Market Insights: Friday, October 25th, 2024

Market Overview:
The Nasdaq closed near record highs amid a rough week for stocks. U.S. stocks closed mixed Friday as Treasury yields ripped higher, and markets logged weekly losses as uncertainty over the Federal Reserve's next move shadowed a robust earnings season in full swing. The S&P 500 (^GSPC) climbed just over flatline Friday after the benchmark snapped a three-day losing streak the previous day. The Dow Jones Industrial Average (^DJI) shed 0.6%, while the tech-heavy Nasdaq Composite (^IXIC) gained about 0.6%, close to the Nasdaq's record of 18,579. Major tech names pushed the index higher in anticipation of earnings next week. Stocks are struggling somewhat as fresh questions over the Fed's interest rate policy put pressure on investor appetite for risk. The benchmark 10-year yield (^TNX) rose to around 4.23%, coming closer to a three-month high above 4.25% that it hit midweek. The Dow and S&P 500 notched downbeat weeks after taking a hard knock amid worries the Federal Reserve will slow or even halt its interest rate cuts. Investors are also bracing for potential disruption on the horizon from the November US jobs report due next Friday and the tight presidential election a week later. Meanwhile, Tesla's (TSLA) earnings surprise has laid the groundwork for five other "Magnificent Seven" megacaps reporting next week: Google parent Alphabet (GOOG, GOOGL), Meta (META), Microsoft (MSFT), Apple (AAPL), and Amazon (AMZN).

SPY Performance:
The SPDR S&P 500 ETF Trust (SPY) saw a minor drop, closing at $579.02, down by 0.03%. Opening at $581.62, SPY reached a high of $584.46 and a low of $578.08. Volume was about average at 47.16 million shares, reinforcing today’s lackluster day. Key levels of resistance around $585 remained intact, while support at $580 was tested, giving way to $578, delineating a tight range within which SPY has moved in recent sessions. Market sentiment suggests continued sideways to slightly bearish action within this range unless new economic data or earnings drive momentum shifts.

Major Indices Performance:
The Nasdaq Composite led with a 0.59% gain, reflecting continued tech strength driven by Tesla and anticipation of upcoming earnings from other heavyweights. The Dow Jones fell by 0.68%, weighed down by traditional sectors more impacted by rising rates. Small caps, as tracked by the Russell 2000, dipped 0.36%, as investors showed caution toward growth-oriented assets amid economic tightening concerns. The tech sector's resilience buoyed the overall market tone, even as rate pressures influenced other indices.

Notable Stock Movements:
Tesla (TSLA) rose another 3%, continuing its post-earnings momentum and lifting broader sentiment in tech. Among the "Magnificent Seven," all rose at least  a bit, while Nvidia (NVDA) and Meta (META) helped boost the Nasdaq. In other sectors, Boeing (BA) struggled amid labor disputes and recent financial pressures, contributing to the Dow’s negative performance. The week closed with most tech names retaining strength as traders positioned for upcoming earnings.

Commodity and Cryptocurrency Updates:
Oil prices reversed recent losses, gaining 2.07% as market participants considered supply dynamics and a possible interruption due to the Israel/Iran conflict. Gold saw a modest increase of 0.27%, as investor caution bolstered demand for safe-haven assets. Bitcoin, however, declined 2.12%, ending below $67,000, signaling mixed sentiment in digital assets, impacted by economic uncertainties and the broader risk environment.

Treasury Yield Information:
The 10-year Treasury yield climbed by 0.98%, reaching 4.242%, reflecting investor anxiety over the Fed’s prolonged rate stance. Higher yields are impacting equities, especially rate-sensitive sectors, and are likely to remain a focal point as they approach previous highs, influencing risk-related sentiment as investors assess the Fed’s path forward.

Previous Day’s Forecast Analysis:
Thursday’s premarket forecast anticipated SPY to trade within a range of $575 to $582, with particular emphasis on resistance near $580. We stated if SPY moved above $580 on volume, it would rally to as high as $585 which would represent strong resistance. We pointed out that $585 has proven to be a challenging barrier, where we would seek mean reversion shorts. We also forecast major support near $575 where we would seek failed breakdowns to initiate long positions.

Market Performance vs. Forecast:
Friday’s market activity largely followed Thursday’s forecast. SPY opened above resistance at $580 but quickly moved to $585 where a failed breakout set up at the day’s highs, leading to a perfect mean reversion short back to major support at $580. The forecast highlighted the potential for resistance near $585 to hold firm, and indeed, SPY’s movements were constrained below this level. The forecast had also suggested that any break below $580 might see SPY dip toward $575, which also materialized as SPY tested $580 in the afternoon session. A failed breakdown at 2:00 pm ET and SPY moved back to $580 from the day’s lows. These intraday moves aligned closely with Thursday’s expectations, indicating the market’s range-bound behavior, and signaling to traders the importance of maintaining positions within the tight boundaries set by these levels. SPY’s inability to decisively breach resistance or support further underscored the cautious tone highlighted in the forecast, reflecting the broader market's wait-and-see approach ahead of next week’s critical economic and earnings data. The resistance level of $585 aligns with the market’s cautious stance, suggesting that upward momentum may be capped in the near term without a strong catalyst.

Looking Ahead:
The market appears set for a continuation of recent trends with larger intraday moves and more two-way price action as market participants digest earnings releases against the backdrop of several external macro risks. SPY is expected to hover between $575 and $585 and a breakout above $580 could potentially rally SPY once again toward $585, though momentum remains tempered. Conversely, a break below $580 may open a path to test $575 and below $575, to potentially $570. Next week’s economic releases, including Core PCE and Non-Farm Payroll data, are expected to drive significant moves, especially as the U.S. election approaches. Coupled with the slew of tech earnings due out next week short-term traders should remain prepared for increased volatility and major price moves.

Guidance for Traders:
Caution is advised as volatility remains elevated, with the VIX at 20.33 and rising. Long entries around $575 may offer favorable setups if this support holds, while failed breakouts near $585 could present short opportunities targeting lower levels in the range. Close attention to Treasury yields and key economic reports will be crucial in the days ahead, as these factors are likely to influence the market’s direction amid earnings season and pre-election sentiment.

Market Sentiment and Key Levels:
SPY’s recent range-bound behavior likely persists, with resistance holding firm at $585 and support anchored at $575. If SPY manages to break above $580, a move toward $585 could ensue. However, a dip below $575 may test support levels closer to $570.

Expected Price Action:
For Monday, SPY is projected to maintain a range between $575 and $585, as sideways trading persists with periods of trending price action. Economic releases next week could introduce directional momentum, while a sustained hold above $580 will drive SPY toward $585. Selling pressure could retest $575 with potential to reach $570 or lower. The market appears to be setting up for a +2% down day over the coming weeks, with signals indicating a potential drop as the election approaches. But for Monday we expect more of the same as today with two-way trading and periods of strong trending price action.

Trading Strategy:
Until SPY breaks $575 on volume, a two-way trading approach is advised: consider long positions around $575 targeting $580, long above $580 on a strong break of this level, and shorts near $585. We also see a breakdown below $575 as a further short opportunity. The current environment favors failed breakout and breakdown strategies, and traders should adjust positions as conditions remain ripe for sudden intraday moves.

Risk Management and Warnings:
Elevated VIX levels and geopolitical risks necessitate disciplined risk management, especially around upcoming economic releases. Adjusting position sizes for potential wider stops will aid in managing risk effectively. Geopolitical developments, particularly in the Middle East, could prompt sudden shifts in market sentiment, so vigilance remains essential.

Model’s Projected Range:
The model projects a range for SPY for Monday is $573.75 to $583.75, with a slight bullish bias due to the options market being Call dominated. This range is quite large, expanding from today, implying trending price action for Monday. SPY is resting atop of the lower band of the September bull trend channel, though probabilities for a bearish trend channel to form continue to increase. Key levels at $575, $580, and $585 will dictate direction, and breakout or breakdown moves are expected to be swift.

Market State Indicator (MSI) Forecast:

Current Market State Overview: The MSI is currently in a Bearish Trending Market State with price closing on top of support. The range is very narrow, implying a weak trend. The MSI rescaled before the open to a Bullish Trending Market State, printing extended targets above which implied a very strong, momentum-based rally with the herd participating. At major resistance of $585, the market topped out and the MSI quickly rescaled to a Bearish Trending Market State printing extended targets below. These extended targets stopped printing just prior to the close. Support is currently $578.82 with resistance at $579.47.
Key Levels and Market Movements: The MSI spent the morning session in a Bullish Trending Market State but with price well above overhead resistance, and with extended targets no longer printing after 10:44 am ET, the market gave way at $584 and fell to MSI overhead resistance, which became support before moving beyond this level, with the MSI rescaling to a Bearish Trending Market State. The MSI rescaled several times lower during the afternoon session and with extended targets below, MSI users knew to hold onto shorts for price to reach $580 or lower, waiting for these extended targets to stop printing before attempting a mean reversion long. This set up a failed breakdown pattern at 2:00 pm ET and provided MSI users a great long trade off today’s lows to MSI resistance at $580. MSI then entered a Ranging Market State and late on a Friday, our users knew it was time to call it a week after three great trades, long from $580 at the open, short from $584 on a failed breakout and long once again from $578.50 after a failed breakdown. All of these trades occurred at our model’s major levels and were confirmed by the MSI, providing MSI users confidence to trade these signals in size.
Trading Strategy Based on MSI: The MSI's current state suggests a weak bear trend with price potentially retesting today’s lows at $578 before finding support and moving toward $580. With such a narrow range and no extended targets below, we do not expect much movement in the market Sunday night. There is no economic news on Monday but several large firms will be reporting earnings. The market can and will react to these earnings violently therefore we recommend using the MSI to trade within trending market states as they emerges, initiating positions preferably close to our models major support and resistance levels.  

Dealer Positioning Analysis:

Summary of Current Dealer Positioning: Dealers are selling $582 to $586 and higher strike Calls while also buying $580 and $581 Calls, indicating the Dealers desire to participate in any upside on Monday. Dealers continue to sell Calls heavily at $585/$586, reinforcing this level as major overhead resistance. To the downside, Dealers are buying $579 to $565 and lower strike Puts in an 8:1 ratio to the Calls they are selling/buying, implying an increasingly bearish view of the market for Monday. We stated yesterday that the Dealers added much more downside protection which served them well today, even with a market that closed just slightly down. Dealer positioning for Monday continues to be bearish but with the Dealer’s appearing to increase their conviction of this view.
Looking Ahead to Next Friday: Dealers are selling $585 to $590 and higher strike Calls while also buying $580 to $584 Calls, indicating the Dealers desire to participate in any rally by next Friday to as high as $590. $585 looks to be quite a challenge for the bulls to overcome based on current Dealer positioning. To the downside, Dealers are buying $579 to $555 and lower strike Puts in a 7:1 ratio to the Calls they are selling/buying. This implies an increasingly bearish view of the market heading into next Friday. Dealers continue to add to their downside protection. This positioning has not changed from yesterday as Dealers remain somewhat bearish for next week. Again we recommend any long book follow the Dealers lead by purchasing downside protection to protect your portfolio.  

Recommendation for Traders:
Focus on highlighted key levels with SPY trading near resistance at $580. The bull trend channel has kept SPY from falling further but once this breaks, prices could move lower very quickly. Next week the market will likely experience periods of excessive volatility due to earnings releases and economic reports. And with the election nearing, if you have not hedged your long portfolio you are advised to do so now. We also recommend trading in much smaller size with more intraday positions to ensure you are not caught in any market-wide sell-off. While we are not predicting a crash or anything more than a pullback, we are projecting a material increase in volatility. Failure to manage this volatility properly has the potential damage any portfolio. Traders are encouraged to review the premarket analysis for updates to the model’s outlook and for any updates to Dealer positioning.

Good luck and good trading!