Market Insights: Tuesday, October 1, 2024

Market Overview:
Tuesday’s market was dominated by sharp declines across major indices, driven largely by escalating geopolitical tensions following Iran’s missile attack on Israel. The Nasdaq Composite led the losses, dropping 1.53%, while the S&P 500 and Dow posted losses of 0.90% and 0.41%, respectively. The ongoing conflict has sparked fears of further economic disruptions, especially in the energy market, as crude oil prices surged in response to the instability. U.S. manufacturing data showed no significant change, with the ISM Manufacturing PMI staying steady at 47.2, indicating continued contraction in the sector. Investors remain on edge as they anticipate Friday’s jobs report for further insights into the Federal Reserve’s next move on interest rates.

SPY Performance:
SPY opened the day at $573.40 and briefly touched a high of $574.06 before a selloff drove the index down to $566.00, closing at $568.62, marking a 0.90% decline. Trading volume was significantly higher than average, with 70.82M shares traded as investors reacted to the volatile geopolitical developments. Key levels to watch include major resistance at $574.75 and key support at $566.

Major Indices Performance:

• Nasdaq: Down 1.53%, leading the declines among major indices as tech stocks took a significant hit.
• Dow Jones: Closed down 0.41%, faring better than the Nasdaq but still weighed down by energy and financials.
• Russell 2000: Declined 1.36%, reflecting broader market weakness, especially in small-cap stocks.

Notable Stock Movements:
The "Magnificent Seven" stocks saw mixed performances, with only Meta (META) and Google (GOOGL) managing to avoid the broader selloff. NVIDIA (NVDA), Apple (AAPL), and Amazon (AMZN) all closed in the red, with NVIDIA losing 3.66%, the steepest decline among the group.

Commodity and Cryptocurrency Updates:

• Crude Oil: Prices jumped 0.28% as the Middle Eastern conflict pushed energy markets higher.
• Gold: Finished marginally lower, down 0.07%, as investors sought safety elsewhere.
• Bitcoin: Experienced a sharp decline of 4.24%, falling just below $61K as the broader crypto market faltered amid global uncertainties.

Treasury Yield Information:
The 10-year Treasury yield edged down 0.35%, closing at 3.732%. Bond market participants continue to monitor the potential impact of inflation and geopolitical risks on long-term yields. The yield curve remains inverted, signaling caution over future economic growth prospects.

Final Thoughts on Market Positions:
Tuesday’s market performance highlighted the fragility of the current economic environment, with geopolitical events significantly influencing investor sentiment. While sectors like technology saw substantial losses, commodities such as crude oil benefited from the escalating conflict. We maintain a cautious outlook on equity markets, favoring defensive positions in commodities like gold and silver and Bitcoin above $62K. SPY’s support at $566 will be a key level to watch, and a breach below this could trigger much further downside.

Recap of Previous Forecast:
In yesterday’s newsletter, we forecast SPY would trade between $570 and $575, with resistance around $574.75. The index indeed tested these levels before breaking down to close at $568.62. The anticipated volatility around $570 played out, with the market experiencing heightened selling pressure, due to external events. We stated a break of $570 would open the door to a deeper pullback to $566. For over a week we have suggested the market would sell off where SPY could drop $10 or more. We suggested it would happen as soon as this week.

Market Performance vs. Forecast:
SPY’s movement aligned closely with our forecast, testing support at $566 as expected and  pulling back as predicted. The geopolitical developments accelerated the selling pressure, pushing the index as anticipated, yet the market’s performance was foretold by our model even before today’s geopolitical event. As a result, our traders were able to capitalize on both short and long positions from the key levels identified in yesterday’s analysis, selling today’s high at $574, selling again at $570 and buying $566 twice.

Final Thoughts
Monday’s forecast played out with impressive accuracy, as key levels identified in our post market recap provided traders with effective entry and exit points throughout the day. Expected volatility and forecasted ranges held firm, allowing traders to capitalize on both resistance and support levels. This further reinforces the importance of planning trades with a clear understanding of the market's technical boundaries. As we move into Wednesday our focus remains on the same key levels, while staying vigilant for potential volatility that could impact these levels.

Premarket Analysis Summary of Key Levels Identified:
Our premarket analysis flagged $574.75 as an overhead resistance level, with $572.85 and $570 as crucial support zones. SPY’s inability to hold above $574 led to a test of lower support, which ultimately broke down to the $566 level as forecast.

Validation of the Analysis:
The market followed our forecast almost perfectly, with SPY experiencing resistance at $574.06 before moving lower to $566. The levels provided excellent trading opportunities, particularly for short positions as the market failed to hold key support zones. And with the premarket analysis aligning with the post market, at today’s high our readers knew the probability of a successful mean reversion short was increased. When this occurs, our readers know to increase their position size to take advantage of this increased probability. Following our suggestions today made the $8 sell-off that developed extremely profitable.

Summary of Upcoming Economic Data:
The rest of the week is packed with high-impact economic reports, starting with ADP Non-Farm Employment Change on Wednesday, followed by Initial Jobless Claims on Thursday. Friday’s Nonfarm Payrolls and Unemployment Rate will be crucial for gauging the Federal Reserve’s next moves.

Anticipated Market Impact:
The geopolitical situation will continue to influence markets, but economic data releases, particularly employment numbers, could provide further volatility. Traders should prepare for sharp intraday moves, particularly as the labor market remains in focus. With so much new information being released into the market, trade what you see using our levels and directional bias as your guide.

Guidance for Traders:
Expect volatility around the ADP report on Wednesday and stay alert for moves triggered by any unexpected geopolitical developments. Short-term traders should focus on key levels identified in premarket analysis and adjust positions accordingly. We continue to advise caution, especially given the high potential for sharp price swings driven by external events.

Market Sentiment and Key Levels:
With SPY closing below $570, we expect tomorrow’s trading to revolve around a retest of the $566 support level before deciding if price will recover or continue to fall. A break below $566 could push SPY toward $563 and then $560. Upside major resistance remains at $574.75 but $570 has now become key resistance as well. Traders should focus trading with the trend around our model’s levels, given the market’s increased volatility.

Expected Price Action:
We anticipate a volatile trading session tomorrow, with SPY likely moving between $566 and $574.75. Any breach of these levels could trigger more significant moves, especially with key economic data releases looming. We expect trending price action with a retest of today’s lows. Its possible $566 holds and reverses much of today’s decline. But it is also possible $566 fails and price tests lower support levels.

Trading Strategy:
Favor long positions if SPY holds above $566, with a target near $570. On the downside, consider short entries if the market breaks below $566 on volume, with support near $563. The overall bias remains bearish due to external risks and a move back to $570 would be another level where we favor a mean reversion short.

Risk Management and Warnings:
With the geopolitical backdrop, traders should exercise caution and use tight stops. The increased volatility could lead to rapid moves in either direction, so flexibility and risk management are key.

Model’s Projected Range:
Our model projects a range of $563.75 to $576.50 for Wednesday with the range increasing significantly from today. The potential for large moves in excess of 1% exist if key levels are breached. SPY is still in the Bull Trend Channel from the August lows but has moved toward the lower range of the channel. As price gets closer to the bottom of the channel, we expect price to bounce or move sideways before breaking this channel.

Market State Indicator (MSI) Forecast

Current Market State Overview:
The MSI is currently in a Ranging Market State with price closing just above lower support. The range is large implying market participants are uncertain what will develop with support at $568.27 and resistance at $572.34.

Key Levels and Market Movements:
At the open the Bullish Trending Market State did not last long. Immediately after the open the MSI shifted to a Ranging Market State and then quickly rescaling to a Bearish Trending Market State. With extended targets below, the MSI rescaled lower several times in the morning session indicating a very strong bear trend with the herd participating. Shortly after 11 am ET extended targets stopped printing signaling the all clear for a mean reversion long from our $566 support level.

Trading Strategy Based on MSI:
After a fantastic mean reversion short from today’s high after the open, the MSI showed us the way by printing extended targets below so we knew to stay in our short trade, riding it to today’s lows. After extended targets stopped printing at our $566 support level, we entered a nice mean reversion long to MSI resistance at $568.27. A retest of the $566 level and once again we were open to a mean reversion long with a perfect failed breakdown signal. Three great trades which were clearly identified and made quite simple by the MSI.

 Dealer Positioning Analysis

Summary of Current Dealer Positioning:
Dealers are selling $572 to $575 and higher strike Calls while buying $569 to $571 Calls. This implies the Dealers desire to participate in any recovery in price which may occur on Wednesday. They also believe should a recovery develop, price has little chance of moving above $575. There is a wall of resistance from $573 to $575 which market participants need to overcome for price to move higher. To the downside, Dealers are buying $568 to $560 and lower strike Puts in a 5:1 ratio to the Calls they are selling/buying, indicating a bearish view for Wednesday. Dealers were positioned more heavily bearish coming into today but still maintain their generally bearish outlook for Wednesday.

Looking Ahead to Friday:
Dealers are selling $573 to $580 and higher strike Calls while buying $569 to $572 Calls, indicating a desire to participate in any move higher by Friday. To the downside, Dealers are buying $568 to $560 and much lower strike Puts in a 4:1 ratio, maintaining their downside protection. Like yesterday, while not overly bearish, Dealer positioning is in place to capitalize on any weakness moving into Friday.

Recommendation for Traders:
Short-term Dealer positioning is bearish with the potential for a base to form at $566. There is virtually no concern prices will make new highs anytime soon. Dealers could be simply waiting for price discovery the rest of the week, expecting more sideways price action than any major decline. Traders should be cautious of any sharp moves below $566 which could either be a trap or the beginning of a much deeper pullback. While the bulls still control the market, bulls need to recover $570 to keep the bears at bay. With the market in a somewhat tenuous spot, we recommend reviewing the premarket analysis for additional insights. Good luck and good trading!