Market Insights: Tuesday, October 15th, 2024

Market Overview:
U.S. stocks took a breather on Tuesday after reaching fresh highs the previous day, with technology stocks leading the retreat. The Nasdaq slid by 1.44%, driven by a selloff in semiconductor stocks after ASML’s earnings were prematurely released, forecasting a weaker-than-expected 2025 outlook. Nvidia, which had hit record highs recently, dropped by over 4.69%, pulling down other chipmakers like AMD, which also fell by 5%. The S&P 500 followed suit, retreating 0.8% from Monday’s record close, and the Dow Jones shed about 0.75%, giving back some of the 300 points it gained from reaching the 43,000 milestone. Energy prices tumbled further as oil dropped by almost 4%, following news of Israel holding off on attacks that would disrupt Iranian crude supplies. Bank earnings provided some positive news, with Goldman Sachs and Bank of America reporting strong quarterly results, though it wasn’t enough to lift overall market sentiment.

SPY Performance:
SPY opened at $584.59 and briefly touched a high of $584.89 before reversing course and heading lower throughout the session, ultimately closing at $579.78, down 0.78% on the day. This marked a significant loss in comparison to Monday’s rally, as the index failed to maintain the bullish momentum seen earlier in the week. Trading volume increased to 45.70 million shares, reflecting heightened activity as traders reacted to the tech selloff and profit-taking at higher levels. SPY’s dip below the $580 support level during intraday trading highlighted the market’s vulnerability after recent gains, although buyers managed to defend this key area, preventing a deeper pullback. Despite hitting an intraday low of $578.54, the index stayed largely within the expected range, reinforcing the importance of key support zones in guiding price action. This consolidation suggests that traders are cautious ahead of major earnings and economic reports due later in the week.

Major Indices Performance:
The Nasdaq led the declines with a 1.44% drop, largely due to the downturn in semiconductor stocks following ASML’s premature earnings release. The S&P 500 and Dow followed, both falling around 0.8%. The Russell 2000 remained relatively flat, edging up by 0.08%, as smaller-cap stocks showed resilience compared to the broader market. Tuesday’s sector performance was mixed, with tech stocks being the primary laggards while other sectors like financials provided some support thanks to strong earnings from major banks.

Notable Stock Movements:
Nvidia was the headline mover, falling 4.69% after a recent surge to all-time highs. ASML, which set the stage for a semiconductor selloff, tumbled more than 15% on its earnings disappointment. Other notable decliners included AMD, which dropped 5%. Netflix and Meta also faced declines, reflecting broad concerns over the sustainability of tech’s recent gains. However, Walgreens Boots Alliance rose sharply by 15% after announcing plans to close 1,200 stores in a cost-cutting effort, buoying hopes for a turnaround.

Commodity and Cryptocurrency Updates:
Crude oil continued its descent, falling 3.87% on its way to $65 per barrel, as reports indicated easing geopolitical risks in the Middle East. Gold managed to climb slightly, gaining 0.46% as some investors sought safe-haven assets amidst the stock market’s pullback. Bitcoin also edged higher by 1.14%, closing just above $66,500, continuing its recent upward trend despite market volatility. We will look to take a long position in Crude if the $65 level holds.

Treasury Yield Information:
The 10-year Treasury yield dipped 2.19%, closing at 4.035%. Despite the lower yields, bond markets reflected cautious optimism, as traders positioned themselves ahead of more economic data later in the week. The slight retreat in yields mirrored the market's hesitancy, especially with upcoming earnings and economic reports in focus.

Previous Day’s Forecast Analysis
Recap of Previous Forecast:
Monday’s forecast for Tuesday anticipated SPY trading between $580 and $587.50, with a bullish bias as long as SPY held above the $580 support level. The forecast highlighted the $585 level as a key resistance point, with the potential for a breakout to $587 if momentum held. Conversely, a failure to maintain support at $580 was expected to trigger a pullback, with the first downside target at $577. The forecast stressed the importance of long trades from support levels, especially around $580, and recommended avoiding trades within the choppy $583-$585 range unless a clear breakout occurred. The forecast predicted that while the market was expected to trend higher, it was likely to consolidate following two strong bullish sessions. The forecast also hinted at a possible mean reversion trade if SPY failed to break above $585, suggesting that traders should look for short opportunities if a failed breakout occurred. In essence, the outlook set clear scenarios for both bullish and bearish outcomes, advising traders to stay nimble while keeping a close watch on the key $580 and $585 levels, with a potential for SPY to reach $587 in a breakout. At the same time, it acknowledged the risk of a pullback should SPY struggle to hold above $580 and stated a $7 to $10 sell off could come at any time.

Market Performance vs. Forecast:
SPY’s performance on Tuesday largely followed the expectations set in Monday’s forecast. The index opened near the projected range at $584.59 but struggled to maintain momentum above the $585 resistance level, which was highlighted as a key point of rejection. After testing the upper limit of the forecasted range with an intraday high of $584.89, SPY reversed course, falling back toward support around $580. This movement was in line with the forecast’s caution that a failure to hold above $585 could lead to a pullback. The anticipated downside scenario also played out, as SPY briefly dipped below $580 during intraday trading, hitting a low of $578.54. However, buyers stepped in near the lower end of the forecasted range, preventing a deeper selloff toward the $577 level. Traders who followed the strategy of fading the rejection at $585 were presented with short opportunities as the market moved lower. Meanwhile, those who looked for long entries around $580 could have captured the small recovery off that support. The market’s behavior confirmed the forecast’s emphasis on the importance of these key levels, with price action remaining confined to the expected range and providing opportunities on both the long and short sides.

Prior Day’s Forecast Final Thoughts:
The forecast for SPY was largely validated as the index struggled to maintain its bullish trajectory above $585. The anticipated resistance at $585 held firm, and the pullback near $580 offered short-term trading opportunities. Traders who followed the strategy of fading rejections near resistance just after the open were able to capitalize on the market’s hesitation to push higher.

Premarket Analysis Summary:
Tuesday’s premarket analysis projected a range between $583 and $585, with a focus on long trades as long as SPY held above $583. The market did test these levels but ultimately failed to sustain momentum above $585, leading to a downside slide. Traders were advised to avoid trading inside the choppy range between $583 and $585, which proved accurate as price action became volatile in that zone.

Validation of the Analysis:
The premarket analysis was accurate, as the $583 to $585 range offered little in terms of long trading opportunities. SPY respected the levels outlined in the forecast, with key support at $580 holding for most of the day. Traders who followed the guidance of avoiding trades within the choppy range were spared from market whipsaws, while those who sought longs near $580 found favorable entry points, along with those who shorted overhead resistance at $585.

Looking Ahead: Economic News Releases:
The week’s major economic releases include Thursday’s Core Retail Sales and Unemployment Claims reports with no material news on Wednesday. These reports will provide key insights into the strength of consumer spending and the labor market, which could shift market sentiment. As earnings season rolls on, traders should watch for further surprises, particularly from tech and financial companies.

Anticipated Market Impact:
Given the focus on consumer spending data and labor market reports, we expect heightened volatility later this week. Positive retail sales figures could reignite the market’s bullish momentum, while any surprises in unemployment claims could spark a more cautious tone.

Guidance for Traders:
With volatility expected to rise, traders should favor long trades near key support levels but keep position sizes smaller until the market establishes a clearer direction. Resistance at $585 remains a key level to watch, and it’s advisable to tighten stop-losses as SPY approaches this zone. The market remains bullish even with today’s sell-off. The VIX remains elevated, so traders should remain cautious and avoid overexposure during periods of increased volatility.

Market Sentiment and Key Levels:
SPY is trading near $580 with key resistance at $585 and major support at $575. The bulls remain in control as long as SPY holds above $580, though caution is warranted near resistance. A breakout above $585 could target $587, while failure to hold above $580 may lead to a retest of support around $575. While today delivered the first red day in many, the bulls still control the narrative and will likely step in soon to support the market.

Expected Price Action:
For Wednesday, SPY is expected to trade between $575 and $585. The market remains bullish but may consolidate further around these levels before making a more decisive move. If SPY breaks above $585, it could test $587 or higher, while a failure to hold $580 could lead to a pullback toward $578 initially and $575 as an additional lower target.

Trading Strategy:
Long trades are favored as long as SPY holds above $578, with upside targets at $583 and $585. Short trades could be considered on a failure to hold above $578, targeting a pullback to $575. We continue to favor long trades over shorts unless SPY trades below $578 where we expect the bears to appear once again. But above $578 it’s likely the bulls will step up on any retest of today’s lows and slightly lower to return the market to the bull trend in place since the August lows. For longs off lower support at $578, look for failed breakdowns as a trigger to get long with first targets at $580. Short trades should be considered below $578 to $575 or if the market rallies to $583 and sets up a topping pattern like a double top or failed breakout.   

Risk Management and Warnings:
With the VIX elevated around 20.64 traders should remain cautious and manage risk with tight stop-losses. Avoid overleveraging, and reduce position sizes during periods of heightened volatility. Keep an eye on key support and resistance levels, as sharp reversals could occur following major earnings or economic data releases.

Model’s Projected Range:
The model projects SPY to trade between $575.50 and $583.75, with a Put-dominated outlook suggesting a bearish sentiment in a somewhat narrow range. This implies a ranging market on Wednesday which is likely to deliver choppy price action. SPY remains within the bull trend channel from the August lows, with support expected around $578 and resistance at $583. If SPY holds above $578, a move toward $583 is likely, while a break below $578 could see a retest of $575.

Market State Indicator (MSI) Forecast:

Current Market State Overview: The MSI is currently in a Bullish Trending Market State closing on support. The are no extended targets and none printed below price today. The MSI only rescaled to an extremely narrow Bullish Trending Market State prior to the close with brief periods of a Ranging State after 3 pm ET. The range is so narrow it’s not visible on a two-minute chart. Switching to a 1-minute time frame will provide more granularity and allow the MSI to provide more quality information. MSI support and resistance are basically at the same level at $579.40 which held price into the close.
Key Levels and Market Movements: At the open, the MSI continued its Bullish Trending Market State from Monday and stopped printed extended targets above just prior to the open. This opened the door to a mean reversion trade from major resistance at $585. A double top at this level by 10 am ET and it was off to the races to the downside with little to keep price from falling to MSI support. Price did just that all the way back to MSI support at $579.39 where priced traded into the close. Yesterday the MSI kept its users out of a mean reversion short trade which was the proper strategy while today, the MSI opened the door to this trade and given the distance from price to support, this trade turned into the best short trade in some time. But users also knew once price reached MSI support at $580, since this too was our model’s major support level, profits were locked in and some users even initiated a quick scalp long from this level. A couple of easy trades made much easier with the MSI.
Trading Strategy Based on MSI: Given the MSI’s current state, we expect price to chop around the $580 level, setting up the MSI for a rescale prior to the open. A likely test of lower support at $578 may provide traders with the opportunity for a long from this level. Changing the chart time to a 1-minute charts and it’s clear that the MSI favored shorts all day, including printing extended targets below until price reached major support at $580. The 1-minute chart is a bit fast for our liking all day but using it when the MSI support and resistance levels are on top of one another is a good strategy. Right now on a 1-minute chart, the MSI is in a Bearish Trending Market State but there are no extended targets below, hence our model’s call for longs off support in the $578 area. Wednesday we will seek longs on any pullback and from any MIS support level once it rescales. The bears dipped their toes into the market today but still do not have control of the market. In fact the market could drop to $550 from $580 and the bulls will still be in charge. In choppy markets like we forecast for Wednesday, look for failed breakout/breakdown patterns as triggers to enter from major support or overhead resistance using the MSI as your guide.

Dealer Positioning Analysis:

Summary of Current Dealer Positioning: Dealers are selling $586 to $590 and higher strike Calls while also buying $580 to $585 Calls indicating Dealers’ desire to participate in any market rally on Wednesday. $590 appears to be a ceiling for the day and Dealers seem to believe $580 will hold with price moving back toward $585. To the downside, Dealers are buying $579 to $575 and lower strike Puts in a 2:1 ratio to the Calls they are selling/buying, implying a neutral to slightly bullish view of the market for Wednesday, and far less bearish than today. Again most options ended the day in the money, therefore Dealer positioning may be less reliable for tomorrow given it's likely Dealers will add much more exposure in the morning.
Looking Ahead to Friday: Dealers are selling $585 to $590 and higher strike Calls while also buying $580 to $584 Calls indicating the Dealers desire to participate in any recovery into Friday. Dealers believe price will not exceed $590. To the downside, Dealers are buying $579 to $560 and lower strike Puts in an 8:1 ratio to the Calls they are selling/buying. This implies a bearish view of the market heading into Friday. Dealers continue to carry significant downside protection, and while their current ratio of Puts to Calls is bearish, again its likely this positioning adjusts in the morning. Dealers are playing it safe with plenty of Put protection, however by buying Calls, they seem to think today’s sell off was nothing more than profit taking and expect prices to resume their upward trajectory into the end of the week.

Recommendation for Traders:
With the market showing signs of consolidation following two strong bullish sessions, traders should continue to favor long trades as long as SPY holds above the key support at $578. Focus on buying dips near this level, with upside targets at $583 and $585. If SPY manages to break above $585 and hold, there could be an opportunity to ride the trend higher toward $587. Caution is warranted around resistance levels, particularly at $585 and certainly below support at $578. Traders should be prepared for potential rejections and consider short trades if SPY fails to break and hold above resistance or moves below major support. As always, risk management is crucial in these market conditions. Remember to review the premarket analysis posted before 9 AM ET to account for any changes in the model’s outlook and in Dealer Positioning.

Good luck and good trading!