Market Insights: Tuesday, November 12th, 2024

Market Overview:

The post-election surge took a pause on Tuesday, with U.S. stock indices stepping back ahead of Wednesday's highly anticipated Consumer Price Index (CPI) report. The Dow Jones Industrial Average led the decline, dropping nearly 0.8%—or around 350 points—as investors assessed whether recent gains may have pushed valuations too high. The S&P 500 also fell more than 0.2%, while the Nasdaq Composite experienced a modest loss of roughly 0.1% after paring earlier declines. Boeing was one of the significant laggards on the Dow, declining more than 2.5% following lower-than-expected October results due to worker strikes. Despite this downturn, Bitcoin continued its rise, nearing the $90,000 mark, supported by optimism about President-elect Donald Trump’s stance on cryptocurrencies.

Wall Street analysts have started to question the sustainability of the recent rally, noting a rise in equity exposure among investors to an 11-year high. Citi strategists highlighted potential profit-taking after stocks reached record highs, while Bank of America found that elevated bullish bets could temper further gains. Meanwhile, markets are monitoring potential policy shifts under Trump’s cabinet picks, especially with Senator Marco Rubio, a noted China hawk, expected to become Secretary of State. This development has intensified concerns around tariffs, adding pressure on Chinese stocks and raising inflationary worries. As the market awaits tomorrow's CPI report, it remains cautious about inflation's potential impact on Federal Reserve policy.

SPY Performance:

The SPDR S&P 500 ETF Trust (SPY) edged down 0.31%, closing at $596.91 on slightly lower-than-average volume of 34.96 million shares. SPY opened at $598.70, climbed to a high of $599.29, and reached a low of $594.37. The ETF's ongoing struggle to break above the $600 psychological level reflects a pullback from recent optimism. The ETF's established support around $595 could serve as a critical threshold for upcoming sessions. Today’s slight dip represents a temporary consolidation amid broader bullish momentum, with investors eyeing $600 as a key pivot that could drive further gains if broken convincingly.

Major Indices Performance:

On Tuesday, the Dow Jones Industrial Average fell 0.86%, leading the market's decline. Small-cap stocks, reflected by the Russell 2000, dropped even more sharply by 1.75%, suggesting diminished risk appetite. The S&P 500 slipped by 0.2%, with traders cooling off after last week’s strong gains. The Nasdaq Composite saw a modest 0.08% dip, as investor caution ahead of CPI data restrained broader tech sector gains. This mixed performance illustrates market hesitance following robust post-election gains, as traders contemplate potential consolidation amid the current economic backdrop.

Notable Stock Movements:

Tesla, which had led recent gains in tech, reversed sharply, sliding more than 6% on Tuesday. This decline comes as part of a broader pullback in “Trump trade” stocks, including a slowdown in gains for crypto-focused companies like Coinbase. While the "Magnificent Seven" stocks mostly posted gains, Tesla's decline highlights renewed caution as investors weigh the sustainability of recent highs. Bitcoin-related stocks showed some volatility, with profit-taking setting in after last week’s exuberant gains. This mixed trend in tech and crypto stocks reflects a temporary cooling period, with markets likely to stay focused on regulatory and policy shifts under the new administration.

Commodity and Cryptocurrency Updates:

Crude oil prices remained unchanged, reflecting balanced global supply-demand factors, while gold prices declined by 0.46% as risk appetite leaned away from traditional safe-haven assets. Bitcoin continued its rally, gaining 1.08% to close above $88,800 amid optimism around pro-crypto regulatory prospects. Bitcoin’s ongoing rise underlines its divergence from traditional assets, suggesting strong sentiment driven by the anticipation of crypto-friendly policies. Other cryptocurrencies, like Ethereum and Dogecoin, have seen similar gains, but investors remain watchful of potential volatility around new policy announcements.

Treasury Yield Information:

The 10-year Treasury yield increased by 1.84% to 4.426%, moving further above the 4.3% mark, a threshold that can challenge equity valuations. This upward shift in yields reflects continued market caution as inflation concerns persist, especially ahead of tomorrow’s CPI report. Investors remain sensitive to yield fluctuations, as persistent rises in Treasury yields could weigh on equities, particularly in high-growth sectors vulnerable to rising borrowing costs.

Previous Day’s Forecast Analysis:

Monday’s forecast anticipated consolidation around the $595–$600 range, with traders urged to take profit at the $600 resistance level. SPY’s slight dip aligned with this expectation, validating the cautious approach suggested for long trades at support levels while eyeing profit-taking near resistance. The analysis also emphasized watching for retracement, particularly in light of profit-taking that could occur after strong recent gains. SPY’s behavior yesterday upheld the forecast’s guidance, demonstrating controlled price action within the projected range.

Market Performance vs. Forecast:

Tuesday’s market activity largely matched the forecast's cautious outlook, with SPY moving within the anticipated range near $595–$600. SPY opened near the $598 mark and tested but did not break through the $600 resistance level, confirming the forecast’s expectation of resistance at this threshold. The slight pullback aligned with the forecasted bias, as traders took profit near resistance following the post-election rally. Profit-taking around $600 underscored the predicted consolidation, with SPY’s low of $594.37 validating the range outlined in Monday’s forecast. The forecast had highlighted the potential for tactical shorts at elevated levels, which played out as SPY remained under $600. The orderly movement within the projected levels underscores the accuracy of the forecast, affirming the guidance provided to traders on Monday.

The session reflected the anticipated trading pattern, where strategic long entries near support at $595 and tactical exits near resistance allowed traders to capitalize on controlled price action. This reinforced the effectiveness of the forecast, particularly as market sentiment held within key support and resistance levels without breaching $600, maintaining alignment with the cautious approach advised in the analysis.

Premarket Analysis Summary:

Today’s premarket analysis noted an SPY spot price of $598.57, with upper targets around $600 and a max of $602.60, while downside targets centered on $598, $597, and lower levels near $593. The report advised long trades above the bias level of $598, with a cautionary note for rapid downside potential if SPY were to fall below $597. Given the upward momentum, longs were encouraged, but only at well-established support levels, with downside targets in focus if selling pressure escalated.

Validation of the Analysis:

SPY traded closely in line with the premarket expectations, respecting key levels around $598. Although it didn’t reach the max target of $602, SPY maintained strength above the bias level for most of the session, allowing traders to capitalize on controlled upward movements. The price action’s adherence to the projected trading levels reinforces the analysis’s reliability, as SPY tested but did not breach the lower support ranges, underscoring the forecast's alignment with intraday performance.

Looking Ahead:

Tomorrow's CPI data will be critical in shaping market direction, with the potential for significant volatility if inflation readings differ from expectations. Wednesday’s report could influence risk sentiment and the Federal Reserve's outlook, with market participants likely to react swiftly to any surprises. Traders should remain cautious, given the market’s sensitivity to inflation data, and monitor levels closely for potential shifts.

Market Sentiment and Key Levels:

The $600 level remains a pivotal point for SPY, serving as a psychological resistance. Key support rests at $595, which traders will watch closely as the market braces for tomorrow’s CPI report. $593 is also presenting as major support. A break of $595 will likely run into major support at $593 while a break above $600 may pave the way for renewed highs. A failure to break $600 will result in further consolidation. The market sentiment continues to favor bulls, yet traders remain wary of profit-taking at elevated levels.

Expected Price Action:

SPY is projected to range on Wednesday between $593 and $602, with a bullish inclination unless strong resistance at $600 halts upward momentum. In case of a pullback, a dip toward $595 would be expected, with further downside likely limited to $593 unless substantial selling materializes. Traders should stay alert to entry opportunities that align with prevailing sentiment, especially given the potential for CPI-driven volatility.

Trading Strategy:

Traders should consider long entries around the $595 support level, aiming for exits near resistance at $600. Current strategies favor failed breakout and failed breakdown trades, with today at 1:00 PM providing a textbook example of a failed breakdown trade. Although 9:34 AM isn't a textbook failed breakout, it’s a solid example, especially since it occurred at a significant overhead resistance level.

Looking ahead to Wednesday, it's crucial to "trade what you see" following the CPI release premarket. If SPY drops below $595, reduce position sizes and aim for prompt profit-taking near $593. Otherwise, short entries should be focused on strong resistance points around $600 and above, with disciplined stop-losses in place. The low VIX suggests consolidation, but caution is still warranted. Bulls maintain control of the narrative therefore we continue to favor longs. A 2% sell-off could happen soon and without notice. Be prepared and forewarned. This would actually be normal and healthy for the markets to digest the last week’s massive gains.

Model’s Projected Range:

The model projects SPY to fluctuate between $590.25 and $601.50, favoring a slightly bearish outlook in a Put dominated market. Major support lies at $593 and $595, with $600 as a key resistance point. The current bull channel in place since the September lows suggests room for upward movement. The trend is steep and uncorrected and at some point price will breach the lower trend channel which will likely lead to a longer and deeper decline. But November is seasonally bullish so perhaps this develops later in December or early January. Close monitoring of CPI data tomorrow is necessary to navigate potential shifts in sentiment.

Market State Indicator (MSI) Forecast:

Current Market State Overview:
The MSI is currently in a Ranging Market State with price closing in the lower end of the range. The range is quite large. This indicates consolidation likely until an external catalyst moves price. We suspect that catalyst will be CPI. The MSI opened in a Ranging Market State and rescaled lower several times after the open to a Bearish Trending Market State while printing extended targets below. A reversal from MSI support at the day’s lows and the MSI stopped printing extended targets and rescaled to the current state which does not favor directional trading either way. MSI support is $596.2 and resistance is $599.31.
Key Levels and Market Movements:
The MSI entering the day in a ranging state at major overhead resistance was a warning that the long trend from the past week was likely to finally find sellers. A solid (not perfect) failed breakout at 9:38 am set up a short which took price down to today’s lows at $594.37…another major level for our model. As the MSI rescaled, extended targets printing kept our users in the short to the day’s lows. At 1 pm a textbook failed breakdown trapped shorts and the squeeze took hold with price reversing hard off MSI support back to $598.50. Two solid trades is all anyone needs to make a fantastic living. Professional traders do not take more than one or two trades a day. Instead they stalk levels and wait for price to set up and for the market to show its hand. One of the best ways to see acceptance or rejection of a level is the failed breakout/failed breakdown trade. We discuss this often and provide examples almost every day. When you combine our model’s levels with this pattern and the MSI, you are able to fine tune entries and exits to take less risk while securing maximum gain. We recommend taking first profits at MSI levels given these are proven to be successful 70% of the time. We like to take 75% of our trade off at the MSI and scale out of 15% at the next MSI level and trail to major support and resistance with stops at breakeven after the second target. Doing this today and pretty much every day allows you to turn a $1 profit to a $5 profit. Once we are in the green, we never go red on the day. This is something every trader should also employ. Trade management and scaling logic are important to being a successful trader. Understanding these concepts will make an immediate impact on your trading results and incorporating the MSI in the process adds a bias, trend, and target dimension most are simply unable to determine on their own. We highly recommend you incorporate this tool into your arsenal to achieve the best results.    
Trading Strategy Based on MSI:
The MSI's current state suggests a sideways market until a catalyst moves price one way or the other. The range is large which further implies uncertainty. A big down followed by a big up move is the definition of a trading range and therefore uncertainty. For Wednesday look for breaks of our major levels and use the MSI to determine the direction and scale of the move. It’s likely the market will provide some trending opportunities tomorrow so get with the MSI trend and ride it to the other side of the MSI. Again our model is forecasting a $10 or larger selloff will come at any time. $593 is a level the bulls want to defend and should we get a pullback that stalls in this area, we favor longs back toward $600.

Dealer Positioning Analysis:

Summary of Current Dealer Positioning:
Dealers are selling $600 to $604 and higher strike Calls while buying $599 Calls implying a desire to participate in any upside tomorrow to $603 with a ceiling probable at $604. To the downside, Dealers are buying $598 to $590 and lower strike Puts in a 6:1 ratio to the Calls they are selling/buying, implying a bearish view of the market for Wednesday. Dealers slightly increased their bearish posture today heading into CPI. Certainly Dealers are ready for a move either way.   
Looking Ahead to Friday:
Dealer are selling $599 to $607 and higher strike Calls while also selling $594 Puts in size, implying the Dealers believe the market will continue to move higher this week and stay above $594. Dealers rarely sell Puts unless they believe prices will move up. To the downside, Dealers are buying $598 to $572 and lower strike Puts in a 6:1 ratio to the Calls/Puts they are selling implying a bearish view of the markets. This has changed to more bearish since yesterday. It’s very possible Dealers also see the 2% sell off setting up and are positioning for this outcome should it develop this week. We continue to advise watching Dealer positioning closely over the next few days as Dealers will provide clues as to what will happen in the near term.

Recommendation for Traders:

With tomorrow’s CPI release, traders should balance long-term optimism with short-term caution. Long trades are recommended near support at $595, while short positions are best taken around strong resistance levels at $600 or higher. Tight stop-losses are essential to manage risk, especially in light of potential market volatility around the CPI announcement. For the latest insights, be sure to review the premarket analysis before the opening bell at 9 AM ET.

Good luck and good trading!