Market Insights: Wednesday, October 16th, 2024

Market Overview: U.S. stocks rebounded on Wednesday, with the Dow Jones Industrial Average leading the charge, jumping nearly 350 points, or about 0.8%, to close at a record high of 43,077.70. The rebound was fueled by strong earnings results, particularly from Morgan Stanley, which saw its shares rise by almost 7% after reporting solid profits driven by a surge in dealmaking. The tech-heavy Nasdaq also posted a modest 0.3% gain, while the S&P 500 rose 0.5%, closing just shy of its all-time high. This recovery followed Tuesday's pullback, which was driven by ASML's disheartening 2025 outlook. Semiconductor stocks saw a recovery, led by Nvidia, which bounced back by 3.1%. The earnings season continued to steer market sentiment, with disappointing results from UnitedHealth Group and luxury giant LVMH tempering broader bullish sentiment. Commodities saw gold approach a record high, buoyed by market uncertainties, including fresh tariff promises from U.S. presidential candidate Donald Trump.

SPY Performance: SPY opened at $579.76 and managed to recover from an early low of $578.96, closing up 0.43% at $582.30. Despite initial weakness, SPY pushed higher as the broader market recovered from Tuesday’s decline. Volume remained below average at 28.65 million shares, reflecting a less volatile session compared to the tech-led selloff the day before. Key support at $578 was briefly tested early in the session, but strong buying pushed the index above resistance at $580, setting the stage for potential gains toward $585 later this week.

Major Indices Performance: The Dow led the major indices with a 0.79% gain, setting a new record high. The Russell 2000 saw a notable 1.65% jump, driven by strong performances from small-cap stocks, which outpaced their large-cap counterparts. The Nasdaq, up 0.29%, was supported by a recovery in semiconductor stocks, particularly Nvidia. The S&P 500 rose 0.5%, just shy of setting its own new record. Despite some disappointing earnings, the broader market sentiment remained bullish as investors focused on strong corporate profits.

Notable Stock Movements: Tesla and Nvidia were the standout performers in the "Magnificent Seven" group, with Tesla rising slightly, while Nvidia jumped by 3.1% after its sharp decline on Tuesday. Most of the other tech giants struggled, with Microsoft and Apple seeing minor declines. Nvidia’s rebound came as investors shrugged off ASML's earnings disappointment and resumed their focus on the broader AI chip market’s potential. Meanwhile, shares of Morgan Stanley surged nearly 7% following robust quarterly earnings, while Walgreens Boots Alliance’s cost-cutting initiatives continued to support a positive outlook.

Commodity and Cryptocurrency Updates: Crude oil slid 0.47%, continuing its decline toward $65 per barrel, though investors are keeping an eye on potential geopolitical developments that could reverse the trend. Gold climbed another 0.43%, pushing closer to a new record high, driven by global economic uncertainties and safe-haven demand. Bitcoin gained 1.01%, closing just above $67,000, maintaining its upward trend despite ongoing market volatility. We are buyers of Crude closer to $65 and continue to favor longs in Gold, Silver, and Bitcoin above $62K.

Treasury Yield Information: The 10-year Treasury yield dipped slightly by 0.45%, closing at 4.018%. The decline in yields reflects a cautious market, as investors await key economic data later in the week, including retail sales and unemployment claims, which could impact both bonds and equities.

Previous Day’s Forecast Analysis:
Recap of Previous Forecast: Tuesday’s forecast projected a range between $575 and $585 for SPY, with a bullish bias as long as SPY held above $580. The key resistance level of $585 was highlighted, with the forecast suggesting a potential breakout if bullish momentum continued. A failure to maintain support at $580 was expected to lead to a test of $578, with a possibility for deeper pullbacks if buyers didn’t step in. The forecast also emphasized the importance of watching for a potential bounce from the $578 support level, advising traders to enter long trades if this level held. Conversely, it warned of short opportunities if SPY failed to break above $583, with a focus on fading rallies near resistance. The strategy was to avoid trades in the choppy $583-$585 range unless a clear breakout or breakdown occurred. The broader expectation was for SPY to consolidate after recent strong gains, offering short-term opportunities both for long and short trades depending on how key levels were respected.

Market Performance vs. Forecast: SPY's performance on Wednesday was largely in line with the forecast. The index held above the critical $580 support level after a test lower as forecast and rebounded toward $583, near the upper end of our model’s projected range. Although SPY didn’t test the $585 resistance, the recovery from $580 support provided traders with opportunities for long positions, particularly after the early dip toward $578 as suggested.

Prior Day’s Forecast Final Thoughts: The market respected key support at $580, confirming the importance of this level in providing a floor for buyers. Traders who followed the recommendation to look for long entries around $580 could capitalize on the rebound toward $583. The failure to break $585 suggests more consolidation is possible before a clearer directional move occurs later this week. Clearly the bulls are holding onto control of this market, leaving little for the bears to do but watch.

Premarket Analysis Summary: Wednesday’s premarket analysis projected a slow, sideways trading day with SPY expected to hover between $580 and $581.50. The analysis favored long trades close to the $580 support level, with a potential upside toward $583, though it suggested early profit-taking if momentum slowed. Resistance at $585 was viewed as unlikely to be reached unless significant buying pressure emerged later in the session. The analysis also warned that if SPY failed to hold above $580, the market could feel heavier, with potential downside targets of $579 and $577.50. Traders were advised to approach the day cautiously, focusing on trades near key levels while avoiding overexposure in what was anticipated to be a choppy and slow-moving session. The forecast highlighted the importance of quick profit-taking in both directions, given the likely lack of momentum.

Validation of the Analysis: Wednesday’s market largely adhered to the premarket analysis. SPY respected the key $580 support level, which allowed for long trades as projected. After initially testing this support, SPY climbed toward $582.30, in line with the forecast's expected range of $580 to $581.50, and surpassed the anticipated upside target slightly. The market's upward move validated the bias toward long trades near support. Although the premarket analysis suggested resistance at $585 was unlikely to be reached, SPY came close to this level during the session, highlighting that the forecast was largely accurate in predicting a slow, upward movement. Traders who followed the guidance of taking long positions near $580 had opportunities to profit, as the market provided gradual upside momentum throughout the day. The recommendation to favor short-term profits also proved useful, as the market did not break through the higher resistance levels.

Looking Ahead: Economic News Releases: Key economic data releases on Thursday include Core Retail Sales and Unemployment Claims. These reports will provide crucial insights into consumer spending and the labor market, both of which could influence market sentiment heading into the end of the week. Traders should prepare for potential volatility, particularly if retail sales data deviates significantly from expectations.

Anticipated Market Impact: Positive retail sales figures could boost market confidence, fueling a rally, particularly in consumer-focused sectors. Conversely, a rise in unemployment claims could dampen sentiment, leading to a more cautious trading environment.

Guidance for Traders: Traders should remain cautious ahead of Thursday’s economic data. Focus on long trades near key support levels, particularly if SPY holds above $580. However, it’s crucial to keep position sizes smaller until the market’s direction becomes clearer. A breakout above $585 could signal further upside to $587 where the market will likely pause. But traders should remain alert for potential resistance at these major levels.

Market Sentiment and Key Levels: SPY is currently trading around $582, with major resistance at $583 and $585 with support at $580 and $578. The market remains in a bullish posture, but consolidation is likely before a decisive move occurs. A break above $585 could open the door to $587 initially with even $590 as a potential target, while a failure to hold $580 may lead to a retest of $578.

Expected Price Action: SPY is expected to trade between $578 and $586 on Thursday. Bulls will be in control if SPY remains above $580, but any break below this level could see the index test lower support at $578/577. A breakout above $585 could target $587, though cautious positioning is advised. Volume was quite weak today which implies many of the larger market participants are sitting out this rally at these levels.

Trading Strategy: Long trades are favored above $578 and $580, targeting $583 and $585, with tighter stop-losses as SPY approaches these resistance levels. If SPY breaks below $578, consider short trades with a target of $575. Focus on trading from support and resistance, and remain flexible in light of potential volatility. To trade successfully, be a hunter. Set up at areas where your prey is likely to appear and remain silent waiting for the opportunity to strike. Do not waste your ammunition on small prey but instead line up the big game for the ultimate kill. Using the levels and strategy provided in these newsletters allows you to do just that...be the ultimate predator.

Risk Management and Warnings: With the VIX still at 19.58 and elevated with major economic releases on the horizon, traders should manage risk carefully by tightening stop-losses and avoiding overexposure. While we need volatility to be profitable, position sizes at extreme levels should be reduced to limit downside risk, especially in a sideways market.

Model’s Projected Range: The model projects SPY to trade between $578 and $586.75, with a Call-dominated outlook indicating a slightly bullish bias. The range has expanded from today indicating a trending day on Thursday due to the economic data being released. Support remains firm at $578, while resistance at $585 will be critical in determining whether the market can continue its upward momentum. SPY continues to trade in the middle of the bull channel from the August lows on a steep and uncorrected trajectory that is likely to reverse at any time.

Market State Indicator (MSI) Forecast:

Current Market State Overview: The MSI is currently in a Bullish Trending Market State closing mid-range. The are no extended targets above, yet there were several today as price moved higher most of the day. The range is average and the bull trend appears strong, however the MSI did rescale a bit lower into the close, potentially indicating a slowing upward trajectory. MSI support is $581.71 and resistance is $582.55.
Key Levels and Market Movements: The MSI rescaled just prior to the open to a very narrow Bearish Trending Market State which was a clue to users that the sell off at the open was a fake breakdown which should be bought rather than sold. The MSI quickly reversed to a Bullish Trending Market State after the bulls trapped the bears and the MSI stayed in this state until price reached overhead resistance at $581, a level identified in the premarket analysis. A quick sell off from this level with the MSI switching to a Ranging Market State and price once again found a base at MSI support at $579.58 and it was off to the races the rest of the day with the MSI rescaling higher and printing extended targets as the trend gained steam. Into the close the MSI recalled a bit lower, indicating a wall of resistance at $583 which will need to be overcome before SPY can reach a new all-time high. Users of the MSI were able to capitalize on the failed breakdown just after the open for a long to $581 with a second opportunity to get long again on another failed breakdown at 10:42 am ET. As the MSI rescaled higher and printed extended targets MSI users sat on their hands and let their longs work toward our major resistance level at $583. While there was an opportunity for a short from today’s highs, given the strength of the move and the time when this trade set up, we were happy to sit out this short, protecting our profits from the two long trades which paid handsomely thanks to the MSI.
Trading Strategy Based on MSI: Given the MSI’s current state we expect price to continue to push higher after testing support at $581 or perhaps $580. The bulls want to make another new all-time high at $587 and there is sufficient evidence to suggest this is probable. But tomorrow and Friday will come down to the economic reports due premarket as well as earning releases from heavies such as Netflix. These are times when the MSI is extremely valuable given it will update in real time and provide insight into what may develop after this information is released to the market. Absent this information, it’s likely SPY chops around between $580 and $583 before breaking higher to $585 with a slight pullback overnight. With the MSI rescaling a bit lower into the close, this tells us a pullback is probable. But should the bulls have the stomach for it, a push to $587 is also likely on very strong economic or earnings news. While tomorrow could be a trend day, we still favor looking for failed breakout/breakdown patterns as triggers to enter from major support or overhead resistance using MSI levels as a guide and will ride any trend, especially with extended targets printing above resistance.

Dealer Positioning Analysis:

Summary of Current Dealer Positioning: Dealers are selling $585 to $590 and higher strike Calls while also buying $583 to $584 Calls indicating Dealers’ desire to participate in any market rally on Thursday. They were perfectly positioned coming into today for today’s rally. $590 continues to be a ceiling for tomorrow and Dealers believe $580 will hold as support with price moving back toward $586 tomorrow. To the downside Dealers are buying $581 to $575 and lower strike Puts in a 3:1 ratio to the Calls they are selling/buying implying a neutral view of the market for Thursday. Again they were bullish coming into day which worked out extremely well.  
Looking Ahead to Friday: Dealers are selling $584 to $590 and higher strike Calls while also buying $583 Calls indicating the Dealers desire to participate in a push to new highs by Friday. Dealers believe price will not exceed $590 but seem to be open to the market breaking above $585.27, the current all-time high. To the downside Dealers are buying $582 to $570 and lower strike Puts in a 5:1 ratio to the Calls they are selling/buying. This implies a slightly bearish view of the market heading into Friday. Dealers are holding significant downside protection and while their current ratio of Puts to Calls is slightly bearish, it is less bearish than it was a day or two ago and therefore likely to reflect more neutral positioning than concern over downside risk. Dealers were positioned well for Tuesdays sell off and todays subsequent rally as they believed the sell off was nothing more than profit taking, expecting prices to resume their upward trajectory. Dealers almost always get this right so we recommend every reader of these newsletters understand how to interpret Dealer positioning.

Recommendation for Traders: With the market consolidating after a series of bullish sessions, traders should continue to favor long trades as long as SPY holds above key support at $578 to $585. If SPY breaks above $585 and sustains that level, traders could aim for a further upside toward $587. Caution is warranted near resistance yet we would be careful entering shorts in this market. Any short trades need to be managed with quick profits, therefore we advise tight stop-losses on any short position until SPY loses support at $578. But to get paid well, the best trades in this market continue to favor longs from support. Volatility may increase with key economic reports due Thursday, therefore manage risk by trading what you see is of the utmost importance on Thursday. 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!