Market Insights: Wednesday, October 23rd, 2024

Market Overview:
Stocks slumped on Wednesday as the major indices extended their losses amid rising bond yields and ongoing earnings reports. The S&P 500 (^GSPC) closed down more than 0.9%, while the Dow Jones Industrial Average (^DJI) shed nearly 1%. Leading the declines, the Nasdaq Composite (^IXIC) dropped 1.6%, with tech stocks weighing heavily ahead of Tesla's highly anticipated earnings report. Meta (META) tumbled over 3%, and Amazon (AMZN) and Nvidia (NVDA) fell more than 2.5%, reflecting broader concerns about the future of interest rates. Investors continue to grapple with the Federal Reserve’s signals on how long rates may stay elevated, pushing the 10-year Treasury yield (^TNX) to 4.24%, a level not seen since July. Despite the sell-off in broader markets, Tesla's (TSLA) better-than-expected earnings after the bell offered some respite for the tech sector, boosting its stock by 8% in after-hours trading. Gold pulled back from its highs, down 1.22%, as profit-taking set in, while crude oil slipped 0.38% amid geopolitical concerns.

SPY Performance:
The SPDR S&P 500 ETF Trust (SPY) experienced a challenging session, closing down .91% at $577.99 after opening at the $581.26. It briefly rallied to an intraday high of $581.71 but failed to maintain momentum, bottoming out at $574.42 before settling down for the day. Volume surged to 43.99 million shares, higher than prior days reinforcing today’s sell-off. Today was the largest selloff for SPY since September 6^th, which indicates heightened market activity despite the lack of clear direction. Resistance is now around $580 to perhaps $582 which will be difficult to overcome initially. A failure to break though these levels could see continued pressure on SPY with potential moves to $575, $572 or lower.

Major Indices Performance:
The Nasdaq’s 1.6% drop led the declines, driven by underperformance in high-growth tech stocks. The Dow also struggled, falling 0.96%, dragged down by losses in industrials like Boeing, which posted disappointing quarterly results. The Russell 2000 dipped by 0.91%, reflecting pressure on small-cap stocks, which continue to struggle with higher interest rates. Defensive sectors, including utilities and consumer staples, saw continued weakness due to rising bond yields, which are making yield-sensitive stocks less attractive to investors.

Notable Stock Movements:
"Magnificent Seven" tech stocks all ended the day in the red led by Meta which dropped 3.15%. NIVIDIA was not far behind nor was Amazon and Apple. Tesla remained in the spotlight ahead of its earnings report, with investors keenly awaiting the company's outlook amid rising competition and economic uncertainties. Tesla did not disappoint after the close, posting better-than-expected results, which led to an 8% surge in after-hours trading. Elsewhere, Meta fell sharply, reflecting concerns about its advertising revenue amidst an uncertain economic backdrop.

Commodity and Cryptocurrency Updates:
Crude oil prices edged lower by 0.38%, ending their recent rally as investors weighed the impact of potential supply disruptions from the Middle East against a backdrop of weakening demand forecasts. Gold pulled back from its recent highs, falling 1.22%, as a brief dip in safe-haven demand led to profit-taking. Bitcoin also retreated, down 1.57%, falling below the $67,000 mark as the broader cryptocurrency market lost steam after its recent surge.

Treasury Yield Information:
The 10-year Treasury yield climbed further to 4.248%, gaining 0.90%, as bond markets continued to reflect concerns about prolonged higher interest rates. The rise in yields remains a key driver of stock market volatility, particularly in rate-sensitive sectors like real estate and utilities, which were hit hardest during Wednesday’s session.

Previous Day’s Forecast Analysis:
Tuesday’s forecast projected SPY to trade within a range between $580 and $587, with resistance likely to be tested at $585. The forecast suggested a slight bullish bias as long as SPY held above $580. However, caution was emphasized if SPY struggled to sustain moves above $580, and the forecast warned of downside risks toward $577 if support at $580 gave way. The forecast further advised traders to remain flexible due to the possibility of two-way price action, with the recommendation to favor long trades from support levels while being prepared for mean reversion shorts near resistance

Market Performance vs. Forecast:
SPY adhered closely to the forecasted range, opening at $581.26, reaching a high of $581.71, before closing down at $577.99, slightly below the forecasted lower range. While the index did not push above the $583.85 resistance level mentioned in the premarket analysis, today’s price action mirrored expectations of a session with support near $580 holding until the 11 am hour. A break of this level led directly to the $577 target stated in the forecast. Several shorting opportunities emerged as SPY failed to hold the $580 level. Traders who followed the forecast were able to take advantage of longs off support at $580 early in the session. Once SPY broke below major support, traders were advised to initiate shorts to at least $577. For several days we stated there was little to support SPY on a break of $580. We stated the market was due to correct and once this level failed, price would quickly reach our initial $577 target. Price in fact did perform precisely as forecast and continued further to $575, another level our model identified in prior newsletters. This is a good lesson for our readers. The levels we identify remain valid, particularly when the market move quickly through several levels. Readers should plot all major levels on their charts so they can react accordingly when price approaches these major support and resistance zones.

Premarket Analysis Summary:
In Wednesday's premarket session, SPY was trading at $582.08, indicating hesitancy near the critical bias level of $583.85. The premarket forecast leaned slightly bearish, suggesting that unless SPY could convincingly break above and hold this level, downside momentum was more likely. Resistance at $583.85 was expected to act as a key barrier, with sellers potentially driving prices lower toward the $580.65 and $579 targets. However, the analysis also noted that if significant buying volume emerged, SPY had the potential to rally as high as $587. Traders were advised to watch closely for failed breakouts or rejections at resistance, as well as potential choppy conditions near support levels​.

Validation of the Analysis:
Wednesday’s market followed the premarket analysis closely, with SPY initially struggling to push above the key resistance level of $583.85, as anticipated. Early attempts to rally were met with resistance, leading to a choppy trading session. The downside pressure prevailed, with SPY reversing and testing support levels around $580.65, aligning with the premarket forecast. Traders who positioned themselves based on the expectation of a failed breakout were able to capitalize on short trades as SPY’s price action stayed within the projected range. Later in the day, despite brief rallies, SPY couldn’t sustain any upward momentum, validating the bearish tilt suggested in the analysis. Long trades off support also provided opportunities, especially when the index failed to break down significantly. The forecast’s call for cautious, two-way trading proved accurate as both longs and shorts found profitable entry points amid the day’s volatility​.

Looking Ahead:
Traders should continue to watch key resistance at $580 and $575 which remain critical levels. With Tesla’s earnings now out, volatility could pick up heading into the latter part of the week and it’s very possible SPY will enter a new trading range between these levels. Focus will shift toward upcoming economic data, including the PMI report, Unemployment Claims and Federal Reserve commentary, which could provide further insight into the central bank’s rate outlook. Expect large trending moves on Thursday after these reports are released and watch for market reactions at our models major price levels.

Guidance for Traders:
While the market sold off today, something it has not done since early September, $575 today proved to a level where plenty of buyers stepped in to get long. The bulls still have the edge longer term, even with the last three days weakness. Long trades should continue to be favored around support levels now at $575 and above $580 on a failed breakdown pattern. Traders should be cautious of rallies that fail to push through $580 on volume. Shorts may be more attractive if SPY continues to struggle at these levels and if the market settles into this new lower range, expect more two-way action until a clear breakout or breakdown occurs. Keep an eye on bond yields, which continue to drive sentiment, Higher yields will not bode well for the market.

Market Sentiment and Key Levels:
SPY looks to be entering a period where it will remain range-bound, with resistance at $580 and support at $575. A break below $575 could lead to further downside pressure to $570 as the next target. On the upside, a breakout above $580 would aim for $585, though momentum remains weak, suggesting caution for bullish trades above $580. With tomorrow’s PMI these levels can change quickly so be prepared to adjust to whatever the market delivers on Thursday.

Expected Price Action:
SPY is expected to trade between $575 and $582 on Thursday. With price closing at $578, the market is in the middle of the range and could move either way Thursday. The decision will likely be driven by PMI which will be released premarket. Overnight there is a reasonable probability that SPY will sell off and retest today’s lows. After three red days a bull flag forming at support gives the bulls a slight edge. However, if the index fails to sustain itself above $575, it will test lower levels around $570, building speed and momentum to the downside. Our model sees a higher likelihood the market trades sideways for a day or two before resuming its push back toward the all-time highs. Of course this is absent the economic news due tomorrow and everything can change quickly as a result of tomorrow’s economic news. We suggest you trade what you see and play close attention to market behavior at our major levels.  

Trading Strategy:
On a retest of today’s lows we like long trades from $575 with targets at $580. We also like longs above $580 on a failed breakdown pattern. Without this pattern we will seek shorts from slightly higher at $582. Shorts should certainly also be contemplated on a break below $575 on increased volume. Traders are advised to stay cautious in the current market as price may produce sudden and violent swings, both long and short. We continue to favor failed breakout/breakdown patterns as potential entry points for trades, as the market appears poised for more pronounced moves in the near term.

Risk Management and Warnings:
With the VIX climbing to 19.24, volatility is back and moving higher. Volatility will continue to increase as we get closer to US elections. Traders should adjust position sizes in anticipation of larger stops and price moves to effectively manage risk. Remain vigilant for sharp moves as key economic data is released. And lets not forget there are several global macro risks also in the middle east and beyond.

Model’s Projected Range:
The model projects SPY to trade between $579.75 and $587.50, with a slight bearish bias. The range is quite large due to PMI being released which implies trending price behavior for Thursday. Price tested the lower bull trend channel in place from the September lows and bounced firmly off this level. Watch for a retest of this channel and the market’s reaction to it. $577 is a level to watch tomorrow for support should price retest today’s lows. $580 is now major overhead resistance and with the market Put dominated, price could enter a period with deeper sell-offs.

Market State Indicator (MSI) Forecast:

Current Market State Overview: The MSI is currently in a Ranging Market State with price closing just above support. The range is wide, implying uncertainty in the near term. The MSI rescaled before the open to a Bearish Trending Market State from a Ranging State and continued to rescale lower throughout the day. The MSI printed extended targets below price, validating the strength of today’s sell-off. At 2 pm ET extended targets ceased printing and price reversed off MSI support at the major $585 level. Support is currently $577.08 with resistance at $582.03.
Key Levels and Market Movements: The MSI spent much of the morning trading sideways in a very narrow Bearish Trending Market State. But extended targets below popped up a couple of times during this sideways price action which gave MIS users plenty of warning that longs should be avoided and that $580 would give way. This is exactly what happened after 11 am and the MSI paid us handsomely, keeping us short all the way down to the day’s lows at our major support level of $575. Once there the MSI stopped printing extended targets below which opened the door to a mean reversion long into the close. Two very strong trades today, thanks to the MSI and our model’s levels.  
Trading Strategy Based on MSI: The MSI's current state suggests sideways price action as the market heads into PMI in the morning. The markets have been selling off overnight and rallying the next day for the past several days. It would not surprise us to see this play out tonight and on Thursday as well. The bulls have not gone away so today’s victory by the bears is likely temporary. We stated for several days the market was due to sell off and that it would be healthy and constructive to the longer-term bull market. Whether the sell-off continues or not is anyone’s guess. But for tomorrow, we suggest waiting for the MSI to rescale after PMI and stick with the direction identified by the MSI, using its levels for entries and targets.

Dealer Positioning Analysis:

Summary of Current Dealer Positioning: Dealers are selling $585 to $590 and higher strike Calls while also buying large quantities of $578 to $584 Calls, indicating the Dealers strong desire to participate in any upside on Thursday. Dealers continue to sell Calls heavily at $580 and $585. While both these levels were weakened by repeated attempts to break, they are now reinforced with new money and therefore will be difficult to overcome, especially $585. To the downside, Dealers are buying $576 to $563 Puts in a 1:1 ratio to the Calls they are selling/buying, implying a bullish view of the market for Thursday. Much of the Dealers Put protection ended in the money today and as such, Dealers will need to reload tomorrow. But as of tonight, Dealer positioning has changed since yesterday to a more bullish view from a neutral stance.
Looking Ahead to Friday: Dealers are selling $588 to $595 and higher strike Calls while also buying $578 to $587 Calls in large size, indicating that Dealers believe the market could rally by Friday to as high as $588. To the downside, Dealers are buying $576 to $555 and lower strike Puts in a 2:1 ratio to the Calls they are selling/buying. This implies a neutral view of the market heading into Friday. Dealers continue to hold significant downside protection, and while they have added further OTM protection, they appear confident the market will receive good news from PMI and resume its push back toward $580 at a minimum. Dealers remain more neutral than anything else heading into Friday.

Recommendation for Traders:
Focus on the key levels highlighted in today’s newsletter. With SPY sitting just below critical resistance at $580, the next few sessions will likely determine the market's direction. Adjust your trading strategy accordingly, remaining cautious in this environment. Remember to review the premarket analysis posted before 9 AM ET for any updates to the model’s outlook and Dealer Positioning.

Good luck and good trading!