Market Insights: Monday, October 21st, 2024

Market Overview:
Stocks closed mixed on Monday as the market digested a sharp rise in Treasury yields while investors prepared for a crucial week of corporate earnings. The Dow Jones Industrial Average (^DJI) suffered a significant drop, shedding over 300 points, or 0.8%, as rising yields weighed on sentiment. Meanwhile, the tech-heavy Nasdaq Composite (^IXIC) managed a 0.2% gain, helped by strong performance from Nvidia (NVDA) and Apple (AAPL), both of which closed at fresh all-time highs. The S&P 500 (^GSPC) dipped 0.2%, pulling back slightly from its record high on Friday. With more than 100 companies in the S&P 500 set to report earnings this week, the market is bracing for potential volatility as corporate results begin to influence the recent rally. Investors are particularly focused on Tesla’s (TSLA) upcoming earnings report, which follows a mixed reaction to its robotaxi reveal. Other key reports this week include General Motors (GM), Coca-Cola (KO), and Boeing (BA), whose results could significantly impact the market, particularly as inflation and yield concerns remain prominent.

SPY Performance:
SPY finished the session down 0.15%, closing at $583.71 after opening at $583.97. SPY's price action showed a clear struggle to gain momentum, reaching an intraday high of $584.83 before slipping to a low of $580.60. Despite testing support near $580, the market largely remained within a narrow range. Volume was below average, with only 30.87 million shares traded. The market continues to consolidate, with $580 acting as critical support while $585 remains overhead resistance. Traders are closely watching these levels, as a decisive move could signal the next major trend.

Major Indices Performance:
The Nasdaq Composite was the best performer, gaining 0.28% thanks to strength in Nvidia, which surged over 4%, and Apple, which eked out a record close. In contrast, the Dow Jones Industrial Average led the losses, falling 0.84% as rising yields and profit-taking weighed on blue-chip stocks. The Russell 2000 also underperformed, dropping 1.57%, as small-cap stocks faced heightened pressure amid concerns about economic growth and higher borrowing costs. The broader market sentiment remains cautious as investors weigh earnings results against macroeconomic concerns.

Notable Stock Movements:
Nvidia (NVDA) was the standout among the "Magnificent Seven" stocks reaching a new all-time high. Apple (AAPL) followed closely, also closing at a record. However, not all tech stocks fared as well, with Meta and Tesla declining slightly. Tesla's upcoming earnings report has left investors uncertain after the market’s lukewarm response to its recent robotaxi event. Despite this, other tech stocks rallied, reflecting investor optimism in the sector’s resilience during earnings season.

Commodity and Cryptocurrency Updates:
Crude oil gained 1.73% as fears of a greater conflict in the middle east weighted on pricing. Should prices fall, we are buyers in the $65 area. Gold continued its upward march, gaining 0.17% to reach another record high as geopolitical tensions and market uncertainty drove demand for safe-haven assets. Bitcoin, however, retreated by 1.07%, closing just below $68,000 as it struggled to maintain its recent rally.

Treasury Yield Information:
The 10-year Treasury yield surged, closing up 2.96% at 4.196%, its highest level since July. This sharp rise in yields weighed heavily on the stock market, particularly affecting the Dow and the Russell. Investors remain concerned about the impact of elevated yields on future economic growth, though the broader market continues to tread cautiously in response to these fluctuations.

Previous Day’s Forecast Analysis:
Friday’s forecast predicted a day of consolidation today for SPY within the $580 to $585 range, with a slightly bullish bias as long as the index held above $582.50. The analysis emphasized that $585 was a key resistance level, suggesting that a break above this threshold could push SPY toward $588, while failure to breach this resistance could lead to a pullback. It also mentioned that long positions should be favored near the $582 support, with a potential short setup if SPY struggled at $585. The forecast highlighted the likelihood of choppy, two-way price action and advised traders to be nimble and flexible. Key levels were clearly identified: $582.50 as support and $585 as resistance. The forecast anticipated that if SPY could break above $585 with strong momentum, it might lead to a more significant upward move. However, caution was urged, noting that failure to hold above this level could indicate a weakening of the bullish momentum. Short trades were suggested if SPY showed signs of failing to break through $585, as this could trigger a pullback toward $582 or lower. The forecast underscored the "trappy" nature of the market, advising traders to be cautious of false breakouts and breakdowns, while also preparing for potential volatility due to expiring options influencing market behavior. The trading strategy centered on using these key levels for both long and short opportunities, ensuring that traders were aware of potential reversals around major support and resistance zones.

Market Performance vs. Forecast:
SPY’s performance on Monday adhered closely to the prior day’s forecast. The index remained in the projected range of $580 to $585, testing both support and resistance. SPY bounced from its low of $580.60 toward resistance at $585, but failed to make a decisive break above this level. Long trades near $580 proved profitable as the forecast anticipated a rebound, while short trades around $585 also played out well when SPY struggled to break through resistance. The overall cautious tone of the forecast was validated, with the market showing range-bound action that provided multiple opportunities for both long and short trades. Overall, the forecast provided clear guidance for entry and exit points, emphasizing flexibility in response to the market's indecisive behavior.

Prior Day’s Forecast Final Thoughts:
Monday’s market movement largely validated the prior day’s forecast, as SPY remained bound within the predicted $580 to $585 range, providing multiple trading opportunities around these levels. The inability of SPY to decisively break through the $585 resistance confirmed the cautious tone of the forecast. Short trades around $585 were viable when SPY failed to break higher, offering downside opportunities. This reinforces the importance of using key levels for trade execution in a range-bound market, especially in a session marked by option expirations, where volatility was expected. Monday's price action confirmed that the market continues to consolidate near major resistance, suggesting that traders should remain cautious until a decisive breakout or breakdown occurs. As SPY repeatedly tested $585 without breaking higher, this level may weaken as a significant point, with the next key resistance likely shifting toward $590. However, the forecast’s guidance for flexibility and preparedness for choppy price action remains relevant as consolidation continues.

Premarket Analysis Summary:
In today’s premarket session, SPY was trading around $582.61, showing hesitancy to push toward recent highs. The premarket forecast identified $583.40 as a critical bias level, with expectations that the market would likely consolidate and lean towards profit-taking if it stayed below this threshold. The upside target was $585, but traders were advised to remain cautious and favor short trades if SPY rejected $583.40. On the downside, support levels at $581.85 and $580 were noted, with a more distant target at $578.25 in the event of significant selling pressure. The sentiment leaned bearish as long as SPY stayed below $583.40, with a preference for shorting rallies at key resistance levels. Given the overall market environment, caution was advised, and traders were encouraged to watch for signs of weakness around major support and resistance.

Validation of the Analysis:
Monday’s market action confirmed much of the premarket analysis. SPY struggled to hold above the bias level of $583.40 and spent the day trading below it. The rejection of the bias level offered a solid opportunity for short trades, as SPY drifted lower toward support near $580. While the market didn’t fully test the lower target of $578.25, the premarket analysis was largely accurate in predicting a consolidation day with a bearish tilt. Traders who followed the forecast’s advice to short rallies were able to capitalize on SPY’s failure to gain upward momentum, while those looking to buy near support around $580 found profitable opportunities as SPY rebounded modestly from its lows.

Looking Ahead:
There are no major economic releases scheduled for Tuesday, but traders should remain vigilant as several Federal Reserve members are set to speak this week. Without major catalysts for significant moves, the market is likely to consolidate, although the ongoing earnings season could create volatility in individual stocks. Looking further into the week, PMI data may provide direction for broader market trends, particularly if the current rally begins to show signs of weakening​.

Guidance for Traders:
Traders should focus on key levels like $580 and $585 to guide their decisions. If SPY holds above $585, there’s potential for further upside towards $590 or even $595. However, failure to break above this level could open opportunities for short trades targeting $578 or lower. Given the current market momentum, it’s crucial to avoid chasing trades unless a clear breakout or breakdown occurs. Traders should favor failed breakout and failed breakdown patterns, which have been repeatedly effective in this choppy market environment​. There were several today, both short at $585 and long at $580.75.

Market Sentiment and Key Levels:
SPY remains cautiously bullish, currently trading near $584 with significant resistance at $585 and support at $580. While $585 remains a notable resistance level, its strength is weakening with each test. As a result, $590 is likely to become the next major resistance level, with $587 also acting as a temporary hurdle. On the downside, a failure to hold support at $582.50 would likely trigger a retest of lower levels around $580 and potentially $577. If SPY drops below $577, there is little to prevent a sharp decline. Traders should carefully monitor these levels, particularly as the market appears to be consolidating ahead of potential volatility​​.

Expected Price Action:
We expect SPY to trade between $580 and $587 on Tuesday, with bulls still holding a slight advantage. The market has yet to experience a meaningful pullback since its September lows, so there is potential for much lower prices on a material break below $580. Today buyers supported this level as the model predicted. Without major economic releases Tuesday, the session is likely to continue to be slow and range-bound, with minimal trending action. Cautious, two-way trading remains the most likely scenario​​. Every recent pullback has lasted only one day so if this pattern holds, tomorrow is likely to push price back toward the all-time highs.

Trading Strategy:
Long trades continue to be favored above $580, with targets at resistance levels of $585 and $587. Traders should also consider short trades if SPY struggles to break above $587. $585 is sufficiently weak now so that we do not recommend shorts from this level. We either prefer to see SPY move to a new high where it’s likely to find resistance, or break below $580 where price will likely visit $577 to initiate short positions. In a choppy market we prefer failed breakout and breakdown patterns for high-probability setups. We continue to favor longs from $580 to $582 on a failed breakdown pattern with price trading back toward $585 and beyond.

Risk Management and Warnings:
The VIX remains elevated at 18.37, creeping up from Friday but below last week’s 20 level which signals some concern about the market. Traders should be prepared for potentially large, unexpected moves. Tighten stop-losses around key levels, particularly near $580 and $585, to mitigate risk. Volatility may spike quickly, so it’s important to remain cautious when adjusting positions​.

Model’s Projected Range:
The model projects SPY to trade between $578.50 and $586.50 on Tuesday, a relatively narrow range which implies more consolidation and sideways trading. There remains a slight bullish bias as the market, although the options market is currently Put dominated. Major resistance is still $585, and any continuation of the rally will need to decisively break through this level for further upside. We expect this level to fail this week. Traders should also watch for a break below $580, as there is limited support beneath this level, which could trigger a sharper drop. Price remains in the bull trend channel from the September lows but as time passes, it gets closer and closer to the lower trend line which will either provide support or break with prices pulling back more materially.

Market State Indicator (MSI) Forecast:

Current Market State Overview: The MSI is currently in a Ranging Market State with price closing at the upper end of the range. The range is wide implying an uncertain market with little direction either way. The MSI rescaled after the open from this state and rescaled briefly to a Bullish Trending Market State but failed to print any extended targets above. Price quickly failed at major overhead resistance and the MSI began a series of rescalings lower to a Bearish Trending Market State before finding support at $580. The MSI spent the entire afternoon session in a Ranging Market State with support at $581.77, and resistance at $583.91.
Key Levels and Market Movements: The MSI spent all afternoon in a Ranging Market State which left little to be done except watch the market move sideways. We do not favor taking trades while the MSI is in this state. As the MSI rescaled lower in the morning session it did print extended targets below indicating the herd was participating in the move to major support around $580. The MSI stopped printing extended targets at this level and given the narrow range of the Bearish Trending Market State, price quickly found a base to move back toward MSI resistance. A nice short from a failed breakout pattern at 10 am ET and a perfect long from MSI support in the 11 am hour set up the two best trades of the day.
Trading Strategy Based on MSI: The MSI's current state suggests more sideways price action. The move up into the close will likely rescale the MSI to a Bullish Trending Market State overnight but given overhead resistance is less than $2 above the current price, it’s likely to be a weak bull trend. We recommend caution trading between $582 and $584 given this is just chop and very hard to navigate, even for the most experienced traders. Instead wait for price to reach one of our major levels and use the MSI to determine strength or weakness before initiating entries. It’s likely Tuesday price drifts higher. We suggested Friday that price would test $582.50 before resuming its upward march which is precisely what it did today. Overnight we do not see price falling materially but simply drifting with an attempt to break the all-time highs this week. Until then the market is likely to offer tight two-way trading opportunities.

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 a neutral stance for Tuesday and the desire by Dealers to participate in any upside on Tuesday. To the downside, Dealers are buying $584 to $572 Puts in a 3:1 ratio to the Calls they are selling/buying implying a neutral view of the market for Tuesday. Dealer positioning hasn’t changed materially since Friday and remains neutral.
Looking Ahead to Friday: Dealers are selling $587 to $595 and higher strike Calls while also buying $584 to $586 Calls in very small size indicating the Dealers believe the market could rally this week to as high as $595. They are positioned to benefit should this come to fruition. To the downside Dealers are buying $582 to $570 and lower strike Puts in a 3:1 ratio to the Calls they are selling. This implies a neutral view of the market heading into Friday. Dealers continue to hold significant downside protection, but as stated last week, the have pushed the sale of Calls out to $595 therefore they believe $590 will be breached sometime this week. Dealers have moved from a bearish position to a more neutral position since Friday.

Recommendation for Traders:
Traders should focus on the key levels outlined in today’s newsletter. With SPY sitting just below critical resistance at $585, long trades are favored if the index holds above $580. For shorts, traders should wait for SPY to break through $585 before seeking shorts or wait for a break below $580 to enter a short position. Otherwise continue to seek longs around major support but take profits quickly given the choppy nature of the market. As always, tight stop-losses should be applied to avoid getting caught in sharp reversals. Be mindful of the heightened volatility, and adjust position sizes accordingly to manage risk effectively. And 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!