, $592, and $594 remaining pivotal for any recovery. Support at $584 is critical, as a break below this level could lead to a gap closure at $576. The bears maintain control below $590, while bulls face an uphill battle to reclaim higher ground amid rising yields and cautious sentiment.

Expected Price Action

Our AI model forecasts a range of $584 to $592 for Friday absent PCE information, with a bearish bias suggesting further downside testing. A break below $584 could target $580 and lower levels, while resistance at $590, $592, and $594 may cap upward movements. Traders should remain flexible, focusing on intraday trends and avoiding overexposure ahead of the PCE report or the end of the day Quad Witching. Quad witching sees four types of derivative instruments expiring simultaneously including stock index futures, stock index options, stock options, and single-stock futures. We advise extreme caution toward the end of the day these instruments expire.

Trading Strategy

Short trades are favored from resistance at $590 and above on any failed breakout targeting $585 and $580. Long opportunities may arise on failed breakdowns near $584, with targets at $590 and $592. Elevated VIX at 24 highlights the need for cautious position sizing and disciplined risk management. Traders should be prepared for sharp reversals and closely monitor economic data releases to adjust strategies in real time. The market is predicted to move in a large range on Friday and traders are advised to trade with the trend and avoid counter trend trades. Favor shorts over longs and trade from the edges where our models believe the probability of success is highest. $585, $590, and $592 should provide the best opportunities for entries.

Model’s Projected Range

The model projects a maximum range of $581.75 to $598.25, in a Put-dominated environment with trending price action. The range is quite large which means get with the trend and stay with it. Do not attempt to pick tops or bottom without a failed breakout or breakdown pattern. Resistance levels at $590 and $592 are expected to challenge bulls, while support at $584 and $580 provides key downside targets. External factors, particularly the PCE report and end of day contracts expiry will drive sentiment and determine the market’s trajectory 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 at MSI support. There are no extended targets printing below and there were none all day today as the market traded mostly sideways. Overnight the market rallied off yesterday’s lows, but the MSI remained in a bearish state only briefly moving into a ranging state before the open. As long time readers of this newsletter know, we do not favor trading within a ranging MSI state. The MSI quickly rescaled back to a bearish state and remained there for most of the day. Two more rescales both higher and lower but still in a bearish MSI and the MSI ended the day where it started with support is $586.22 and resistance is $590.96.
Key Levels and Market Movements:
With SPY opening above MSI resistance at our model’s major $590 level, SPY set up a textbook failed breakout at 9:36 am ET which produced a solid short with the trend to MSI support. Additional short opportunities arose on a retest of MSI resistance at $590 which provided two additional potential entries. We managed to enter the failed breakout at the open and added to our position on the double and triple top retest of MSI resistance. We closed the trade at the end of the day at major support at $586, another of our model’s levels. We stated yesterday “we advise looking for the MSI to rescale to short any rally at MSI resistance.” Today this played out three times out exactly as forecast and as a result, a three for three day, once again supported by the MSI and our model’s price levels. The MSI provided us the confidence to enter our short 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 bear trend without herd participation. Given price is hovering at the crucial $585 pivot between higher and lower prices, Friday price could move either way. We stated yesterday “the bears are now in control as the bulls attempt to hold $585” and 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.” Our view of the market for Friday remains unchanged. $585 is a crucial level for the bulls to defend. 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. Instead and for tomorrow we advise watching to see if the MSI rescaling and to short any rally at MSI resistance, as long as there are no extended targets printing above. We may consider longs from a retest of $585 on failed breakdowns but only if the MSI is no longer printed extended targets below. Be extremely careful with long trades on Friday. And 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 $615 and higher strike Calls while buying $587 to $605 Calls indicating the Dealers’ desire to participate in any move higher on Friday. If price does move higher, it appears $610 is the ceiling. To the downside, Dealers are buying $586 to $570 and lower strike Puts in a 2:3 ratio to the Calls they are selling/buying implying a bullish view of the market for Friday. This stance has changed from slightly bullish to bullish. We continue to distrust the positioning given tomorrow’s quad witching. Dealers look to be mostly hedged with Futures given the options market is not providing many clues to their positioning for tomorrow. It’s highly likely this changes over the holidays to reflect a clearer view of Dealer positioning. While technically the Santa rally starts next week, today’s information does little to clarify which way the Dealers are positioned.    
Looking Ahead to Next Friday:
Dealers are selling $597 to $610 and higher strike Calls while also buying $587 to $597 Calls. To the downside, Dealers are buying $586 to $560 and lower strike Puts in a 2:3 ratio to the Calls they are selling/buying, implying a bullish view of the market for next week. This has changed from bearish to bullish. Dealers appear to be convince the Santa rally will materialize next week and are positioned for higher prices longer into next 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 remains in a precarious state, with key levels and elevated volatility dictating caution. Below $585, the bears maintain complete control, targeting further declines to $580 and $576. Short trades remain preferred below $594, while failed breakdowns near $584 could offer long opportunities. With heightened volatility and large projected ranges, traders should trade with the trend and seek larger targets and use larger stops. But when stop sizes increase, scale down in size to adjust for risk. The market is likely to slow over the holidays next week and offer fewer opportunities. Friday should provide at least one opportunity for material profits. Continue to seek failed breakout and failed breakdown patterns as triggers to entries. Traders should continue to monitor premarket updates for real-time adjustments to the model’s outlook and maintain a flexible approach in navigating these challenging conditions.

Good luck and good trading!