Market Insights: Thursday, October 24th, 2024

Market Overview:
Tesla (TSLA) led a strong rally in tech stocks on Thursday, driving the Nasdaq Composite (^IXIC) up by 0.8%. The electric vehicle giant posted its best day in over a decade, soaring by more than 20% after reporting impressive earnings and a bullish sales outlook. Tesla's performance uplifted broader sentiment around the tech sector, though the Dow Jones Industrial Average (^DJI) lagged, closing down nearly 0.3%, as IBM (IBM) dragged the index lower with a 6% loss following disappointing quarterly results. The S&P 500 (^GSPC) managed a modest gain of 0.2%, recovering from earlier losses. Investors continue to weigh strong corporate earnings against concerns over higher-for-longer interest rates, which are keeping bond yields elevated. The 10-year Treasury yield (^TNX) eased slightly to 4.20%, down from 4.25%, as the market reassessed the Federal Reserve's rate outlook. Gold edged up by 0.72%, while crude oil dipped by 0.37%, reflecting ongoing volatility across the commodities space.

SPY Performance:
The SPDR S&P 500 ETF Trust (SPY) saw a mild uptick, closing 0.21% higher at $579.23. After opening at $579.98, SPY traded in a relatively tight range, with a high of $580.04 and a low of $576.57. Trading volume remained subdued at 29.78 million shares, below the recent average, suggesting a cautious mood among investors. Resistance remains solid around $580, while support is holding firm at $575, giving traders clear levels to watch in the days ahead. The market appears poised for continued sideways action unless a significant catalyst, such as key economic data or further earnings surprises, emerges.

Major Indices Performance:
The Nasdaq led the charge on Thursday with a 0.75% rise, heavily supported by Tesla’s blockbuster performance. The Dow Jones struggled, shedding 0.33%, as IBM’s disappointing earnings weighed heavily on the index. Small caps fared better, with the Russell 2000 gaining 0.23%, rebounding from recent losses as investor interest shifted toward sectors with stronger growth potential. Despite the mixed performance across indices, optimism in tech kept the broader market buoyant.

Notable Stock Movements:
Tesla’s impressive earnings fueled a dramatic 22% rise, its best single-day gain in over a decade. Among the "Magnificent Seven," only Apple (AAPL) and Google (GOOGL) experienced small losses, while the others rallied, reflecting broad strength in the tech sector. Boeing (BA), however, continued to struggle, declining around 1% as its labor disputes and recent financial troubles compounded investor concerns. In addition to Tesla, Nvidia (NVDA) and Meta (META) also posted gains, helping lift the Nasdaq higher.

Commodity and Cryptocurrency Updates:
Crude oil prices slipped by 0.37%, continuing a downward trend as supply disruptions in the Middle East failed to spur a sustained rally. Gold, meanwhile, gained 0.72%, with investors seeking safe-haven assets amid persistent market uncertainty. Bitcoin saw a solid rise of 2.88%, surging past the $68,000 mark as the broader cryptocurrency market continued to recover from recent dips. Sentiment in digital assets appears to be stabilizing, with traders eyeing further gains if macroeconomic conditions remain supportive.

Treasury Yield Information:
The 10-year Treasury yield dropped to 4.208%, down 0.85% from the previous day, easing pressure on rate-sensitive sectors. The bond market’s movements continue to play a pivotal role in shaping equity market trends, as investors gauge how long the Federal Reserve will maintain its elevated interest rate policy. The dip in yields provided some relief to stocks, particularly in real estate and utilities, which had been under significant pressure from rising rates in recent weeks.

Previous Day’s Forecast Analysis:
Wednesday’s premarket forecast had projected a potential range between $575 and $582 for SPY, with the expectation of choppy price action. The analysis suggested that while the index might attempt to rally, resistance at $580 would likely pose a challenge. Indeed, SPY struggled to break convincingly above this level, with the market largely moving sideways before closing just under resistance at $579.23. The forecasted range held true, offering opportunities for both longs and shorts as price action stayed confined within the predicted levels.

Market Performance vs. Forecast:
The market adhered closely to the previous day’s forecast, with SPY bouncing off the $575 support level before rallying toward $580, only to meet resistance just above this level as was suggested in the forecast. We mentioned while the $580 and $585 levels had weakened from repeated attempts to break these levels, “new money” had found its way to these levels which would present a significant challenge for the bulls to overcome. We suggested the bulls may be able to push prices as high as $582 today but clearing this would be quite challenging. We suggested mean reversion shorts from just above $580 which set up perfectly today right at the open. We also suggested longs off $575 or a failed breakdown which also set up perfectly at noon. Traders who positioned around these levels had multiple opportunities to capitalize on the market’s intraday movements. The performance validated the bearish tilt outlined in the premarket analysis as well, though the market's inability to break lower reflects continued buying interest at key support levels.

Looking Ahead:
As we head into the end of the week, traders should watch for further volatility, particularly as economic data such as the PMI report and unemployment claims are digested by the market. With Tesla’s earnings out of the way, attention will shift toward other key players in the tech space, as well as broader economic indicators that may influence the Federal Reserve’s next move. The range between $575 and $580 remains critical, with a breakout above $580 potentially driving SPY toward $585. Conversely, a breakdown below $575 could trigger further downside pressure toward $570. Money is moving down from $585 to $580 which increases the probability of further downside risk.

Guidance for Traders:
Traders should remain cautious as volatility remains elevated, with the VIX hovering around 19.08. Long positions near $575 continue to offer favorable risk-reward setups, especially if the index holds above this key level. However, failed breakouts near $580 should be watched closely, as these could signal an opportunity to enter short trades, targeting the lower end of the range. Keep an eye on bond yields and any major shifts in sentiment following key economic reports, as these factors will likely determine the market’s next significant move, especially as earning season winds down in a couple of weeks and as we approach US elections.

Market Sentiment and Key Levels:
SPY remains range-bound, with key resistance at $580 and support at $575. If the market can break above $580 on volume, expect a move toward $585, though momentum remains muted and $580 is becoming a major impediment to higher prices. Conversely, a break below $575 will open the door for a test of $570 and perhaps much lower. Traders should be prepared for potential swings with the market being held up by only a handful of stocks.

Expected Price Action:
Friday’s session is expected to see SPY trade within the range of $575 to $582. The market's recent pattern of sideways movement may continue, but upcoming economic releases next week with Core PCE and Non-Farm Payroll will introduce more directional moves. If SPY holds above $580 on volume, it could rally toward $585. But if selling pressure mounts, expect a retest of $575 with the possibility of a dip toward $570. While we do not expect a major move on Friday, the market appears to be setting up for a large downward move of 2% or more in the next few weeks. While our model is not forecasting this drop yet, there are indications from the model that below the surface, the market could potentially experience this type of drop at any time. Be forewarned and prepared for what may follow between now and the election.

Trading Strategy:
Until the market does break $575 on volume, we favor two-way trading both long from $575 with a target of $580 and shorts if SPY fails to break above $580 or if it breaks below $575 on strong volume. Traders should remain cautious, as the market could see sharp intraday swings. Using failed breakout and failed breakdown patterns remains a favored strategy in the current market environment.

Risk Management and Warnings:
With volatility elevated and the VIX nearing 20, traders should exercise caution, particularly when positioning ahead of major economic releases. Adjusting position sizes to account for larger potential price swings and wider stops will be essential for effective risk management. Keep an eye on geopolitical risks, particularly in the Middle East, which could introduce sudden market shifts.

Model’s Projected Range:
The model projects SPY to trade between $573.75 and $583.75 on Friday, with a slight bullish bias in a Call dominated market. The range is narrow, which implies more sideways price action for Friday. Price is trading along the lower band of the bull trend channel in place since the September lows. The channel held yesterday and today but as time passes, probabilities increase that SPY will break trend and form a new bearish trend channel. The next several days are very important to SPY’s performance through the end of the year. Watch for key levels at $575 and $580 to provide direction, with any breakouts or breakdowns likely to trigger sharp moves.

Market State Indicator (MSI) Forecast:

Current Market State Overview: The MSI is currently in a Bullish Trending Market State with price closing just above support. The range is narrow, implying a weak trend. The MSI rescaled before the open to this state  but after PMI was released in the premarket, rescaled to a Ranging Market State with price approaching major support at $575. The MSI printed extended targets above price in the premarket but was quiet all day with price spending the bulk of the day in a Ranging Market State. Support is currently $579.41 with resistance at $580.85 with lower support at $576.16.
Key Levels and Market Movements: The MSI spent virtually all day in a Ranging Market State which tells us as traders to sit on our hands and only trade failed breakout or failed breakdown patterns from major levels. We got a triple top short at our major level of $580 at the open and at MSI resistance at $580.85 which provided a perfect short to the day’s lows. But with the MSI in a Ranging State and not rescaling to a Bearish Trending Market State, our users knew to take profits at our major support level and to look for a reversal on any failed breakdown pattern. We got this pattern perfectly at noon which provided for a long back to major overhead and MSI resistance at $580. Two perfect trades, planned for in advance and validated by the MSI.
Trading Strategy Based on MSI: The MSI's current state suggests a weak bull trend with price potentially reaching $581 overnight. With such a narrow range and listless trading day, we do not expect much from the market on Friday. If the market pattern resumes, we may see a sell off overnight toward $576 with a rally back to $580 tomorrow. But given there is no economic news due Friday or major earning releases, use the MSI to trade with the trending state that emerges entering close to support and exiting near MSI resistance. Friday may be a day to do nothing as its probable the MSI rescales to a Ranging Market State where we know the odds of success trading level to level are lower than 50%.

Dealer Positioning Analysis:

Summary of Current Dealer Positioning: Dealers are selling $583 to $585 and higher strike Calls while also buying $580 to $582 Calls, indicating the Dealers desire to participate in any upside on Friday. Dealers continue to sell Calls heavily at $585 and have reinforced this level as major overhead resistance. To the downside, Dealers are buying $579 to $565 Puts in a 5:1 ratio to the Calls they are selling/buying, implying a bearish view of the market for Friday. We stated yesterday that the Dealers would reload today and they certainly did by adding much more downside protection. As a result Dealer positioning has changed since yesterday to a bearish view from a bullish stance.
Looking Ahead to Next Friday: Dealers are selling $587 to $590 and higher strike Calls while also buying $580 to $586 Calls, indicating the Dealers desire to participate in any rally by Friday to as high as $585. This appears to be a ceiling for next week. To the downside, Dealers are buying $579 to $555 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 next Friday. Dealers have added to their downside protection. This positioning has changed from yesterday from a neutral view to a bearish view. It would appear our model is picking up on this recent Dealer positioning forecasting potential market risks in the near term. We recommend any long book purchase downside protection.   

Recommendation for Traders:
Continued focus on the key levels highlighted in today’s newsletter and with SPY hovering 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!