Market Insights: Thursday, October 17th, 2024

Market Overview:
U.S. stocks moved higher on Thursday, with the Dow Jones Industrial Average hitting fresh records. The technology sector led the charge as upbeat guidance from Taiwan Semiconductor Manufacturing Company (TSMC) alleviated concerns about artificial intelligence (AI) demand. TSMC's earnings beat and positive forecast helped lift Nvidia and other chip stocks, further boosting investor sentiment. Nvidia reached an intraday all-time high, benefiting from the renewed optimism surrounding AI, while other chip stocks like Arm and Broadcom also surged. Despite the tech-driven gains, the S&P 500 briefly reached an intraday record before slipping back into slightly negative territory. Meanwhile, the Nasdaq barely crossed the flatline, while the Dow gained 0.42%, maintaining its momentum as stronger-than-expected retail sales underscored the resilience of the U.S. economy. Retail sales grew by 0.4%, outpacing expectations and strengthening the bullish case for continued economic expansion. Weekly jobless claims dropped significantly to 241,000 from 260,000, reinforcing confidence in the labor market. With Big Tech earnings season kicking off after the bell, eyes are on Netflix, which is set to report and potentially signal more bullish momentum in the sector.

SPY Performance:
SPY opened at $585.97 and struggled to maintain its footing after reaching a high of $586.12. The index briefly tested lower support, dipping to $582.16 before closing slightly lower at $582.18, down by 0.02% on the day. Trading volume remained light, with 31.7 million shares exchanged, below average for the index. The struggle to surpass the $585 resistance level suggests consolidation before another attempt at higher levels. Support at $582 provided a temporary base, with potential for further tests of lower levels before a breakout.

Major Indices Performance:
The Dow Jones led the market with a 0.42% increase, bolstered by gains in tech stocks, setting another all-time high. The Nasdaq gained only 0.07%, held back by mixed performances within Big Tech, while the Russell 2000 fell by 0.32%, reflecting the struggles of small-cap stocks. The major indices reflected a cautious optimism as strong retail data and tech gains balanced against broader economic uncertainties.

Notable Stock Movements:
Nvidia led the "Magnificent Seven" with a solid rally, climbing by over 2% as chip stocks rebounded on TSMC’s positive guidance. Other standouts included Arm and Broadcom, both benefiting from the broader chip rally. Tesla, however, saw a slight decline, as did Netflix and Google, which pulled back ahead of Netflix's earnings report. The mixed performance in Big Tech reflected some profit-taking following strong gains earlier in the week.

Commodity and Cryptocurrency Updates:
Crude oil saw a slight recovery, rising by 0.48%. Should prices near $65 per barrel, there will be buying opportunities for energy traders. Gold hit a new record high, climbing 0.61% on safe-haven demand amid economic uncertainties. Bitcoin, however, experienced a decline, falling by 1.20% to just below $67,000, reflecting the ongoing volatility in the cryptocurrency market but is still bullish above $62K.

Treasury Yield Information:
The 10-year Treasury yield rose sharply by 2%, closing at 4.098%. The increase in yields suggests that bond investors are positioning themselves ahead of potential inflationary pressures and upcoming economic data releases, which could impact the broader market.

Previous Day’s Forecast Analysis:
Tuesday’s forecast projected that SPY would consolidate between $580 and $583, with a bullish bias provided it held above the critical support level of $580. The report highlighted that resistance at $585 would be a pivotal level, warning that a failure to break decisively above this resistance could lead to a potential pullback. We felt the market would trade as high as $586.75, making a new all-time high. The forecast emphasized the importance of looking for long trades near $580, as the support level was expected to hold, offering a favorable risk-reward ratio for buyers. However, it also suggested that short trades might be viable if SPY failed to sustain upward momentum above $585, signaling potential weakness. Additionally, the forecast noted the likelihood of a slow upward movement throughout the day, with the market expected to test key resistance levels before making any decisive moves. The analysis emphasized the importance of trading around these levels and cautioned traders to be flexible, as price action was likely to remain choppy unless SPY made a significant move beyond the $585 resistance level. The broader market sentiment indicated a potential for consolidation after recent gains, with traders advised to be patient and avoid chasing trades in a tight range unless a clear breakout occurred.

Market Performance vs. Forecast:
SPY's performance on Thursday closely followed the forecasted levels. The index tested support near $582 after falling slightly below the expected range, before stabilizing and rebounding. The projected resistance at $585 proved too strong to overcome, and the market consolidated in the expected range, validating the forecast's emphasis on this key level. Long trades around $582 worked well, with traders able to profit from the recovery toward the upper end of the range. The predicted range of $580 to $585 largely held, with limited upward momentum beyond these levels with several opportunities for both long and short trades from major levels.

Prior Day’s Forecast Final Thoughts:
The market adhered to key support and resistance levels, confirming the previous day’s forecast. Traders who followed the long recommendation around $582 had profitable opportunities, especially with the expected consolidation playing out as predicted. However, the failure to sustain a break above $585 suggested that further consolidation or a potential pullback could be imminent. The forecast highlighted the importance of flexibility in trading strategies, and Thursday’s session validated this approach as the market struggled to maintain higher prices after reaching a new all-time high.

Premarket Analysis Summary:
Thursday’s premarket analysis suggested SPY could face resistance near $585, with upside targets at $588 and $590 if buying pressure increased. The bias leaned toward long trades above $582.50, with a potential breakout if SPY held above $585. On the downside, a break below $582.50 could lead to further declines toward $581 or even $579. Traders were advised to look for bounces off key support levels, particularly around $582.50, and to approach the day cautiously.

Validation of the Analysis:
The premarket analysis proved largely accurate, with SPY struggling to sustain a break above $585, falling back to test support near $582. The predicted range of $582.50 to $585 held, providing profitable opportunities for traders who followed the guidance to take long positions near support. The resistance at $585 remained a significant barrier, validating the cautious approach suggested by the premarket analysis. The analysis successfully anticipated the sideways trading pattern, and traders who followed its guidance benefited from predictable market behavior.

Looking Ahead: Economic News Releases:
Friday has no key economic data.

Anticipated Market Impact:
Stronger-than-expected retail sales and lower than forecast unemployment claims could fuel further market gains, particularly in consumer-focused sectors. Next week PMI will be a major contributor to fuel the rally or it could lead to profit-taking and increased volatility, especially after the recent rally. Traders should remain cautious and monitor the data closely to gauge market direction.

Guidance for Traders:
Traders should focus on key levels such as $582 and $585 for SPY, using these as for long or short trades. If SPY holds above $585, further upside toward $590 is possible. However, if the index fails to break this level, short trades targeting support at $582 and lower should be considered.

Market Sentiment and Key Levels:
SPY is currently trading around $582.35, with major resistance at $585 and support at $582.50. The market remains cautiously bullish, but consolidation is likely before any major directional move occurs. A break above $585 could signal a push toward $588 or even $590, while a failure to hold $582.50 may lead to a retest of $580. With today’s break to a new high but failure to close above $585, it’s likely the market will continue to consolidate between $580 and $585. There is little support below $580 therefore a failure to hold this level could quickly see prices drop to $575 or lower.

Expected Price Action:
SPY is expected to trade between $580 and $585 on Friday. While the bulls are still in control, the market has still not had a proper pullback since the September lows. We expect price to drift slightly lower overnight to as low as $580 where buyers are waiting to support price. But given there is no news due on Friday and few earnings which have the potential to move the market, it’s likely Friday is a slow, sideways day with little trending price action. Breaks above and below our major levels should be viewed with caution given the “trappy” nature of the market. Traders should remain flexible, looking for opportunities to trade only from key support and resistance levels.

Trading Strategy:
Long trades are favored above $580, targeting resistance at $585, while short trades should be considered if SPY fails to break above $585 and creates a failed breakout pattern. While the bulls are still in charge, the market is weakening at these levels and needs a further catalyst to push prices higher. We favor shorts from overhead resistance and on a break with volume of $580, with longs from $580/582 to $585. Sideways markets provide two-way trading with smaller stops and smaller targets therefore managing risk is critical in these market conditions.

Risk Management and Warnings:
The VIX is currently elevated at 19.11 therefore traders should be prepared for large moves which may appear at any time. The potential for increased volatility around economic data and the US election makes it essential to remain nimble until the market establishes a clearer direction.

Model’s Projected Range:
The model projects SPY to trade between $577.50 and $587.25, about the same as today indicating a more sideways market. The market remains Call-dominated, suggesting a slightly bullish outlook, with resistance at $585 needed to be breached for any upward continuation. Price remains in the middle of the bull trend channel from the September lows but price is moving sideways and, in a few days, will be forced to either resume its path higher or break trend and form a new bear channel.  

Market State Indicator (MSI) Forecast:

Current Market State Overview:
The MSI is currently in a Bearish Trending Market State, closing mid-range. There are extended targets below price implying the herd is participating in pushing prices lower. The range is quite narrow, indicating a weak bear trend. The MSI rescaled lower into the close like it did yesterday signaling a slowing trajectory. MSI support is $582.77, and resistance is $583.09.
Key Levels and Market Movements:
The MSI rescaled higher this morning after strong retail sales numbers were released setting a new all-time high for SPY. But at the open, SPY put in a classic failed breakout and double top and fell from today’s highs, reaching MSI lows at $583.50. SPY bounced around this level for some time, retesting MSI resistance at $584.90 before finally rescaling lower at 2:00 pm ET to its current bearish state, reaching MSI support at the day’s lows. Users of the MSI understand the probability of price moving from one side of the MSI to the other in a trending state is @ 70% and today this proved to be the case.
Trading Strategy Based on MSI:
The MSI’s current state suggests continued downward movement, perhaps with an overnight test of $580 before finding major support to return to higher prices. The range is very narrow therefore we believe any test of today’s lows or lower should be bought. The bulls got their new high today but price sold off quickly. There doesn’t seem to be enough energy built up for another push beyond the current high, at least not for tomorrow. Watch for the MSI to rescale to a Ranging Market State and be careful to avoid trading in this state. The odds are far better to trade when the MSI is in a trending state therefore we favor waiting for this MSI state to provide direction for Friday’s trades. Again in a choppy market, traders should look for failed breakout or breakdown patterns at major support or resistance, using MSI levels to guide entries and exits.

Dealer Positioning Analysis:

Summary of Current Dealer Positioning: Dealers are selling $584 to $590 and higher strike Calls while also buying $583 Calls indicating Dealers’ desire to participate in any market rally on Friday. $590 continues to be a ceiling for tomorrow and Dealers believe $580 will hold as support with price moving back toward $585 tomorrow. To the downside Dealers are buying $582 to $570 and lower strike Puts in a 4:1 ratio to the Calls they are selling/buying implying a slightly bearish view of the market for Friday. They were neutral coming into the day which was the proper posture.  
Looking Ahead to Next Friday: Dealers are selling $583 to $595 and higher strike Calls while also selling $580 to $582 Puts indicating the Dealers believe there is a floor in the market next week of $580. Dealers typically sell Puts only when they believe prices will rise. In addition Dealers have moved up their Call selling to $595 from $590 implying continued upside by next Friday. To the downside Dealers are buying $579 to $570 and lower strike Puts in a 4:1 ratio to the Calls/Puts they are selling. This implies a neutral to slightly bearish view of the market heading into next Friday. Dealers are holding significant downside protection but they have reduced this slightly from today. Dealers are almost always positioned properly so we recommend every reader learn how best to interpret Dealer positioning to make their plan your own.   

Recommendation for Traders: The market continues to consolidate after a series of bullish sessions but is showing some signs of slowing, even after making a new high today. Traders should continue to favor long trades as long as SPY holds above key support at $580, and certainly look for longs on a breakout above $585. But weakness at either of these levels may also be sold given the strength of the uptrend is waning. We may be entering a period where price simply drifts higher as opposed to large trend days. More two-way trading provides for more opportunities for profit so pick your spots based on our major levels and wait for the market to set up to maximize your gains. 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!