Market Insights: Friday, October 18th, 2024
Market Overview: U.S. stocks ended the week on a high note, led by Netflix’s (NFLX) explosive 11% rally following its stellar earnings report. This momentum helped push the S&P 500 (^GSPC) to a fresh all-time high, while also marking its sixth consecutive week of gains, the longest streak of the year. The Nasdaq Composite (^IXIC) outperformed the other major indices, rising 0.6%, as investors embraced strong Big Tech results. Meanwhile, the Dow Jones Industrial Average (^DJI) edged up by 0.1%, securing another record close after leading the market earlier in the week. Optimism surrounding corporate earnings, especially in the tech sector, has kept the bullish sentiment alive, with Netflix's results calming earlier fears of a disappointing earnings season for Big Tech. Gold continued its march upward, setting a new record high, while geopolitical tensions and looming economic uncertainty spurred further demand for safe-haven assets.
SPY Performance: SPY closed higher, rising 0.38% to finish at $584.56. After opening at $584.09, SPY tested its intraday high of $585.39 before dipping to $582.58. The market remained within a tight range, reflecting cautious optimism with volume still below average at 34.19 million shares. The bulls defended key support levels, with $582 acting as a reliable floor, and the lack of any significant breakout suggests potential consolidation before the next leg up. Key resistance remains at $585, and a break above this level could lead to further gains.
Major Indices Performance: The Nasdaq led the day's gains, rising 0.6%, driven by Netflix’s blockbuster earnings and a strong showing in other tech stocks. The Dow followed with a modest 0.1% increase, extending its record-setting performance earlier in the week. However, the Russell 2000 underperformed, dropping 0.22%, as small-cap stocks faced renewed pressure. The broader market sentiment remained positive, bolstered by strong corporate earnings and economic resilience, though concerns about future growth persist.
Notable Stock Movements: The “Magnificent Seven” stocks saw mostly positive action, with Netflix surging over 11%, the clear standout following its earnings beat. Other notable gainers included Nvidia and Meta, both of which continued their steady climb, reflecting the broader optimism surrounding tech. However, Tesla and Meta slipped slightly, as profit-taking ahead of key earnings reports caused brief pullbacks. Tesla remains a stock to watch as its performance diverged slightly from its peers.
Commodity and Cryptocurrency Updates: Crude oil fell 1.83% amid signs of slowing global demand. As prices approach the $65 mark, this creates a potential buying opportunity for energy traders. Gold, meanwhile, hit a new record high, gaining 1.00%, driven by increased demand for safe-haven assets as uncertainties surrounding the Middle East conflict and U.S. economic outlook continue to dominate investor sentiment. Bitcoin surged 2.68%, closing just above $68,000 as it remains resilient in the face of global financial uncertainty, reaffirming its place as a volatile yet bullish asset.
Treasury Yield Information: The 10-year Treasury yield dipped slightly, closing down 0.37% at 4.081%. Investors appeared to be seeking safety in bonds, driving yields lower amid concerns about potential inflationary pressures and uncertainty around upcoming Federal Reserve actions. While yields remain elevated, the slight decline suggests a cautious market ahead of key economic data releases.
Previous Day’s Forecast Analysis: In yesterday’s forecast, the primary expectation was that SPY would remain in a consolidation range today between $580 and $585, with a bullish bias if the index held above $582.50. The projected trading range was $580 to $585, with the bias leaning towards the upside as long as SPY remained above key support. The forecast emphasized that a break above $585 could trigger a move toward $588, while a failure to sustain momentum above $585 could result in a pullback, possibly testing support at $582 or even lower. Guidance favored long trades from key support levels, particularly around $582, with upside targets set near $585 and $588. The forecast also noted the possibility of short trades if SPY failed to break decisively above $585, indicating that a failed breakout could lead to weakness and potential selling opportunities back towards support. The strategy encouraged traders to remain cautious given the "trappy" nature of the market, advising flexibility and readiness for choppy price action. The overall bias was slightly bullish but recognized the potential for consolidation before a more decisive move in either direction. By highlighting these key levels and advising traders to take advantage of opportunities at support and resistance, the forecast provided clear entry and exit points for both long and short trades.
Market Performance vs. Forecast: SPY's performance on Friday closely aligned with the prior day's forecast. As anticipated, the index consolidated within the projected range of $580 to $585, testing key support and resistance levels throughout the session. SPY dipped to a low of $582.58 before bouncing back toward its intraday high of $585.39, just above of the crucial $585 resistance level. While the forecast suggested a potential breakout if SPY held above $585, the index failed to make a decisive move above this level, resulting in a pullback toward the middle of the range. The long trades recommended around $582 provided solid opportunities for traders as SPY rebounded from support and approached resistance near $585. Short trades were also viable when SPY tested resistance at $585 but failed to break through, confirming the forecast's caution around a potential failed breakout. The market's range-bound action, particularly around these major levels, validated the forecast’s emphasis on being flexible and ready for choppy, two-way trading. Overall, the forecast accurately predicted the day’s price movements, with SPY remaining within the expected range and providing several profitable opportunities for both long and short trades at the key levels outlined in the analysis. Traders who followed the forecast’s guidance were able to capitalize on these predictable movements.
Prior Day’s Forecast Final Thoughts: Friday’s session validated the prior day’s forecast, as SPY respected the key support at $582 and the forecasted resistance at $585. Traders who followed the recommendations saw profitable opportunities. The inability to break above $585 suggested potential consolidation ahead, reinforcing the need for traders to stay flexible and adjust strategies as SPY continues to test major resistance levels.
Premarket Analysis Summary: Today’s premarket session indicated with SPY trading at $583.96, just below its recent all-time highs, the market seemed hesitant to make a strong upward move at the open, and we advised traders to remain cautious. The upside target was $585, but the sentiment suggested that upside potential may be limited. There was a possibility for SPY to reach as high as $586.50, but traders were advised to take profits quickly if momentum weakened. Long entries should have only be considered if SPY held above $582 with clear buying strength above this level. On the downside, we stated a rejection at $585 could serve as a strong signal for short entries, with targets first at $582 and further down at $579.45 if the market accelerates lower. With a large number of options expiring today, we expected choppy, two-way trading as the market digests these influences. Traders were encouraged to stay nimble and avoid overcommitting in such a potentially volatile environment.
Validation of the Analysis: The premarket analysis predicted a choppy session with two-way movement, and SPY’s performance on Friday adhered to these projections. The index tested the expected support and resistance levels, providing trading opportunities for both long and short positions. The forecast range of $582.50 to $585 proved accurate, with SPY remaining within these levels, validating the cautious approach suggested in the analysis.
Looking Ahead: There are no major economic releases scheduled for Monday, though traders should remain vigilant as several Federal Reserve members are set to speak. With limited catalysts for a major move, the market is likely to consolidate, though the ongoing earnings season could spark volatility in individual stocks. Traders should monitor next week’s PMI data, which could influence broader market direction, especially as the current rally appears to be losing steam.
Guidance for Traders: Traders should focus on key levels such as $582 and $585 when making trading decisions. If SPY holds above $585, further upside toward $590 and even $595 could be possible. A failure to break above this level might provide opportunities for short trades targeting $582 and lower. With market momentum slowing, avoid chasing trades unless a clear breakout occurs and instead trade failed breakout and failed breakdown patterns which have been described several times in these newsletters.
Market Sentiment and Key Levels: SPY remains cautiously bullish, trading near $584, with major resistance at $585 and support at $582.50. While $585 remains significant overhead resistance, this level is weakening on each attempt to break and its likely $590 will emerge as the next major level to be overcome with $587 also representing a temporary resistance level. Options are piling up at the $590 level. A failure to hold support at $582.50 will likely trigger a retest of lower levels around $580 and then $577. Below $577 there is little to support price from falling quickly and violently. Traders should monitor these key levels closely as the market appears to be consolidating ahead of potential volatility next week.
Expected Price Action: We expect SPY to trade between $582 and $587 on Monday, with the bulls still holding the advantage. However, the market has yet to experience a significant pullback since its September lows, and we could see a drift lower toward $580 before buyers step in to support price. With no major economic releases on Monday, expect a slow, sideways day with minimal trending action.
Trading Strategy: Long trades remain favored above $580, targeting resistance at $585. However, traders should consider short trades if SPY continues to fail to break above $585, although this level is no longer very strong therefore be careful when initiating shorts from this level. $587 may be a better level to seek short trades on Monday. Look for a failed breakout pattern as a trigger to short $585. In a choppy market failed breakout/breakdown patterns are high probability and should be used to enter trades. Today there was a clear failed breakdown at 9:34 am ET, again at 2:00 pm and at 2:28 pm. The market remains in a consolidation phase, and it’s essential to manage risk carefully with smaller stops and targets, particularly given the potential for sudden reversals.
Risk Management and Warnings: The VIX remains elevated at 18.03, however it dropped this week from over 20. Yet volatility remains a concern therefore traders should prepare for large moves that could occur unexpectedly. Manage risk by tightening stop-losses around key levels, particularly near $582 and $585.
Model’s Projected Range: The model projects SPY to trade between $580.50 and $588.75 on Monday which has narrowed from today. There is a slight bullish bias as the market remains Call dominated. Major resistance is at $585, and the market will need to forcefully break this level for any continued upside. Traders should watch for a break below $580, as there is limited support below this level, which could lead to a sharper drop. SPY continues to trade in the bull trend channel from the September lows and Monday is likely to be a choppy, sideways consolidation day.
Market State Indicator (MSI) Forecast:
Current Market State Overview: The MSI is currently in a Bullish Trending Market State closing mid-range. There are no extended targets and the range is quite narrow, indicating a weak bull trend. The MSI rescaled from a Ranging Market State to a Bullish Trending Market State in the afternoon session and remained there into the close. MSI support is $584.29 and resistance is $584.74.
Key Levels and Market Movements: The MSI rescaled higher this afternoon after the market found support at $582.50 by setting up a perfect long with a failed breakdown from MSI support just after the open. With a slow grind higher, the MSI rescaled to a Bullish Trending Market State and printed extended targets above indicating the herd was participating in the long trend. But the range of the MSI was less than $1 which is extremely narrow, indicating while the herd is trading long, they don’t really believe price will go very far. Sticking to our rules, our MSI traders did not fade the first move at $585 and instead looked to get long once again after a failed breakdown at 2 pm. Once price reached $585 later in the session, our traders waited for the extended targets to stop printing before initiating a mean reversion short into the close. While there was little to trade today given the very tight, $2 range, the MSI did provide three trade opportunities which generated respectable gains on an otherwise unremarkable day.
Trading Strategy Based on MSI: The MSI’s current state suggests a very weak bull trend which will likely drift higher as opposed to trend on Monday. Its possible SPY retests $582.50 on Sunday before resuming its march higher. There aren’t any major economic news or significant earnings Monday morning so once again, we expect the market to trade sideways, providing tight two-way trading. Like today, watch for the MSI to rescale to a Ranging Market State and be careful to avoid trading in this state except from major levels. The odds are far better to trade when the MSI is in a trending state. 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 $587 to $590 and higher strike Calls while also buying $585 to $586 Calls indicating Dealers’ desire to participate in any market rally on Monday. $590 continues to be a ceiling for Monday and Dealers believe $580 will hold with price moving to as high as $587 on Monday. To the downside Dealers are buying $584 to $570 and lower strike Puts in a 2:1 ratio to the Calls they are selling/buying implying a neutral view of the market for Monday. Dealers are clearly not very concerned about major downside risk on Monday.
Looking Ahead to Next Friday: Dealers are selling $585 to $595 and higher strike indicating the Dealers believe the market could rally next week to as high as $595. To the downside Dealers are buying $584 to $570 and lower strike Puts in a 6:1 ratio to the Calls they are selling. This implies a bearish view of the market heading into next Friday. While Dealers are holding significant downside protection, they have pushed the sale of Calls out to $595 therefore the believe $590 will be breached sometime next week. Its likely Dealers are positioned for a continued push higher early in the week to $590 or beyond but feel this will not hold and therefore they want to own more downside protection than they did just a few days ago. We suggest our readers learn from Dealer positioning and add Put protection for any long book.
Recommendation for Traders: Traders should focus on the key levels outlined in today’s premarket analysis. With SPY sitting just below critical resistance at $585, and with long trades favored if the index holds above $582. The market is strong enough to push higher and it appears that $590 is the new target for the bulls. With $585 being tested repeatedly, we would be more careful shorting this level going forward. Instead we would like to see SPY push to $587 where we would seek a mean reversion short. But the trade is still long from support which keeps moving higher each week. $582 is now a strong area of support and where we would seek long trades. 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!
