Market Insights: Thursday, October 10th, 2024

Market Overview:
The U.S. stock market faced slight losses on Thursday as investors digested hotter-than-expected inflation data and weaker job numbers, which clouded the outlook for the Federal Reserve's next interest rate decision. The Dow Jones Industrial Average slipped by 0.14%, losing nearly 60 points, while the S&P 500 fell 0.2%, both cooling off after their record-setting performance on Wednesday. The tech-heavy Nasdaq shed 0.20%, despite Nvidia's continued strength. Traders were caught between the latest CPI report showing prices rising by 0.2% versus the expected 0.1%, and a sharp rise in unemployment claims, which hit the highest level since August 2023. These mixed signals left market participants uncertain about whether the Fed will proceed with a rate cut in November. Meanwhile, Nvidia climbed 1.63%, aiming for record highs, and Amazon also posted gains, helping offset broader tech losses.

SPY Performance:
SPY opened at $575.82 and traded within a narrow range, reaching a high of $577.58 before closing slightly lower at $576.10, down 0.18% for the session. Trading volume was light, with 38.97 million shares exchanged, below the average. Despite testing resistance at $577, SPY failed to break through, reflecting cautious sentiment ahead of more economic data releases. The day’s range-bound movement indicated hesitation among traders, as key resistance levels held firm.

Major Indices Performance:
The Dow led losses with a 0.14% decline, followed by the Nasdaq's 0.20% drop. The Russell 2000 fared the worst, down 0.57%, as small-cap stocks continued to underperform amid concerns over economic resilience. Sector-wise, tech stocks were mixed, with Nvidia rallying, but other giants like Meta and Tesla fell, highlighting the sector’s volatility. Defensive sectors, such as utilities and consumer staples, offered some support but failed to counterbalance the broader losses.

Notable Stock Movements:
The "Magnificent Seven" stocks had a mixed session. Nvidia led the gainers, up 1.63%, continuing its impressive rally toward record highs. Amazon also posted a modest gain, while Meta, Tesla, Microsoft, and Apple all lost ground. Meta and Tesla were among the weakest performers in the group, reflecting investor caution in the face of rising inflationary pressures and weakening consumer sentiment. Alphabet, still under pressure from regulatory concerns, also failed to gain traction.

Commodity and Cryptocurrency Updates:
Crude oil surged 3.26%, as supply concerns returned following disruptions in key oil-producing regions. Gold rose by 0.80%, benefiting from increased safe-haven demand amid inflation fears. Bitcoin plunged 4.31%, falling below $60,000, as the cryptocurrency market continued to struggle under tightening monetary conditions and dwindling investor enthusiasm.

Treasury Yield Information:
The 10-year Treasury yield inched higher by 0.10%, closing at 4.072%. The bond market remained largely flat as traders processed the conflicting signals from inflation and labor market data. Despite ongoing inflation concerns, the reaction in Treasuries was muted, with market participants awaiting more clarity from the Federal Reserve.

Previous Day’s Forecast Analysis:
Recap of Previous Forecast:
Wednesday’s forecast anticipated SPY to trade within a range of $571 to $580 with an upward bias, as long as SPY held above the key level of $570. It was expected that SPY would need to push through resistance at $577.75 to move to new all-time highs. The forecast also warned of potential rejection at this level which could lead to a pullback to $575 or lower. Traders were advised to favor long trades above $570, targeting the upper resistance levels while remaining cautious of sharp reversals.

Market Performance vs. Forecast:
SPY's performance closely followed the forecast, with the index opening above $575 and initially moving toward the upper resistance at $577.55. However, as anticipated, SPY faced resistance at this level and struggled to sustain the upward move, closing just below $576. This reversal aligned with the forecast's caution about a potential stall near $577.75, validating the advice to take profits or consider short trades at this level. The market's inability to push through the upper levels reflected the uncertainty around the inflation data, and traders who followed the forecast were able to navigate the choppy price action effectively.

Prior Day’s Forecast Final Thoughts:
Wednesday's forecast was accurate, particularly in identifying $577.75 as a critical resistance point. SPY tested this level but failed to break through, providing a clear opportunity for traders to lock in profits or consider mean reversion shorts. The forecast’s emphasis on caution around these key levels proved prescient, as the market faced difficulty pushing higher. Traders who remained flexible, as advised, were able to capitalize on both long and short opportunities throughout the session.

Premarket Analysis Summary:
Thursday’s premarket analysis indicated that SPY would likely range between $573.30 and $577.55, with the potential to reach $579.35 if the market could push through the upper resistance. The bias was slightly bullish, favoring long trades, but the analysis also highlighted the risk of a rejection near $577, which could lead to a pullback to $573.30 or even $570. The CPI data was expected to add volatility to the session, making it crucial for traders to monitor these key levels closely.

Validation of the Analysis:
SPY's movement aligned well with the premarket analysis, with the index reaching resistance at $577.55 but struggling to break higher. The expected range held firm, as SPY remained between $573.30 and $577.55 all day. The rejection at $577.55 provided a clear signal for traders to take profits on long positions or initiate short trades, as outlined in the analysis, particularly since the premarket and post market reports aligned virtually to the penny. Readers of this newsletter understand that when the pre and post market reports align, the probability of success increases therefore trade in larger size and with more confidence. Doing this today and even on a choppy, sloppy post CPI trading session, mean reversion shorts from $577 and several longs from $575 with multiple failed breakdown patterns worked to perfection. Once again, the premarket levels were highly effective in guiding trading decisions.

Looking Ahead: Economic News Releases:
Friday’s Producer Price Index (PPI) report will be in focus as traders look for additional insights into inflationary pressures. Several Fed members are also scheduled to speak, which could further influence market sentiment, particularly if they address the potential for future rate cuts. These developments are likely to drive volatility heading into Friday.

Anticipated Market Impact:
The PPI report could reinforce or challenge the narrative established by the CPI data. A higher-than-expected PPI reading may increase fears of persistent inflation, while a softer print could provide some relief. Fed commentary will also be critical, as traders assess the likelihood of a rate cut in November. Expect sharp moves if the data surprises.

Guidance for Traders:
Traders should continue to manage risk carefully, especially with more inflation data on deck. Position sizes should remain small, and stop-losses tightened, particularly around key resistance and support levels. Be prepared for sudden reversals, as market sentiment remains highly reactive to economic data.

Market Sentiment and Key Levels:
SPY is currently trading near $576, with resistance at $577.55 and support at $573.30. Bulls remain in control as long as SPY holds above $573.30, but a failure to break through $577 could lead to a pullback toward $570. Friday’s data will be critical in determining whether the market can push higher or if a correction is on the horizon.

Expected Price Action:
For Friday, SPY is expected to trade between $573.30 and $579.35, with the potential for a breakout above $577 leading to a test of $580. There is virtually zero chance SPY pushes beyond $580. Should SPY fail to clear $577, expect a pullback toward $573 or lower. The PPI data will likely dictate the market’s direction, so traders should remain flexible and ready to adjust their strategies based on the outcome.

Trading Strategy:
SPY has made 22 new highs in 2024. Certainly the market is tired and feeling quite bubbly. SPY is now in a new $7 consolidation zone between $570 and $577. If you overtrade in this zone, you will lose money. We continue to favor long trades above $573.30, with targets at $577 and $579.35. If SPY fails to break through $577, short trades should be considered, targeting $573.30 and potentially $570. Tight stop-losses are recommended, as the PPI report could trigger sharp reversals in either direction. And when market participants finally decide to lock in profits, the market sell-off will be fast and violent.

Risk Management and Warnings:
With the VIX sitting at 20.93, volatility is expected to increase following the PPI report. Traders should tighten stop-losses and avoid overleveraging, particularly near key resistance and support levels. Be prepared for sudden moves in response to the data.

Model’s Projected Range:
The model projects SPY to trade between $571.25 and $581.25, still quite large, dominated by Call options indicating a bullish outlook. If SPY holds above $573, it could test resistance at $580 with little to no chance of moving higher. A break below $570 would expose SPY to downside risks, targeting $567. The model suggests trending price action for Friday, so traders should be cautious with countertrend trades and look for failed breakout/breakdown patterns from major levels to initiate entries.

Market State Indicator (MSI) Forecast:

Current Market State Overview: The MSI is currently in a Ranging Market State with price closing mid-range. This is a transitionary zone which consists mainly of choppy price action. SPPY spent most of the day in this MSI state with only brief periods in a trending state. The MSI rescaled several times today both higher and lower, but only briefly printed extended targets which indicated a listless trading session without any significant trending price action. The size of MSI’s range is a bit narrow, so the market is coiling and consolidating for a big move post PPI. Resistance is at $576.75 with support at $575.32.

Key Levels and Market Movements: At the open, the MSI was in a Ranging Market State with price trading mid-range. There is little to do in this state until price reaches one of our model’s major levels AND puts in a failed breakout/breakdown pattern. We got both of these at 9:48 am ET when price dipped below $575, our major level, and triggered a failed breakdown long. When price reached MSI resistance at $576.50 we exited our long and waited for our next set up which came after SPY broke higher at noon ET. With extended targets we waited for them to stop printing at 12:22 pm and again, given price was sitting at a major level of $577.55 we initiated a mean reversion short back to support at $575. And once again on a failed breakdown pattern at 2:42 pm at $575 we once again were long into the close. Three perfect trades which took little to no heat, laid out well in advance from the combination of these newsletters and the MSI.  

Trading Strategy Based on MSI: Given the MSI’s current state, we expect the MSI to rescale either just prior to or after PPI to a trending state. We highly recommend you trade what the MSI provides once this occurs. While bulls are in complete control of the market, and the market continues to be poised to move higher, the math for the bulls is poor given the upside has little left in it while the downside has lots of risk. For example, with a max upside of $580 or $3 but a downside risk to $566 or $11, trader math is bad for Friday. The market needs to build momentum and possibly find an external catalyst to push to significantly higher prices. While the bears are not yet participating in the market, and while short trades should be avoided except from major overhead resistance, we recommend trading smaller than usual and taking profits more quickly. We still favor long trades and mean reversion trades from major resistance, and will use the MSI to determine support levels, currently at $575.32 and resistance at $576.75.

Dealer Positioning Analysis:

Summary of Current Dealer Positioning: Dealers are selling $579 to $580 and higher strike Calls while buying small quantities of $577 and $578 Calls, indicating the Dealer’s desire to participate in any upside that may develop from PPI on Friday. Dealers have sold large quantities of $580 Calls for tomorrow indicating a likely ceiling at that level. To the downside, Dealers are buying $576 to $567 and lower strike Puts in a 7:1 ratio to the Calls they are selling/buying, implying a bearish view of the market for Friday and a bit more bearish than today. Dealers added more protection this morning in anticipation of volatility around PPI.
Looking Ahead to Next Friday: Dealers are selling $577 and $585 and higher strike Calls while also selling $572 to $576 Puts. Dealers sell Puts when they believe prices will move higher. This implies Dealers believe the market can and will continue to move higher by next Friday, to as high as $585 with a potential floor at $572. To the downside, Dealers are buying $571 to $560 and lower strike Puts in a 5:1 ratio to the Calls and Puts they are selling. This implies a bearish view of the market heading into Friday, although due to the sale of Puts, less so than they were heading into today. Dealers have significant downside protection and while they showed some concern the recent all-time highs are due to correct, this has seemed to have waned overnight. We mentioned yesterday their heavily bearish positioning was primarily due to the low cost of downside protection. Dealers seem to be saying for at least next week, the markets are moving higher, but to be safe, add downside protection.

Recommendation for Traders:

There are several macro and other risks which could possibly derail this market’s push higher. Dealers are protecting themselves from any major shock to the market and we suggest a long book do the same. Dealer positioning does change daily so be sure to check in with the premarket report before 9 am ET for the latest updates.

Good luck and good trading!