Market Insights: Monday, October 14th, 2024

Market Overview: U.S. stocks climbed on Monday, with the Dow and S&P 500 securing fresh record highs, propelled by a strong rally in tech stocks led by Nvidia. The Dow Jones Industrial Average gained more than 200 points, rising 0.47% to surpass the 43,000 mark for the first time, while the S&P 500 jumped 0.82%, continuing its upward march after closing above the 5800 level last week. Nvidia surged nearly 3%, setting a new all-time high as semiconductor stocks like ASML and Applied Materials followed suit, boosting the tech sector's performance. Cryptocurrencies also mirrored the positive sentiment, with Bitcoin rising over 5%, pushing past $66,000. Earnings season has taken center stage, with investor attention shifting toward major banks like Goldman Sachs, Citi, and Bank of America, set to report this week. Despite ongoing uncertainty about the Federal Reserve’s rate path, strong earnings could further fuel the rally.

SPY Performance: SPY opened at $581.22, briefly reaching a high of $585.27 before closing slightly lower at $584.34, marking a 0.82% rally on the day. Volume was lighter than usual, with 32.43 million shares traded. The index remained within the projected range but faced resistance near the $585 level. Monday’s movement reflects the market’s cautious optimism, with traders eagerly awaiting more earnings reports to guide sentiment.

Major Indices Performance: The Nasdaq led the way, gaining 0.82%, followed by the Russell 2000 with a 0.74% rise. The Dow trailed with a 0.47% increase, yet it set a record as it crossed 43,000 for the first time. The broader market was lifted by strong performances in tech and semiconductor stocks, which offset mixed results in other sectors like consumer discretionary.

Notable Stock Movements: Nvidia led the tech sector with a 2.43% gain, reaching a new all-time high. The rest of the “Magnificent Seven” had a strong day overall, though Netflix and Amazon posted slight declines. Nvidia's rally boosted the semiconductor sector, as ASML and Arm Holdings also saw solid gains. However, Amazon's recent drop reflected broader concerns about consumer spending and potential headwinds for e-commerce in the coming months.

Commodity and Cryptocurrency Updates: Crude oil fell sharply by 4.97%, reflecting easing concerns over supply constraints. Gold inched lower by 0.31%, as investors shifted away from safe-haven assets amidst the strong stock market rally. Bitcoin saw a 5.11% rise, closing above $66,000, as cryptocurrencies continued to benefit from the broader risk-on environment.

Treasury Yield Information: The 10-year Treasury yield ticked up slightly by 0.20%, closing at 4.112%. Despite the strength in equities, bond yields remain elevated as traders await further economic data to provide clarity on the Federal Reserve's next moves.

Previous Day’s Forecast Analysis

Recap of Previous Forecast:
Friday’s forecast for today projected SPY to trade between $575 and $583, with a bullish bias as long as SPY held above the $575 support level with a possible push to as high as $585. A breakout above $580 was expected to trigger a test of at least $583, while a failure to hold above $578 could have led to a pullback toward $575. The forecast emphasized long trades above $578 and stated this week to expect more new all-time highs.

Market Performance vs. Forecast:
SPY opened at $581.22 and stayed within the expected range, testing the upper limit with a high of $585.27. As anticipated, SPY maintained a bullish trajectory throughout the session, breaking through the $580 resistance, reaching the upper forecasted target of $583 mid-morning. Traders who followed the forecast’s long bias benefited from the upward movement, particularly around $580, where buying dips proved effective. The market did sell off at $583 to $582.30 before resuming its climb to today’s highs. The market respected key levels with SPY facing resistance at $585, aligning closely with the projected price action.

Prior Day’s Forecast Final Thoughts:
Friday’s forecast accurately highlighted the critical support at $578 and resistance around $583 and $585. The bullish bias played out as predicted, with SPY breaking resistance and moving towards the initial $583 target on its way to $585. The expected pullback below $580 was minor, but provided traders ample opportunities to capitalize on the forecasted long trades. The forecast once again demonstrated the usefulness of following key levels and maintaining the model’s bias in a trending market.

Premarket Analysis Summary: Today’s premarket analysis forecasted SPY to trade between $578.25 and $585, with a strong bias toward long trades as long as SPY stayed above the $578.25 support. The expected initial upside target was $582.20, with a potential move to $585 if momentum held. On the downside, losing $578.25 could have led to a struggle around the $574.45 support level. However, the bias remained bullish, favoring buying dips near support levels.

Validation of the Analysis: The premarket forecast was largely validated by SPY’s performance. SPY opened strong, tested resistance at $585.27, and closed near $584.34, confirming the upside targets outlined in the analysis. The market adhered to the bullish bias, with long trades from support levels around $578.25 providing profitable opportunities. SPY respected the forecasted range, and traders who followed the premarket analysis were able to benefit from the upward movement. The premarket analysis complemented and confirmed the post market recap and readers of this newsletter know when this occurs, trade in size with additional conviction. Doing so today generate massive profits for our readers who follow these newsletters.

Looking Ahead: Economic News Releases: Key economic releases this week include Thursday’s Core Retail Sales and Unemployment Claims reports, which will provide important insights into consumer spending and labor market conditions. Additionally, earnings season continues, with major reports from banks like Goldman Sachs and Morgan Stanley expected to impact market sentiment. Fed Members are also scheduled to speak, which could further influence expectations around the Federal Reserve’s rate policy.

Anticipated Market Impact: The upcoming data could bring volatility, especially in sectors sensitive to economic performance, such as retail and banking. A positive retail sales report could bolster the market's bullish trend, while any surprises in unemployment claims may spark caution. Earnings reports from financial giants will also be critical in shaping the market's direction.

Guidance for Traders: Traders should continue to favor long trades, particularly if SPY holds above key support at $580. While the market remains bullish, it’s essential to stay cautious around potential resistance at $585 and to avoid countertrend trades. Upcoming earnings reports could trigger sharp moves, so it’s advisable to maintain smaller position sizes and use tighter stop-losses. Watch for volatility spikes following economic data releases.

Market Sentiment and Key Levels: SPY is trading near $585, with key support at $580 and major resistance at $587. Bulls remain in control as long as SPY holds above $580. A breakout above $585 could lead to a test of $587, while failure to hold above $580 might lead to a pullback towards $574.45. With earnings season underway, continued bullish momentum is expected, though traders should be mindful of potential reversals near resistance levels.

Expected Price Action: For Tuesday, SPY is expected to trade between $580 and $587.50. A breakout above $585 could push SPY towards $587, while a failure to hold above $580 may lead to a retest of support at $574.45. Given the ongoing bullish sentiment, we expect SPY to continue its upward trajectory, though the potential for a pullback near resistance levels remains.

Trading Strategy: Long trades are favored as long as SPY holds above $580, with upside targets at $587 and potentially $590. Short trades could be considered if SPY fails to break above $587, targeting a pullback to $585 or lower. Focus on buying dips near key support levels and look for breakout opportunities above $585. The market is extremely strong and does not seem to care that it’s the most expensive since the dot com bubble. After two exceptionally strong bull days, it would not surprise us to see it take a few days to consolidate at these levels. The market is overdue for a $7 to $10 correction in SPY and it could occur at any time. That said there is no bear case until the market sells off hard. Until then, find spots to go long at major levels but be cautious to take profits quickly and tighten stops.   

Risk Management and Warnings: With the VIX remaining elevated at 19.70, traders should be prepared for sudden reversals. It’s critical to manage risk by keeping tight stop-losses and reducing position sizes during volatile periods. Avoid overexposure, particularly as the market reacts to earnings reports and economic data, which could quickly shift sentiment.

Model’s Projected Range: The model projects SPY to trade between $579.75 and $587.50, with a Call-dominated outlook, suggesting a bullish sentiment. SPY is trading in the middle of the bull trend channel from the August lows with support expected around $580, with resistance at $585 to $587. If SPY holds above $585, it could move towards $587 or slightly higher, while a break below $585 might lead to a pullback towards the lower support at $583 and the $580. Traders should monitor these levels closely as volatility could increase due to upcoming earnings reports and macroeconomic data.

Market State Indicator (MSI) Forecast:

Current Market State Overview: The MSI is currently in a Bullish Trending Market State with price well above resistance and all extended targets. The extended targets above printed virtually all day from the open into the close, indicating a very strong and powerful trend with the herd participating. SPY spent all day in this MSI state without rescaling. The size of MSI’s range remains narrow therefore the market may consolidate to give the MSI time to rescale before its next major push higher. There is no MSI resistance and simply support at $579.41 and $578.19.
Key Levels and Market Movements: At the open the MSI continued its’ Bullish Trending Market State from Friday, printing extended targets above price. SPY opened just above these extended targets and after a failed breakdown at these targets just prior to the open, price never looked back and simply ripped higher all day. The strength and power of the herd was evident from the open with extended targets printing. This kept MSI users out of any mean reversion short trades, which was a good thing given price simply moved up and to the right all day into the close. The trade for today was to get long just after the open to $583, the initial level profit target, riding the balance of the long position to $585 where our model stated was a ceiling for today.  
Trading Strategy Based on MSI: Given the MSI’s current state we expect higher prices. The MSI has not rescaled at the current levels since Friday and given the range of the MSI is narrow, as soon as the extended targets above stop printing, we favor a mean reversion short from $585 to $581. After two strong days, it’s likely Tuesday puts in a sideways to slightly higher day. That said, prices do not appear to want to move below $583 or higher than $587. We would seek longs on any pullback and from any MIS support level should it rescale for Tuesday. The bears continue to avoid the market therefore short trades should only be taken from major resistance levels without any extended targets above AND with a failed breakout pattern. Without all three, short trades are a very low probability for Tuesday. Therefore we continue to favor long trades using the MSI to determine support levels from which to go long.

Dealer Positioning Analysis:

Summary of Current Dealer Positioning: Dealers are selling $585 to $590 and higher strike Calls implying a potential ceiling in the market for Tuesday of $590. To the downside Dealers are buying $584 to $580 and lower strike Puts in a 10:1 ratio to the Calls they are selling implying a bearish view of the market for Tuesday and much more bearish than today. That said, most options ended the day in the money therefore Dealer positioning is less reliable for tomorrow given its likely Dealers will add much more exposure Tuesday morning.
Looking Ahead to Friday: Dealers are selling $585 to $590 and higher strike Calls while also selling $572 to $584 Puts. Dealers sell Puts when they believe prices will move higher. This implies Dealers believe the market can and will move higher into 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 3:1 ratio to the Calls and Puts they are selling. This implies a neutral view of the market heading into Friday, although due to the sale of Puts, Dealers actually appear bullish the rest of this week. Today Dealers sold Puts which worked out extremely well and while Dealers have significant downside protection, they continue to show little concern the recent all-time highs are due to correct any time soon.

Recommendation for Traders:
With the market very bullish and SPY holding above key support at $580, traders should continue to favor long trades, particularly on dips near support levels. Look for opportunities to enter long positions around $583, with upside targets at $585 and $587. A breakout above $585 could present a chance to ride the trend higher, potentially reaching $587 or beyond. However, be cautious near resistance levels, and consider short trades only if SPY fails to break and hold above $585, with downside targets at $583 and $580. Given the elevated VIX volatility remains a concern, especially as major earnings reports, and economic data releases approach. It’s essential to manage risk particularly when trading near key support and resistance levels. Be prepared for sharp moves in either direction, as the market could experience quick reversals if earnings disappoint or economic data surprises. Remember to review the premarket analysis posted before 9 AM ET for any updates to the model’s outlook or Dealer Positioning.

Good luck and good trading!