Market Insights: Tuesday, October 22nd, 2024

Market Overview: The S&P 500 posted its first back-to-back losses since early September, as investors grappled with rising bond yields and a slew of mixed earnings reports. The S&P 500 (^GSPC) and Dow Jones Industrial Average (^DJI) both closed slightly lower, reflecting a market treading cautiously amidst growing uncertainty about the Federal Reserve's interest rate path. Meanwhile, the Nasdaq Composite (^IXIC) ticked up 0.17%, benefiting from gains in some tech stocks, though the overall market sentiment remained wary. Rising Treasury yields, which touched 4.2% on the 10-year note, weighed heavily on rate-sensitive sectors such as real estate and utilities. General Motors (GM) was a standout in earnings, surging over 10% after raising its guidance for the third time this year. However, GE Aerospace (GE) and Verizon (VZ) underperformed, highlighting the mixed tone of earnings reports. As investors await Tesla’s (TSLA) earnings on Wednesday, market focus remains on whether the “Magnificent Seven” tech stocks can sustain the broader market rally. Despite elevated yields, gold continued to shine, hitting another record high as geopolitical tensions and economic uncertainties pushed investors toward safe-haven assets.

SPY Performance: SPY closed nearly flat, down just 0.05%, finishing the day at $583.32 after opening at $583.37. The intraday movement was subdued, with SPY reaching a high of $584.50 and a low of $580.38, reflecting a tight trading range. With trading volume coming in below average at 28.97 million shares, the session lacked significant momentum, further signaling consolidation. Resistance at $585 remains a critical level, while $580 continues to serve as solid support. The market appears to be consolidating, with traders waiting for a decisive move in either direction.

Major Indices Performance: The Nasdaq Composite led the major indices with a modest gain of 0.17%, helped by tech stalwarts like Microsoft, which rose over 2%. The Dow Jones Industrial Average slipped slightly by 0.02%, weighed down by a lackluster performance in industrials, while the Russell 2000 underperformed with a 0.38% decline, reflecting continued pressure on small-cap stocks amid concerns about rising interest rates. Defensive sectors struggled as rising yields dampened investor appetite for these traditionally safer plays.

Notable Stock Movements: Within the "Magnificent Seven" stocks, there was a mixed performance. Microsoft stood out while Netflix, Tesla, Apple, and Nvidia all finished the session lower. Tesla’s stock remains a focal point for investors ahead of its earnings report, with speculation about its future direction weighing on sentiment. Nvidia and Apple, which have seen strong rallies in recent weeks, experienced modest pullbacks as profit-taking set in. Despite these declines, investor confidence in the tech sector remains relatively strong, as evidenced by the Nasdaq’s overall positive performance.

Commodity and Cryptocurrency Updates: Crude oil continued its upward march, rising 1.42%, as geopolitical tensions in the Middle East kept supply concerns at the forefront of traders’ minds. Gold also extended its gains, climbing 1.07% to reach another all-time high, bolstered by safe-haven demand amid market uncertainty. Bitcoin, however, saw a slight dip of 0.38%, closing below the $68,000 mark as the cryptocurrency market struggled to maintain its recent momentum.

Treasury Yield Information: The 10-year Treasury yield edged up 0.33%, closing at 4.210%, as investors continued to sell bonds amid expectations that the Federal Reserve may hold rates steady or even hike again in November. Rising yields remain a key driver of stock market volatility, with particular pressure on sectors like real estate and utilities that are sensitive to interest rates.

Previous Day’s Forecast Analysis: Monday’s forecast expected SPY to trade within a range of $580 to $585, with potential short trades around resistance at $585 and long opportunities near support at $580. The cautious tone of the forecast played out as predicted, with SPY trading within this narrow range and failing to break decisively in either direction. The failure to hold above $585 validated short trades at resistance, while long trades near $580 offered a modest rebound opportunity. Overall, the market remained range-bound, as anticipated.

Market Performance vs. Forecast: SPY’s actual performance adhered closely to Monday’s forecast, with the index staying within the projected range of $580 to $585. The lack of a decisive move above $585 provided shorting opportunities, while the rebound from $580 confirmed support at this level. Traders following the forecast were able to capitalize on both long and short trades as SPY moved predictably within its established range, offering multiple entry and exit points. While we were a bit hesitant to short the $585 level, longs from $580 played out extremely well and according to our forecast.

Prior Day’s Forecast Final Thoughts: Monday’s forecast correctly predicted the choppy, range-bound action for SPY, with resistance at $585 and support at $580 remaining key levels. The forecast emphasized the importance of being nimble and prepared for two-way price action, which proved accurate as SPY offered trading opportunities on both sides of the market. The failure to break above $585 suggests that this level may weaken, with $590 emerging as the next potential resistance. Traders are advised to remain cautious, as the market continues to consolidate ahead of a potential breakout or breakdown. While $585 appeared to have weakened due to all the attempts to break higher, resistance at this level increased today and as such will likely continue to provide strong overhead resistance to short against.

Premarket Analysis Summary: This morning SPY was trading around $581.29 showing signs of hesitancy near the critical bias level of $581.85. The premarket forecast suggested a bearish tilt if SPY failed to push above this level, with downside targets at $580 and potentially as low as $577.35. However we stated if SPY could build a strong base near $580, a rally toward $583 or higher would materialize. Short entries were favored, especially if early rallies struggle to gain traction above $580.

Validation of the Analysis: SPY’s premarket analysis remained consistent with today’s market behavior, with the index struggling to move above key levels early in the day. Early rallies faced resistance until price finally broke higher in the afternoon session. While there we several opportunities to short this resistance, longs from support provided best to $585 where the market once again sold off. SPY remains vulnerable to downside pressure from major resistance levels. Traders who aligned their strategies with the forecast benefited from the choppy conditions in the morning session and the long off support once SPY broke higher.

Looking Ahead: Traders should remain cautious as the market digests earnings from major companies like Tesla on Wednesday, which could trigger significant volatility. With no major economic releases scheduled for tomorrow, the market is likely to continue its consolidative pattern, though Federal Reserve speakers could offer new insights into the central bank’s rate outlook. Traders should keep an eye on bond yields, which remain a key driver of market sentiment.

Guidance for Traders: Focus on key levels around $580 for potential long trades, but be prepared to short rallies that fail to break above $583 and $585. Tight stop-losses are recommended, especially with volatility likely to increase as earnings season progresses. Should $585 finally give way, prepare for price to move toward $590 where we once again favor mean reversion shorts back to $585. The market is in a holding pattern until a catalyst pushes prices one way or the other. Alternatively price could simply trade sideways for several more days and eventually break the bull trend channel that has been in place from the September lows. This would set the market up for a deeper pullback…one that is overdue and would be quite healthy and constructive to the longer-term bull market.

Market Sentiment and Key Levels: SPY continues to trade within a narrow range, with resistance at $585 and support at $580. As the market consolidates, the bulls have a slight advantage, but a break below $580 could trigger further downside, with $577 as the next target. On the upside, a breakout above $585 could push SPY toward $590, though the lack of momentum suggests caution is warranted. Traders should watch these key levels closely, as the market appears poised for a potential breakout or breakdown.

Expected Price Action: SPY is expected to trade between $580 and $587 tomorrow with the bulls holding a slight edge. However, if SPY fails to hold above $580, it could test lower levels around $577. A sustained move above $585 would target $590 or higher, but until a breakout occurs, choppy, two-way trading is the most likely scenario.

Trading Strategy: Long trades are favored above $580, with resistance targets at $585 and $587. However, short trades should be considered if SPY breaks below $580 on volume. Traders are advised to take profits quickly in this choppy market, with tight stop-losses to protect against sudden reversals. The range between $582 and $585 is nothing but chop and trap filled so we recommend caution when trading in this range. We favor failed breakout/breakdown patterns to trigger entries. The bull market is two years old with the typical bull market lasting five years. Therefore probabilities suggest this bull run will continue for several more years before finding material resistance. Favor long over short trades from major support. 

Risk Management and Warnings: With the VIX creeping higher to 18.20, traders should tighten stop-losses and remain vigilant for potential volatility. Position sizes should be adjusted to manage risk, especially around key support, and resistance levels.

Model’s Projected Range: The model projects SPY to trade between $579.75 and $587.50 on Wednesday, with a slight bullish bias despite the current consolidation. The range is rather narrow, which implies choppy, sideways trading. Resistance at $585 remains the key level to watch, while support at $580 continues to hold. Traders should monitor these levels closely, as a break could lead to sharper moves in either direction.

Market State Indicator (MSI) Forecast:

Current Market State Overview: The MSI is currently in a Ranging Market State with price closing just below 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 a Bearish Trending Market State to a Ranging State before putting in a series or rescalings higher to a Bullish Trending Market State. There were extended targets printing above which indicated a strong trend with the herd participating. These extended targets ceased printing at the day’s highs which led to a sell off from overhead resistance at $585 into the close. Support is currently $581.54 with resistance at $583.52.
Key Levels and Market Movements: The MSI spent all morning in a Ranging Market State which left little to be done except to sit on our hands. Users of the MSI know we do not favor trading while the MSI is in this state. But at the open the MSI did provide a long opportunity off support at $580.56 once extended targets stopped printing. Patient traders who held this long to the day’s highs were well rewarded. A mean reversion short from overhead resistance at $585 also worked well, again, once the MSI stopped printing extended targets above. Short trades in the current market environment are not likely to move very far so we continue to favor longs over shorts. But a couple of very nice trades from support and from resistance provided two profit generators for the MSI once again.
Trading Strategy Based on MSI: The MSI's current state suggests more sideways price action. The move up in the afternoon was sold and the MSI remains in a do-nothing state while price figures out its next move. Sticking with the broader trend, we continue to favor longs from major support at $580 as long as there are no extended targets printing below and especially on a failed breakdown pattern and or a narrow MSI bearish range. We recommend caution on shorts from $585 given the number of times this level has been tested. That said, new options have come into this level which appears to have strengthened it once again. Price is likely to continue to move sideways until Thursday’s PMI and Unemployment numbers come out. The market is likely to continue to offer tight two-way trading opportunities slightly favoring longs.

Dealer Positioning Analysis:

Summary of Current Dealer Positioning: Dealers are selling $585 to $590 and higher strike Calls while also buying tiny quantities of $584 Calls, indicating the Dealers desire to participate in any upside to as high as $590. Dealers are selling heavily between $586 and $590 building a wall of overhead resistance. To the downside, Dealers are buying $583 to $575 Puts in a 3:1 ratio to the Calls they are selling/buying, implying a neutral view of the market for Wednesday. Dealer positioning has not changed materially since yesterday and remains neutral.
Looking Ahead to Friday: Dealers are selling $588 to $595 and higher strike Calls while also buying $584 to $587 Calls in very small size, indicating that Dealers believe the market could rally this week to as high as $590. To the downside, Dealers are buying $583 to $570 and lower strike Puts in a 4:1 ratio to the Calls they are selling/buying. This implies a neutral to slightly bearish view of the market heading into Friday. Dealers continue to hold significant downside protection, and are adding to it at major levels such as $580 and $585. But overall, Dealer remain more neutral than anything else heading into Friday implying more sideways price action the rest of the week.

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 failed breakout pattern. Shorts are also favored with a break below $580 on volume. Longs continue to be preferred however, particularly around major support. With such a choppy market its best to trade less and take profits more quickly. While VIX sits close to 20, SPY hasn’t done anything in seven days so be ready for a much more pronounced move which can come at any time. Adjust position sizes accordingly to manage risk and remember to review the premarket analysis posted before 9 AM ET for any changes in the model’s outlook and Dealer Positioning.

Good luck and good trading!