Market Insights: Friday, October 11th, 2024

Market Overview:
The U.S. stock market saw record highs on Friday as major U.S. banks kicked off earnings season with strong quarterly results. The Dow Jones Industrial Average surged 0.97%, closing at a new all-time high, driven by positive earnings from JPMorgan Chase, which set an optimistic tone for the financial sector. The S&P 500 followed with a 0.6% gain, also reaching a record close, while the Nasdaq rose 0.33%. Investors weighed the positive earnings reports against inflation data, which failed to provide clarity on the Federal Reserve's next move on interest rates. Tesla was a notable underperformer, plunging 8.7% after the company's underwhelming reveal of its robotaxi, dampening sentiment in the EV space. The day ended with all three major indices posting solid weekly gains, signaling continued confidence heading into earnings season.

SPY Performance:
SPY opened at $576.04, reaching a high of $580.33 before closing at $579.54, up 0.59% for the session. Despite the lower-than-average trading volume of 34.74 million shares, SPY's movement reflected strong bullish momentum, driven by positive earnings reports and record-breaking performances in the Dow and S&P 500. SPY managed to break through key resistance levels, suggesting further upside potential as the market continues to digest corporate earnings.

Major Indices Performance:
The Russell 2000 led the major indices with a 2.05% gain, reflecting strength in small-cap stocks. The Dow climbed 0.97%, reaching a new record, while the S&P 500 gained 0.6%, also closing at an all-time high. The Nasdaq posted a more modest 0.33% increase. Tech stocks were mixed, with some of the "Magnificent Seven" slipping, while the broader financial sector outperformed. Financials led the charge, buoyed by strong earnings from JPMorgan and Wells Fargo, while consumer discretionary stocks lagged due to Tesla's significant drop.

Notable Stock Movements:
Tesla plummeted 8.7% after the disappointing reveal of its highly anticipated robotaxi, which left investors questioning the company's ambitious targets. Analysts expressed skepticism about the viability of Tesla's plans, dubbing the prototype a "toothless taxi." On the other hand, Nvidia was unchanged while the others in the group rose with the exception of Netflix and Apple which posted small declines. Financial stocks across the board rallied, helping the Dow and S&P reach today’s record highs.

Commodity and Cryptocurrency Updates:
Crude oil fell 0.40%, reflecting easing supply concerns, while Gold rallied 1.28% as investors sought safe-haven assets amidst ongoing inflation worries. Bitcoin surged 6.66%, closing just above $63,000, as the cryptocurrency market saw renewed buying interest, likely fueled by expectations of looser monetary policy.

Treasury Yield Information:
The 10-year Treasury yield dipped by 0.22%, closing at 4.086%. Despite the strong performance in equities, the bond market remained relatively quiet, with yields slightly lower as traders waited for further clarity on inflation and the Fed's rate path. The bond market’s subdued reaction suggests that inflation concerns remain but are not causing immediate panic among investors.

Previous Day’s Forecast Analysis:
Recap of Previous Forecast:
Thursday’s forecast anticipated SPY to trade within a range of $573.30 to $579.35 with a clear bullish bias, provided it held above the key support level of $573.30. The forecast suggested that the market was poised for further gains if SPY could break through resistance at $577 and $579.35, signaling a potential test of the $580 level. However, it also cautioned that SPY might face rejection at these resistance levels, particularly given the upcoming Producer Price Index (PPI) report, which had the potential to introduce volatility and trigger a pullback. A failure to hold above $573.30 was expected to expose SPY to lower levels near $570 or below. Traders were advised to focus on long trades as long as SPY remained above $573.30, with targets at $577 and $579.35. The forecast recognized the possibility of mean reversion shorts if SPY failed to sustain momentum at higher levels, but it advised caution in executing short positions, favoring them only around major resistance points, stating there was little to no chance SPY would exceed $580 today. We further stated today would be a trend day and the strategy was to capitalize on bullish momentum while remaining vigilant for signs of reversal near major resistance levels.

Market Performance vs. Forecast:
SPY performed well within the projected range, breaking through resistance at $577 and closing just shy of the upper target at $579.35. The move higher was supported by strong earnings, validating the forecast's bullish bias. Traders who followed the forecast and positioned long above $573.30 were rewarded, as SPY easily surpassed the key levels, offering opportunities for gains to $580 where the market failed to break higher. While mean reversion shorts from $580 worked well in the morning session and then again late in the day, the strategy for the day was to find spots to go long to $580 which worked exactly as forecast.

Prior Day’s Forecast Final Thoughts:
Thursday’s forecast was once again highly accurate, particularly in identifying $575 as a base from which todays’ liftoff occurred, with $577 as a critical resistance level. SPY’s ability to push beyond this level without facing a significant pullback allowed traders to capitalize on the markets’ bullish momentum. The forecast’s emphasis on long trades above $573.30 proved effective, as SPY continued to climb toward the upper end of the projected range at $580 and with the high of the day at $580.33, the forecast perfectly picked today’s top.

Premarket Analysis Summary:
Friday's premarket analysis expected SPY to range between $574.50 and $579.35, with a potential breakout leading to a test of $582 if momentum held. The bias was bullish, favoring long trades as long as SPY remained above $574.50. However, the analysis cautioned that the area around $577 to $578 could pose resistance, and failure to break through convincingly could lead to a pullback toward $572.

Validation of the Analysis:
SPY’s actual performance closely followed the premarket analysis, with the index breaking through $577 and closing near $579. The expected range was accurate, and traders who positioned long around $574.50 were able to ride the bullish momentum. While SPY tested resistance near $579.35, the overall market sentiment remained strong, with no significant pullback materializing, although fading $580 in accordance with the post market forecast and premarket call for resistance at these levels, also generated material profits for the day.

Looking Ahead: Economic News Releases:
With a bank holiday on Monday, market focus will shift to Thursday’s Core Retail Sales and Unemployment Claims reports, which could provide further insights into the health of the U.S. economy. Additionally, Fed Member Waller is scheduled to speak, potentially offering more clues on the Federal Reserve’s monetary policy outlook. Earnings season also kicks off in earnest next week, with major companies like Netflix, Citi, and United Airlines set to report.

Anticipated Market Impact:
The upcoming economic data and earnings reports could drive significant volatility, especially in sectors like retail and banking. Traders should keep a close eye on the Core Retail Sales figures, as they could influence expectations around consumer spending and the broader economic recovery. We expect earnings to exceed expectations overall, leading to higher prices next week.

Guidance for Traders:
With earnings season underway and more economic data on the horizon, traders should remain bullish but remain cautious, particularly around key resistance levels. While we recommend generally trading with the bullish trend, scaling down on counter trend trades with quick profits and tight stop-losses is also advised. Keep an eye on how the market reacts to earnings reports, as these could provide opportunities for both long and short trades depending on the results.

Market Sentiment and Key Levels:
SPY is currently trading near $579, with resistance at $580 and support at $575. Bulls remain in control as long as SPY holds above $575, with the potential on Monday to test $583 if momentum continues. However, failure to break above $580.33 could lead to a pullback toward $575, especially if upcoming earnings reports disappoint. $585 is a major level for the bulls to reach for this bull trend to continue.

Expected Price Action:
For Monday, SPY is expected to trade between $575 and $583. A breakout above $580 could lead to a test of $583, while a failure to hold above $578 may expose SPY to lower levels near $575. Given the ongoing earnings season and the upcoming economic reports, traders should be prepared for increased volatility. We expect SPY to pullback slightly heading into Monday toward support at $578 or perhaps even $575 before resuming its march toward another all-time high. While we are not forecasting another all-time high on Monday, we suspect next week this powerful bull trend will deliver more new highs.

Trading Strategy:
Long trades are favored as long as SPY holds above $575, with targets at $580 and $583. If SPY fails to break through $580.33, short trades could be considered, targeting $578 and potentially $575. Traders should use tighter stop-losses, as upcoming earnings reports could trigger sharp moves in either direction.

Risk Management and Warnings:
With the VIX sitting at 20.46, volatility remains elevated, and traders should be prepared for sudden reversals. Avoid overleveraging, especially as earnings season progresses. Be prepared for quick shifts in sentiment based on corporate results and economic data.

Model’s Projected Range:
The model projects SPY to trade between $573.50 and $583.75, remaining in the bull channel which has been in place since the August low. The market is dominated by Call options indicating a bullish outlook. As long as SPY holds above $573, it could retest resistance at $580 and push to as high as $585. SPY’s projected range for Monday has shrunk from today but is still large suggesting trending price action for Monday. Traders should remain cautious with countertrend trades.

Market State Indicator (MSI) Forecast:

Current Market State Overview: The MSI is currently in a Bullish Trending Market State with price closing at resistance at the top of the range. There are extended targets printing above which indicates a very strong and powerful trend. SPY spent all day in this MSI state rescaling higher three times today, printing extended targets for much of the day indicating a strong trend with the herd participating. The size of MSI’s range is a bit narrow, so the market may consolidate before its next major push higher. Resistance is at $579.41 with support at $578.18.
Key Levels and Market Movements: At the open, the MSI had just rescaled to a Bullish Trending Market State printing extended targets above. SPY opened just above major support at $575 which, when combined with the MSI rescaling long, set up the perfect long to today’s highs. The move higher was quick and powerful and traders who jumped on the long trend were rewarded handsomely. Once SPY reached $580, price was above MSI resistance and as indicated in our newsletter, at major resistance with “little to no chance of moving higher” so we took profits. Extended targets were printing above which gave us pause to enter a mean reversion short so we waited for price to pull back to MSI support at $578 and entered long once again to $580. Again $580 looked quite attractive to our users for a mean reversion short but we do not take countertrend trades when extended targets are printing, especially after two extremely profitable long trades on the day. We went into profit protection mode and we were done for the day. The MSI once again kept its users from making the mistake of trying to fade today’s move to a new all-time high, while also providing levels to enter longs with the trend. Once again, perfect trades with little to no heat, outlined 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 higher prices. That said, given the MSI has not rescaled at the current levels since 10 am, and given the range of the MSI is somewhat narrow, as soon as the extended targets above stop printing, we favor a mean reversion short from $579/580, expecting price to pull back to at least $578 and perhaps as low as $575. Monday’s have a tendency to reverse some of Friday’s gains. While we expect a pullback, we do not see prices falling below $575 and would look for long entries at the support levels of $575 and $577. The MSI may rescale to a Ranging State which would indicate more sideways than trending price action. Should that be the case, wait for a failed breakdown pattern to emerge to get back with the trend. The market still needs to build momentum and possibly find an external catalyst to push to significantly higher prices. The bears are not participating in the market so 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, using the MSI to determine levels with support currently at $578.46 and with resistance at $579.40.

Dealer Positioning Analysis:

Summary of Current Dealer Positioning: Dealers are selling $581 to $585 and higher strike Calls while buying small quantities of $580 Calls, indicating Dealer’s desire to participate in any follow-through that may develop on Monday. Dealers have sold large quantities of $585 Calls for Monday indicating a likely ceiling at that level. To the downside, Dealers are buying $579 to $576 and lower strike Puts in a 5:1 ratio to the Calls they are selling/buying, implying a bearish view of the market for Monday, but less bearish than today. With most options ending the day in the money, its likely Dealers will add more protection Monday morning.
Looking Ahead to Next Friday: Dealers are selling $580 to $590 and higher strike Calls while also selling $572 to $579 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 $590 with a potential floor at $572. To the downside, Dealers are buying $571 to $560 and lower strike Puts in a 4:1 ratio to the Calls and Puts they are selling. This implies a slightly bearish view of the market heading into next Friday, although due to the sale of Puts, far less than it might otherwise imply. Today Dealers had also sold Puts which worked out extremely well. Dealers still have significant downside protection and while they continue to show some concern the recent all-time highs are due to correct, they are not positioned for that outcome next week. Dealers continue to be positioned for the markets to move higher.

Recommendation for Traders:
While there are several macroeconomic risks and corporate earnings reports on the horizon that could derail the market’s upward momentum, the market seems ready to accept even higher levels to as high as $590 next week. Dealers continue to hedge against potential volatility and with VIX still above 20, there exists the potential for a quick and violent pullback. Traders should adopt a cautious approach to the market. Long trades are favored with SPY above $575. Below this level, the bears may roar and push the market lower. Remember to review the premarket analysis posted before 9 AM ET to account for any updates in the model's outlook and Dealer Positioning.

Good luck and good trading!