Market Insights: Wednesday, October 2, 2024

Market Overview

U.S. stocks edged slightly higher today, with the S&P 500 closing up 0.04%, the Dow rising 0.09%, and the Nasdaq gaining 0.08%. Despite the modest gains, market sentiment remained cautious as escalating tensions between Israel and Iran continued to loom over global financial markets. The geopolitical tensions also spurred a 1.69% surge in crude oil prices as fears of potential supply disruptions mounted. Gold, on the other hand, fell 0.38%, signaling that investors were seeking safety in other areas despite the risk environment.

In single stock movements, Tesla (TSLA) saw a significant decline of more than 3% after reporting Q3 global deliveries that missed Wall Street estimates. This weighed on the broader market, especially within the tech-heavy Nasdaq. Elsewhere, Nike (NKE) shares plummeted over 6% after the company withdrew its outlook for the year, citing disappointing Q1 revenue and supply chain concerns. The company warned that it has yet to "turn the corner" on challenges.

On the economic front, the ADP Non-Farm Employment Change report showed 143,000 jobs were added in September, beating the forecast of 125,000 and up from August’s 99,000. This labor market data, along with manufacturing data that indicated continued contraction with the ISM Manufacturing PMI holding at 47.2, kept traders on edge as they awaited Friday’s pivotal Nonfarm Payrolls report. Treasury yields responded to these developments, with the 10-year Treasury yield climbing 1.16% to close at 3.786%, reflecting inflation concerns and uncertainty surrounding the Federal Reserve's next moves.

SPY Performance

SPY opened at $567.66, reached an intraday high of $569.90, and fell to a low of $565.27 before closing the session at $568.84, marking a modest gain of 0.04%. Trading volume was significantly below average, with only 34.06M shares traded, reflecting a lack of conviction among traders. Despite today’s narrow trading range, the key support level at $566 held firm, preventing further downside movement. Resistance at $574.75 remains a crucial level to watch for a potential breakout while $570 has become the new dividing line between the bulls and the bears. While the market still favors the bulls, the bears definitely have wrestled some control from the bulls and it won’t take much to move the market significantly lower. Investors continue to monitor the ongoing geopolitical tensions and upcoming economic reports, which could inject additional volatility into SPY's performance over the next few sessions.

Major Indices Performance

All major indices finished higher today, though gains were quite modest. The Nasdaq rose by 0.08%, the Dow increased 0.09%, and the Russell 2000 slipped slightly by 0.15%. Investors remained cautious due to escalating geopolitical tensions between Israel and Iran, which weighed on market sentiment. The Dow’s gains were supported by strength in defensive sectors like healthcare and utilities, while the Russell 2000 underperformed due to weakness in small-cap stocks, which are more sensitive to global market uncertainty.

Notable Stock Movements

The “Magnificent Seven” stocks saw mixed results today. Apple (AAPL), Netflix (NFLX), and NVIDIA (NVDA) all posted gains, while Tesla (TSLA) dropped more than 3% after reporting lower-than-expected Q3 global deliveries, missing Wall Street’s estimates. This weighed on broader market sentiment, particularly in the tech-heavy Nasdaq. Nike (NKE) shares plunged over 6% after the company withdrew its outlook for the year, citing disappointing revenue for Q1 and ongoing supply chain challenges. The company stated it had yet to "turn the corner" on key challenges affecting its performance, leading to increased selling pressure.

Commodity and Cryptocurrency Updates

Crude oil surged 1.69% as the ongoing conflict in the Middle East spurred concerns over potential supply disruptions. This marks one of the largest single-day gains for crude oil in recent weeks, driven by heightened geopolitical risks. Gold fell 0.38% as investors looked for safety in alternative assets despite geopolitical uncertainties, signaling a shift in risk preferences. Bitcoin dropped 2.32%, closing just above $60,000. The broader cryptocurrency market faced strong selling pressure, with increased volatility amid concerns over regulatory actions and declining risk appetite.

Treasury Yield Information

The 10-year Treasury yield increased by 1.16%, closing at 3.786%. This rise reflects growing concerns about inflation and geopolitical tensions, particularly as investors brace for Friday’s upcoming Nonfarm Payrolls report, which could influence the Federal Reserve's policy direction. Bond market participants remain cautious as the labor market shows signs of cooling but remains resilient, keeping yields elevated. We continue to believe the 10-year bond yield will rise above 4% and likely stay there for some time.

Final Thoughts

Today’s market performance highlighted the ongoing impact of geopolitical risks, with energy prices pushing higher and equities making only modest gains. The ADP report beat expectations, but concerns about the conflict between Israel and Iran continue to weigh heavily on sentiment.

SPY’s $566 support level remains critical, with a potential downside risk if this level breaks. On the upside, resistance at $574.75 continues to limit any significant bullish movement while $570 is the battle zone for control between bulls and bears. We still believe the bears have one more push in them to test $560 before the bulls step up in earnest. Today’s low volume supports this assumption. But the bulls overall still rule the market and even a $10 to $20 sell off would be nothing more than a buying opportunity. That said, as we move closer to Friday’s Nonfarm Payrolls report, traders should brace for increased volatility, with key economic data likely to shape near-term market trends.

Recap of Previous Forecast

In yesterday’s forecast, we projected that SPY would trade within the range of $566 to $574.75, with key support at $566 and major overhead resistance near $574.75. We also stated $570 was interim resistance and a level where we would favor mean reversion shorts. As expected, SPY tested $570 early in the session, reaching an intraday high of $569.90 before encountering resistance and pulling back. And volatility around the $566 support level was in line with our forecast, providing opportunities for long trades from this level to initial resistance at $570. Traders who followed the forecast could have capitalized on the failed breakdown at $566 as well as the rejection near $570. The range-bound movement validated the importance of these key levels as SPY consolidated within the expected range.

Market Performance vs. Forecast

Today’s SPY performance largely adhered to the forecasted range, direction, and type of day with SPY testing support early on at $566, moving to resistance at $570. We stated yesterday we felt SPY would retest Tuesday’s lows before bouncing and this is precisely what SPY delivered. As predicted, support at $566 held firm, preventing a significant breakdown and opened the door to a great mean reversion long.

The forecast’s key levels of $566 and $570 played a pivotal role in guiding the day’s trades. SPY’s inability to breach the $570 mark, followed by the afternoon pullback, allowed traders to capitalize on both short opportunities from the resistance zone and long trades off support. Volatility remained within the anticipated range, with no major deviations from the forecast, reinforcing the accuracy of the levels identified. Overall, traders who followed the forecast benefited from the precision of the key levels. The clear respect shown by the market for these areas confirmed their importance in the current trading environment, providing profitable opportunities on both sides of the market.

Final Thoughts

Today’s market performance highlighted the ongoing impact of geopolitical risks, with energy prices pushing higher and equities making only modest gains. The ADP report beat expectations, but concerns about the conflict between Israel and Iran continue to weigh heavily on sentiment. SPY’s $566 support level remains critical, with a potential downside risk if this level breaks. On the upside, resistance at $570 continues to limit any significant bullish movement. As we move closer to Friday’s Nonfarm Payrolls report, traders should brace for increased volatility, with key economic data likely to shape near-term market trends.

Premarket Analysis Summary

In today's premarket analysis, SPY was expected to remain within the range of $566.35 to $569 with key levels identified at $569 for bias, and upside targets set at $571 and $573.50. On the downside, support was noted at $566.35, with further targets at $565.10 if the market lost momentum. The market largely adhered to these projections, with SPY testing the resistance near $570 in the early session before pulling back toward the $566.35 support.

Validation of the Analysis

With a break of $569 just after the open, a short to $566.35 played to perfection followed by a mean reversion long on a failed breakdown pattern back to $569.35. Several opportunities to short this level from 11 am ET on provided sufficient opportunity to earn on the day. Throughout the session, the market’s respect for these levels reinforced the accuracy of the premarket projections. Traders who followed the analysis were able to capitalize on both short entries near resistance and long trades from support, maximizing profitability. The precision of these levels helped traders stay on the right side of the market, while managing risk effectively. The market's behavior highlighted the importance of premarket planning and adhering to the identified trading range.

Summary of Upcoming Economic Data

Looking ahead, key economic reports will likely influence market sentiment. On Thursday, the market will focus on the Initial Jobless Claims report, which could provide early insights into the labor market’s health. However, the biggest catalyst for the week will be Friday’s Nonfarm Payrolls and Unemployment Rate data. These reports are expected to generate significant market volatility, especially as traders assess the Federal Reserve's potential policy moves based on labor market conditions.

Anticipated Market Impact

With key economic reports on the horizon, the market is expected to experience heightened volatility. Thursday’s Initial Jobless Claims report will offer insights into the labor market, setting the stage for Friday’s more impactful Nonfarm Payrolls and Unemployment Rate data. These reports will be critical in shaping market sentiment, particularly regarding the Federal Reserve’s future interest rate decisions. A stronger-than-expected labor market could lead to concerns over prolonged inflationary pressures, potentially spurring more hawkish Fed actions, while weaker data might ease those concerns. Traders should prepare for sharp price swings, with any significant surprises in the data likely to trigger moves across equities, bonds, and currencies.

Guidance for Traders

As we approach the release of key economic reports, traders should be prepared for increased market volatility. With the VIX remaining below 16, market complacency persists, but this could change rapidly depending on the outcome of Thursday’s Initial Jobless Claims and Friday’s Nonfarm Payrolls reports.

Key levels to watch remain at $566 for support and $574.75 for resistance. If SPY holds above $566, consider long positions targeting $570 and above where we favor mean reversion shorts on a failed breakout pattern. Conversely, if SPY breaks below $566 with strong volume, expect further downside, with $563 as the next support level. Tight stop-losses and cautious position sizing are essential, especially with the increased potential for sharp moves in response to economic data.

Market Sentiment and Key Levels

Market sentiment remains cautiously bearish, with traders focused on SPY’s $566 support level. A break below this level could signal a move toward $563, while the $574.75 resistance remains a key barrier to any upside momentum. With geopolitical risks and upcoming economic data still in play, volatility is likely to rise, keeping traders on edge as these levels are tested.

The market is likely to remain range-bound between $566, $570, and $574.75 until a catalyst, such as Friday’s Nonfarm Payrolls report, triggers a more significant move. Traders should closely monitor how SPY interacts with these key levels, as any break above resistance or below support could lead to sharper price movements.

Expected Price Action

For tomorrow’s session, SPY is expected to remain within the established range of $566 to $574.75. Given the current market sentiment and the proximity of key economic data releases, we anticipate another day of range-bound trading. A test of the $566 support level is likely, and if this level holds, SPY could see a rebound back toward $570. However, if selling pressure increases and $566 is breached, we may see further downside toward $563.

On the upside, if SPY gains strength and moves above $570, resistance at $574.75 will act as the next critical barrier. Any breakout above this level could lead to a move toward $577.75, but a lack of positive catalysts may keep SPY constrained within the current trading range.

Trading Strategy

For tomorrow’s session, traders should focus on key levels as the market continues to respond to upcoming economic data. On the long side, consider buying if SPY holds above the $566 support level. Initial upside targets should be set near $570, with a more aggressive target at $574.75, which has acted as strong resistance in previous sessions. If SPY manages to break above $574.75, look for continuation toward $577.75. Traders should tighten stop-losses as SPY approaches these resistance levels to lock in profits and avoid sharp reversals.

On the short side, consider initiating positions if SPY fails to hold above $570, with a downside target at $566. A break below $566 would signal further weakness, with the next downside target at $563. If momentum picks up on the downside, we could see SPY testing the $560 level as the session progresses. Traders should be prepared to take profits quickly in these scenarios, especially if volatility increases.

Given the upcoming economic reports, especially Friday’s Nonfarm Payrolls, volatility is expected to rise. Tight stop-losses and prudent position sizing will be critical to managing risk. Traders should remain flexible, using both key levels and technical signals to adjust positions as the market reacts to incoming data.

Risk Management and Warnings

With increased volatility expected as we approach key economic data releases, traders should focus on risk management. Tight stop-losses are essential, particularly near key levels like $566 on the downside and $574.75 on the upside. Position sizing should be adjusted accordingly to account for potential sharp moves, especially with the Nonfarm Payrolls report just days away.

If SPY breaks below $566, be prepared for increased selling pressure, and avoid taking overly aggressive positions during periods of heightened volatility. On the flip side, if SPY approaches resistance near $574.75, it’s important to lock in profits early to avoid getting caught in potential reversals. Staying flexible with position sizes and maintaining a disciplined approach will be key as the market responds to economic developments.

Model’s Projected Range

Our model projects SPY to trade between $561.25 and $574.75 for tomorrow's session. The projected range suggests potential consolidation, with the market likely to remain range-bound between these levels unless key economic data triggers a breakout.

If SPY holds above $566, the upper end of the range, near $574.75, could be tested again, with $577.75 serving as a secondary target if bullish momentum picks up. Conversely, a break below $566 could lead to further downside, with the model pointing toward $563 and $561.25 as key lower levels to watch. Traders should remain cautious as the projected range could shift significantly depending on upcoming economic data.

Market State Indicator (MSI) Forecast

Current Market State Overview

The MSI remains in a Ranging Market State, with SPY closing near the lower boundary of support. The size of the range is quite large with Support at $568.37 and resistance at $572.38. The MSI remained in this state for much of today’s trading session which suggests indecision, with both bulls and bears struggling to gain control.

Key Levels and Market Movements

Today at the open SPY was in a Bearish Trending Market State which played out well with SPY moving from resistance through support just after the open. There were extended targets below briefly. Once the MSI rescaled to a Ranging Market State SPY was listless the rest of the day with only brief moves below support. By noon price barely moved into the close.

Trading Strategy Based on MSI

Given the current Ranging Market State, we favor mean reversion trades between support at $566 and resistance at $569. Traders should remain cautious around these levels, especially with increased volatility expected ahead of Friday’s jobs report. The zone between $568 and $572 is basically chop and traders should be very careful trading this zone. We prefer to see the MSI rescale either higher or lower to a trending state before initiating any positions.

Dealer Positioning Analysis

Summary of Current Dealer Positioning

Dealers are actively selling $573 to $580 Calls, while also buying $569 to $572 Calls. This implies Dealers do not believe price will move higher than $575 tomorrow but should there be any recovery, Dealers wish to participate in the party. To the downside, Dealers are buying $568 to $560 and lower strike Puts in a 2:1 ratio to the Calls they are selling/buying implying a neutral market on Tuesday. Dealers were decidedly more bearish coming into today and have reduced their downside protection. Based on current positioning market participants will need to reclaim $571 and hold it before the market will accept higher prices while a break of $566 will stall at $565. A move below $565 can easily reach $560.

Looking Ahead to Friday

Dealers are selling $573 and $580 and higher strike Calls while also buying $569 to $572 Calls. This implies the Dealers desire to participate in any market recovery by Friday. To the downside Dealers are buying $568 to $560 and lower strike Puts in a 5:1 ratio to the Calls they are selling/buying. This implies a bearish view of the market heading into Friday. This level of protection has not changed materially from yesterday.

Recommendation for Traders

Given current Dealer positioning, traders should be cautious around $566 and $570 given this zone is all chop at this point. Dealers are heavily positioned for moves both lower and higher. This is typical in a market with so many unknowns and possible external factors which will influence price. Upside looks limited this week yet strong moves lower also look unrealistic without a major macro event. But given Dealer positioning changes daily, we highly recommend checking our premarket post before 9 am ET each day for additional insights. Good luck and good trading!