The bulls were getting desperate on Wednesday afternoon as SPY and QQQ closed with bearish, shaved-bottom candles. It felt like a Christmas miracle would be needed to prevent further downside. Instead of a miracle, we got a cooler-than-expected CPI report.

Headline CPI was forecast at 3.1% year over year but came in at 2.7%, while Core CPI printed at 2.6% versus expectations of 3.0%. That surprise triggered a decent gap up, rather than the gap down you often see following a strong shaved-bottom bearish candle. However, the gap failed to turn into a sustained rally. SPY ran directly into resistance near $680, while QQQ stalled at $613.

As long as those resistance levels hold, selling pressure could persist and price may continue lower toward the 100-day SMA. If, however, markets can close decisively above those levels, the probability that the recent lows are in increases significantly, opening the door for a push back toward all-time highs and potentially beyond.

SPY

On the downside, the 100-day SMA on SPY is critical. A sustained close below that level would materially increase the odds of a deeper pullback. A close below the November low around $650 would be a major red flag and strongly suggest that the larger selloff is already underway. Until those bearish confirmations occur, the risk-reward on this dip remains reasonable and could improve further if we see a final push into the 100-day SMA.

While this market has been more difficult to navigate than the up only environment we experienced earlier this year, it is still offering clearly defined levels and clean if–then scenarios to balance risk and reward.

QQQ

When mapping current price action against the dot-com analog we’ve been tracking, the expectation would be for a low sometime in December, potentially into Wednesday, December 24th—the official start of the Santa Rally—followed by a push into new all-time highs. That sell off into Christmas day would also resemble a much toned-down version of the 2018 price action.

A dip into late December or early January would also mirror December 2024, when a long-day bearish engulfing, shaved-bottom candle appeared on December 18th. This year’s version arrived one day earlier, on December 17th. In 2024, that move bottomed at the 100-day SMA before price pushed into new highs. Both periods share additional similarities, including significant rallies off the April lows into new all-time highs and bearish divergence.

SPY December 2024

It’s also worth noting that in both the 2023 analog and the dot-com analog, volatility increases meaningfully after new all-time highs are made, particularly in February. Earlier this year we saw nearly a 22% pullback during the tariff-driven volatility, while the dot-com analog suggests a potential 12% decline, with both tops aligning in February. This does not mean the market will top in February, but if we do bottom in December or early January and push into new highs into late January or February, there will be enough similarities for me to begin locking in gains, adding collars, and becoming more defensive.

If instead we break down from here—losing the 100-day SMA and then the November lows—that would be my signal to shift decisively into a more defensive posture and focus on capital preservation.

SPY Dot Com Analog

The TLDR:

A. Slightly lower, or the low is already in, followed by a push to new all-time highs near $700 and increased volatility in February.
B. A break below the 100-day SMA followed by a break of the November low, signaling that the larger volatility event has already begun.

I will manage risk and game plan around either outcome, but if I had to choose the higher-probability path, it would be scenario A.

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