Market Insights: Wednesday, January 22nd, 2025

Trump's ambitious $500 billion AI investment initiative, which includes Oracle, OpenAI, and SoftBank, is reigniting investor confidence in U.S. tech dominance. Oracle shares soared 7%, and SoftBank gained 11% as the "Stargate" venture drew attention. Arm Holdings saw a meteoric rise of 16%, reflecting optimism in AI infrastructure development. However, looming tariff concerns tempered broader sentiment, with the administration considering new duties on China and the EU. Despite these tensions, corporate earnings painted a resilient picture, with Johnson & Johnson and Procter & Gamble reporting strong results.

SPY Performance

SPY advanced 0.56% on Wednesday, closing at $606.44 after reaching an intraday high of $607.82. Opening at $605.93, the ETF displayed steady upward momentum, although trading volume remained below average, reflecting caution amid geopolitical uncertainty. With SPY sitting just below critical resistance at $608, bullish momentum appears intact, though market participants remain on edge for potential policy developments.

Major Indices Performance

The Nasdaq led the charge with a 1.22% gain, driven by strong performances in Netflix, Nvidia, and Microsoft. The S&P 500 followed with a 0.6% rise, nearing record levels. The Dow posted a modest 0.21% increase, sustaining Tuesday's rally. Meanwhile, the Russell 2000 bucked the trend, dropping 0.65%, signaling weakness in small-cap stocks amid rising bond yields. Tech and consumer discretionary sectors outperformed, while defensive plays like utilities lagged.

Notable Stock Movements

Netflix emerged as the standout performer among the "Magnificent Seven," skyrocketing over 9% on robust earnings. Nvidia and Microsoft also surged, each climbing over 4%, reflecting optimism in the tech sector. Other members of the group posted gains except Tesla, which fell more than 2%, weighed down by concerns over vehicle demand. These mixed performances underscore the market's selective appetite for risk.

Commodity and Cryptocurrency Updates

Crude oil slipped 0.59% to $75.38 per barrel, with demand concerns overshadowing the broader rally in equities. Gold edged up 0.22%, closing at $2,765, as a hedge against potential market volatility. Bitcoin retreated 2.64%, ending just below $104,000, as speculative sentiment cooled following a recent rally. We continue to be buyers of Bitcoin on pullbacks. Our model suggests $83000 and $77000 represent optimal entry points.

Treasury Yield Information

The 10-year Treasury yield climbed to 4.615%, a 0.90% increase, heightening concerns for equities. Yields above 4.5% continue to challenge stock valuations, with a potential breach of 5% signaling broader market risks. Persistent yield pressure underscores the importance of monitoring fixed-income trends in the days ahead.

Previous Day’s Forecast Analysis

Tuesday’s forecast anticipated a bullish SPY trajectory with a trading range of $599 to $606, highlighting resistance at $604 and $606. Long trades were suggested above $599, targeting $604 and higher. Support at $599 held firm, aligning with expectations, while the ETF's close near $606 underscored the forecast’s precision.

Market Performance vs. Forecast

SPY performed in line with projections, trading between $605.36 and $607.82. The forecasted resistance at $606 played a pivotal role, guiding traders to capitalize on bullish momentum. Long positions initiated above $599 or at dips near $603 yielded favorable results, reinforcing the accuracy of the analysis.

Premarket Analysis Summary

Today’s premarket analysis, issued at 7:55 AM, anticipated a bullish bias with SPY targets at $610 and $615, provided it held above $603.75. The session unfolded as predicted, with SPY testing $607. Resistance at $606.25 was critical, signaling consolidation before further gains. Support at $603.75 ensured stability during minor pullbacks, validating the day’s outlook.

Validation of the Analysis

The market adhered closely to the premarket forecast, with SPY holding above the bias level of $603.75 and advancing toward $607. Traders capitalized on upward momentum, particularly around $606, as anticipated resistance influenced trading behavior. The accurate identification of key levels enhanced trading opportunities throughout the session.

Looking Ahead

With unemployment claims scheduled for Thursday and PMI data on Friday, volatility may increase as traders adjust expectations for Federal Reserve policy. The absence of significant economic data today suggests a more subdued session, but tariff announcements could spark sudden market reactions. The market may settle and consolidate after Friday while it awaits next week’s FOMC on Wednesday.

Market Sentiment and Key Levels

SPY closed at $606.44, reinforcing bullish sentiment. Resistance at $608, $609, and $610 presents immediate hurdles, while support at $603 and $600 offers stability. A breakout above $608 could propel SPY toward $610 and new highs, whereas a drop below $603 might signal consolidation or a potential reversal to $600.

Expected Price Action

Our model forecasts SPY to trade within $603 to $608, favoring a bullish bias. Resistance at $608 will be tested, with momentum likely driving SPY toward $610. But overcoming $608 initially will not be an easy feat therefore we expect the first and perhaps second test of this level to fail. Support at $603 must also hold for the bulls to push to new highs. A failure at this level could see a retracement to $600 and perhaps lower. Probabilities favor a test of the upper channel of the bear trend channel which currently rests at $600. This highlights the need for caution in more volatile conditions.

Trading Strategy

For Thursday, consider long trades above $600 targeting $606 and $608, with tight stop-losses below $600. Short trades at $608 or higher could yield profits if resistance holds, but stop-losses should protect against extended rallies. Elevated VIX suggests careful position sizing to navigate increased volatility effectively. Given we expect a day of consolidation, plan to use failed breakdown and failed breakouts as trigger to entry. These patterns have a high probability of success in sideways markets.

Model’s Projected Range

The model projects a maximum trading range for Thursday of $603.25 to $611.75, with Call dominance supporting a bullish outlook. Resistance at $608, $609, and $610 will challenge further gains, while support at $603 and $600 anchors the market. Below $600 there is little to keep price from falling to $590 and lower. Above $608 the door is open to $610 and new all-time highs. Price is trading below the bull trend channel from the September lows and is currently breaking out above the bear trend channel from December 18th. This channel has a high of $600.25 and a low of $574.25 for Thursday. This channel will get redrawn in a few days if price continues its ascent.

Market State Indicator (MSI) Forecast

Current Market State Overview:
The MSI is currently in a Bullish Trending Market State, with price closing above support. The MSI range is wide and extended targets printed for much of the session. Extended targets stopped printing just after 3 pm ET with price pulling back to close just above MSI support. The bull trend is strong, which the MSI has been indicating for several days. But the ETF is now showing some signs of weakness with the MSI ceasing to print extended targets above. The MSI has not rescaled higher since the premarket and with SPY falling from the day’s highs toward MSI support, price is likely to retrace further tomorrow and or Friday. The MSI rescaled higher today in the premarket and printed extended targets for much of the overnight and day session. Readers know when the MSI rescales quickly with extended targets, the trend is strong with the herd participating, so jump onboard and ride the trend to profits. $605.61 is now MSI support and lower at $601.92.  
Key Levels and Market Movements:
SPY continued to move higher overnight, breaking above major resistance at $604, reaching $605.60 in the premarket. A small pullback at the open to MSI support at $605.61 and with extended targets, we were long on a double bottom at MSI support. We didn’t love this trade given our model suggested major resistance would be found at $606 and $607. So we decided to take first profits at $607 and moved our stop to breakeven out of concern that the market was peaking. We held onto runners and sure enough, the herd returned as was evident from extended targets above price, and we saw SPY reach the day’s highs at $607.82. Price struggled to move beyond this level and given $607 was another major resistance level for our model, we took a second target and left only a runner. But as we watched extended targets print off and on, we decided to close our trade contemplating a mean reversion short. We waited for a failed breakout to present but this did not happen. Given the strength of the trend, we did not take a short at the day’s highs. We stated yesterday “we seek patterns at major levels to initiate entries” so following our own advice we did not short. Certainly the MSI told us we could enter a short trade given extended targets stopped printing. But again, following our own advice, we decided to pass. The short did work out well for those who took it as SPY retraced toward MSI support at $605.61. Once again not the easiest day to trade but knowing who controls the market with the MSI as your knowledge base, it was clear what we should and should not do to maximize profits and probabilities of success. Those who fight the trend and do not have access to these tools had a very bad day today. We know of at least a handful of folks who lost their entire bankroll today trying to short every level. The MSI and our model kept us from attempting to fade this rally all day. The MSI provides actionable information to assist traders in staying on the right side of the market and with the prevailing trend so we highly recommend integrating the MSI into your trading arsenal to maximize your long-term success.
Trading Strategy Based on MSI:
We stated yesterday “we must respect the bulls and favor longs” and for “Wednesday our model sees more follow through to today’s rally, pushing above today’s highs”. We also stated above “ $604, $606, and $607 will present challenges for the bulls. The bears did little today to keep price contained below $600 so perhaps they are holding out for $607”. And sure enough $607 was the level where the bears decided enough was enough. The bears are now in the mix once again, trying to push price lower. But after seven straight up days and killer earnings out of Netflix and others, any dip is likely to get bought. Our model suggests Thursday will be a bit of a slog for the bulls with the bears targeting $603 as a minimum retracement. We do believe should price reach $600, the bulls will come back in full force and recommend buying dips at these levels. The bulls maintain control of the market so traders should focus on finding spots to get long to ride the trend…the same advice we gave yesterday. But after so many green days in a row, the market needs a red day to consolidate and gather energy to push to new all-time highs. Therefore we favor longs from $603 and $600, particularly on failed breakdowns with the goal of moving toward $608. On any retest of today’s highs we also favor mean reversion shorts but prefer to only enter on failed breakouts. While we didn’t get any consolidation today, the advice from yesterday holds true for Thursday: “The market needs time to consolidate and digest gains before deciding where to go next. But at least for the foreseeable future, the bulls control the narrative and will likely close out January strong. $607 may become the battleground for the bulls and bears so we advise two-way trading from the edges, trading level to level, while watching the MSI to identify the trend and key levels to trade to ensure alignment with prevailing market conditions. If you do not have this tool, we highly suggest contacting your representative to secure a copy.”

Dealer Positioning Analysis

Summary of Current Dealer Positioning:
Dealers are selling $607 to $610 and higher strike Calls while also selling $605 and $606 Puts implying the Dealers believe the market will continue to rally on Thursday. They were spot on with their assessment yesterday when we stated “Dealers believe the market has nowhere to go but up on Wednesday.” Dealers do not sell Puts unless they are supremely confident of higher prices. While we aren’t so sure about tomorrow’s positioning, Dealers seem ready for new all-time highs as soon as tomorrow. To the downside Dealers are buying $604 to $580 and lower strike Puts in a 3:1 ratio to the Calls they are selling, implying a neutral outlook for Thursday. This has changed from bullish to neutral reflecting Dealers’ belief that while the relief rally may continue on Thursday, perhaps it’s getting long in the tooth and needs to retrace a bit by Friday. 
Looking Ahead to Friday:
Dealers are selling $607 to $615 and higher strike Calls while also selling $604 and $605 Puts implying Dealers believe there is a floor in the market this week at $605. The Dealers wish to participate in any market rally to as high as $615 by the end of the week and are positioned for higher prices. $610 appears to be the ceiling for the week. To the downside, Dealers are buying $603 to $580 and lower strike Puts in a 6:1 ratio to the Calls they are selling, reflecting a strongly bearish view for the week. This bearish posture remains largely unchanged from yesterday. It’s very possible due to the low cost of Put protection Dealers are loading up on OTM Puts just in case something unforeseen causes a sell off. Given Dealers are selling Puts for tomorrow and Friday, they are bullish. Yet the quantities of Puts they are buying contradicts this positioning. As we said yesterday this bearish view “is in conflict with the view for Wednesday” and we think maybe this ratio is not as relevant as the fact Dealers are selling Puts. Long time readers of this newsletter know Dealers do not sell Puts unless they are convinced of higher prices. Our advice is to take heed of this bearish positioning but also balance it against the Puts they are selling. When things like this are in conflict, it’s likely the market moves sideways and not one direction or the other. While a retracement is likely to come Thursday or Friday, Dealers still seem to believe the market will move higher so follow the Dealers lead, buy some inexpensive OTM Put protection until there is a clearer picture of what February is likely to deliver. Dealer positioning does change daily so it’s essential to monitor these updates each day for shifts in sentiment.

Recommendation for Traders

Focus on long trades above $600 and $603 targeting $607 and $607 with disciplined risk management around volatile levels. Shorts from $608 on failed breakouts may also provide an opportunity for profit. VIX at 15 suggests confidence the market will move higher therefore our general lean is to favor the bulls until the bears do more damage and reclaim control from the bulls. That does not happen until price closes below $600 and reenters the bear trend channel from December. Until then its buy the dips and favor longs. Be sure to review our premarket analysis posted before 9 am daily for updated levels and insights.

Good luck and good trading!