Market Insights: Monday, October 28th, 2024

Market Overview:

The Dow Jones Industrial Average led the market higher on Monday, gaining over 250 points, or nearly 0.7%, as US stocks climbed at the start of a crucial week packed with Big Tech earnings, key inflation data, and the monthly jobs report. The tech-heavy Nasdaq Composite (^IXIC) and the S&P 500 (^GSPC) both rose by around 0.3%. With five of the "Magnificent Seven" megacaps set to release earnings this week, investors are focused on results from Alphabet (GOOGL, GOOG), Apple (AAPL), Amazon (AMZN), Microsoft (MSFT), and Meta (META), hoping these tech giants will bolster the S&P 500 to fresh highs. At the same time, Big Tech faces scrutiny over whether investments in AI are translating into profits. The economic data due this week, particularly the Federal Reserve’s preferred inflation gauge and the October jobs report, will test the market’s confidence in a "soft landing." Political tensions remain in focus as the US election nears, with Trump Media & Technology Group stock surging after a rally by Donald Trump in New York. In commodities, relief over Israel’s restrained military response toward Iran eased oil prices, with crude dropping nearly 6%—its largest one-day decline in over two years.

SPY Performance:

The SPDR S&P 500 ETF Trust (SPY) experienced a slight drop, closing at $580.83, down 0.31%. After opening at $582.58, SPY briefly reached a high of $582.71 but dipped to $580.52. Trading volume was below average, with 28.32 million shares traded, reflecting a subdued start to the week. The key resistance level at $585 remains intact, while support around $580 was tested, maintaining SPY within a narrow range. Market sentiment signals a continuation of this tight, sideways trading pattern, with a possible tilt towards bearish action if no significant earnings or economic surprises shift momentum.

Major Indices Performance:

The Dow Jones climbed 0.65%, leading the indices, buoyed by gains in traditional sectors. The Nasdaq Composite ended flat, up just 0.00%, as mixed performance in major tech stocks tempered gains. The Russell 2000 rallied by 1.63%, reflecting renewed optimism in smaller, growth-oriented stocks. The market’s broader performance indicates a cautious optimism, yet ongoing concerns over economic tightening are dampening enthusiasm in rate-sensitive areas.

Notable Stock Movements:

Tesla (TSLA), Nvidia (NVDA), Netflix (NFLX), and Microsoft (MSFT) all faced losses, tempering overall tech performance, while other megacap names posted gains. Meanwhile, Trump Media & Technology Group saw a notable surge as its stock jumped 20% amid political rallies. The mixed results among tech stocks are a prelude to this week’s earnings reports, with investors eagerly awaiting guidance on AI investments and profitability.

Commodity and Cryptocurrency Updates:

Oil experienced a major downturn, dropping 5.03% amid lower geopolitical risk as Israel refrained from striking Iran’s oil and nuclear facilities. Gold slipped slightly, down 0.17%, reflecting less demand for safe-haven assets. Bitcoin, however, jumped by 2.5%, closing above $69,000, suggesting bullish sentiment within the cryptocurrency market as broader economic uncertainties continue.

Treasury Yield Information:

The 10-year Treasury yield saw a slight dip, closing down 0.05% at 4.284%. This moderate change signals a cautious investor stance as markets remain uncertain about the Federal Reserve’s rate path amid pivotal earnings and economic data releases later this week.

Previous Day’s Forecast Analysis:

Friday’s forecast anticipated a restrained trading day with potential support around $580 and resistance at $585. As predicted, SPY tested both these levels, with the resistance at $585 continuing to act as a ceiling for upward moves. While the session saw brief attempts to break higher, the broader market’s sideways trend held, in line with expectations of range-bound behavior amid earnings season and critical economic data on the horizon.

Market Performance vs. Forecast:

The forecast accurately captured the range-bound movement of SPY, which oscillated between support and resistance but remained within the $580-$585 corridor. The day’s restrained action validated the previous day’s emphasis on cautious trading, as resistance at $585 was maintained, supporting the forecast’s suggestion of a “wait and see” approach ahead of this week's major economic events with longs favored from $580 and shorts from overhead resistance with any failed breakout/breakdown patterns.

Premarket Analysis Summary:

In Monday's premarket analysis at 7:45 AM, SPY was trading at $581.87, indicating a slight upward move over the weekend but facing immediate resistance at key levels. Given the array of economic data and major earnings due this week, we anticipated significant mixed signals as the market digested these catalysts. The analysis suggested favoring long entries around support at $581, with initial upside targets at $582.50 and potentially $584.50 if support held. However, caution was advised on any advance, as we projected the rally might face stalling pressure near these targets. On the downside, a failure to hold above $581 or a strong rejection of upper targets was forecast to drive SPY toward $578.60. In such a scenario, short positions near those resistance levels were recommended, while traders were advised to avoid aggressive moves as consolidating behavior is expected near support.

Validation of the Analysis:

Monday’s market action closely followed the premarket outlook. SPY opened just above the $581 level, testing resistance at $582.50 before failing to break through and subsequently reversing toward the lower target at $580. This adherence to anticipated support and resistance levels validated the caution expressed in the analysis, as early attempts at upside were met with resistance. Traders who aligned with the expectation of a brief upside followed by range-bound movement were rewarded, as SPY's oscillations allowed profitable entries and exits at predicted levels. The premarket guidance to trade conservatively within the anticipated range—keeping an eye on failed breakouts at $582 and potential support at $578—proved accurate, highlighting the value of waiting for clear breaks before pursuing aggressive positions.

Looking Ahead:

This week’s market is likely to remain within the $575 to $585 range, awaiting potentially significant moves based on the release of earnings and economic data. A breakout above $580 could drive SPY toward $585, while a dip below $575 could see it testing $570. Core PCE and Non-Farm Payroll data, along with Big Tech earnings, will drive sentiment, with the earnings and the election adding an extra layer of uncertainty. Traders should be prepared for increased volatility, especially around earnings and data releases.

Guidance for Traders:

Traders are advised to exercise caution with the VIX at 19.80. Long positions near $575 and short positions around $585 remain viable strategies within this range. Close monitoring of Treasury yields and economic reports is essential, as these are likely to impact broader market movements, particularly in rate-sensitive sectors. We expect volatility to further increase after the close on Tuesday which could lead to tests of both ends of our projected range.

Market Sentiment and Key Levels:

SPY appears locked in a band with resistance at $585 and support at $575. A sustained move above $580 could test the $585 ceiling, while a drop below $575 could push SPY to $570. Given the market’s tentative behavior, traders should continue using range-bound strategies until a clear directional catalyst emerges.

Expected Price Action:

For Tuesday, SPY is projected to stay within the $575-$585 range with two-way trading and little trending price action. While broader market sentiment suggests more downside potential in the coming weeks, near-term trading is expected to be range-bound, particularly with pivotal earnings and economic data set for release. We expect SPY to move lower overnight but to find support at $578 or higher to remain within the $578 to $583 range.

Trading Strategy:

Adopting a two-way strategy is advisable until SPY makes a decisive move below $575 or above $585. This includes seeking long entries near $575 with targets at $580, and short entries around $585 if the level holds firm. A potential breakdown below $575 could present further short opportunities, while failed breakout or breakdown setups are ideal within the current volatility framework. If you enter a failed breakdown above $580, be prepared to take quick profits given $583 has proven to be difficult to overcome. The same goes for failed breakouts at $583 or higher…look to capture profits quickly in this very narrow and chop filled range.

Risk Management and Warnings:

With the VIX at heightened levels and ongoing geopolitical tensions, risk management remains paramount. Traders should consider adjusting position sizes to accommodate potential increased volatility. The upcoming economic releases and election developments will likely drive market sentiment, making it essential to monitor positions closely. We recommend smaller position sizes through the election.

Model’s Projected Range:

The model’s range for SPY for Tuesday is between $577.00 and $586.50, with a slight bullish bias as the options market shows a Call dominance. This narrow range suggests the potential for more two-way choppy price action. Key levels at $575, 578, $580, 583 and $585 continue to dictate movement. Any sustained break above or below these points is likely to fail quickly in this environment without an external catalyst as SPY continues to respect the bull trend channel in place since the September lows. SPY is tenuously riding along the lower channel which looks like it wants to give way sooner rather than later. But until it does, the bulls continue to hold the advantage. Be prepared in case this changes quickly.

Market State Indicator (MSI) Forecast:

Current Market State Overview: The MSI is currently in a Bullish Trending Market State with price closing on top of resistance. The range is very narrow, implying a weak trend. The MSI rescaled before the open to a Bullish Trending Market State and printed extended targets above which implied a very strong, momentum-based rally with the herd participating. But SPY ran into resistance at $583 in the premarket and just prior to the open, the MSI stopped printing extended targets opening the way to a mean reversion short at the open. The MSI remained in very narrow range without extended targets all day which led to price ranging in a less than $2 range for most of the day. Support is currently $580.48 with resistance at $580.98.
Key Levels and Market Movements: With SPY making a head and shoulders pattern at the open and the MSI no longer printing extended targets, we entered a mean reversion short at $582.50 to MSI support at $580.98. And that was it for the day given price barely moved from that level all day. On a day like today one solid trade is a success and the MSI cleared the way for us to enter this trade and showed us where to book profits.
Trading Strategy Based on MSI: The MSI's current state suggests a very weak bull trend with price likely testing MSI support at $580.48 overnight. Probabilities favor sitting on our hands until this range expands or extended targets show us the herd is pushing the trend. Until one of these occurs, we recommend waiting for a better opportunity to strike. Trading is like hunting…there are times when days can go by with seeing a suitable prey. There will be plenty of opportunities as this week unfolds but for now, sit back and wait for them to develop.

Dealer Positioning Analysis:

Summary of Current Dealer Positioning: Dealers are selling $583 to $587 and higher strike Calls while also buying $581 and $582 Calls, indicating the Dealers desire to participate in any upside on Tuesday. To the downside, Dealers are buying $579 to $570 and lower strike Puts in a 3:1 ratio to the Calls they are selling/buying, implying a slightly bearish view of the market for Tuesday. Dealers have added more downside protection but today seem to have moved from bearish to a more neutral position, for Tuesday. Perhaps since Isreal’s attack on Iran didn’t results in a full-blown war, Dealers are taking a more optimistic tone.  
Looking Ahead to Friday: Dealers are selling $585 to $590 and higher strike Calls while also buying $581 to $584 Calls, indicating the Dealers desire to participate in any rally by Friday to as high as $590. $583 and $585 looks to be a wall the bulls need to overcome for SPY to move higher. Dealers continue to lower these levels, selling closer to the money Calls to finance their purchase of Puts. This is bearish. To the downside, Dealers are buying $579 to $560 and lower strike Puts in a 6:1 ratio to the Calls they are selling/buying. This implies a bearish view of the market heading into Friday. Dealers did not add to their downside protection today but it remains relatively unchanged from Friday. Again we recommend any long book follow the Dealers lead by purchasing downside protection to protect your portfolio at least through the election.  

Recommendation for Traders:

Key levels remain fixed with little chance of a change until an external catalyst creates one. There is now a range within the range at $581 to $583. But the market remains bullish as long as its above $550. Every dip is still getting bought although last week SPY finally put in a red week. We continue to favor longs but are not overly active while the market trades in this tight trading range. We prefer to wait for it to come to our major levels rather than risk being chopped up and suggest our readers do the same thing. With volatility expected to rise, traders are advised to keep positions small and avoid large, long-term exposures, and of course check in with the premarket analysis posted before 9 am daily for updates to the day’s action.  

Good luck and good trading!