Market Insights: Tuesday, October 29th, 2024

Market Overview:

The Nasdaq Composite marked a record close on Tuesday, driven by Alphabet’s earnings report, which fueled a positive tone across Big Tech as earnings season intensifies. Alphabet (GOOG, GOOGL) exceeded Wall Street expectations in both revenue and earnings, with after-hours trading showing the stock up about 4% following news of ongoing growth in its cloud sector. Broadcom (AVGO) bolstered tech sentiment, gaining over 4% on reports of its collaboration with OpenAI and Microsoft (MSFT) on a new AI chip. The Nasdaq Composite (^IXIC) rose nearly 0.8%, leading the day, while the S&P 500 (^GSPC) managed a 0.2% gain. Conversely, the Dow Jones Industrial Average (^DJI) lagged, losing 0.4% amid weakness in industrials. Labor market data indicated a dip in job openings, with the Bureau of Labor Statistics reporting 7.44 million openings for September, down from the revised 7.86 million in August. This softening of labor demand may impact the Fed’s policy considerations ahead of its November meeting. In other news, Trump Media & Technology Group surged again after another campaign rally by Donald Trump, extending Monday's gains. Oil prices dipped, shedding 0.77% as Middle East tensions showed no significant escalation, while investors eye major economic releases later in the week.

SPY Performance:

The SPDR S&P 500 ETF Trust (SPY) closed at $581.75, up a modest 0.16%. The day saw SPY trade within a tight range, opening at $579.84 and climbing to a high of $582.91 before slipping back near closing. Volume was below average, with 36.23 million shares traded, reflecting investors’ measured stance. Key resistance at $585 remains unchallenged, while $580 continues to serve as reliable support. Given the restrained movement and lack of significant market direction, the sideways trend appears likely to persist, with a bullish tilt unless earnings or economic data significantly shifts sentiment.

Major Indices Performance:

The Nasdaq led Tuesday’s indices, climbing 0.98% as tech stocks capitalized on favorable earnings and positive AI news. The Russell 2000 gained 0.32%, while the Dow Jones declined by 0.36%, reflecting mixed investor sentiment amid industrial sector underperformance. The session’s movement, while promising for tech, underscored persistent caution in rate-sensitive sectors where enthusiasm remains dampened by ongoing economic tightening.

Notable Stock Movements:

Tech stocks saw gains with Alphabet and Broadcom, driving the Nasdaq’s strong performance. Tesla (TSLA) slipped slightly, the only laggard among the Magnificent Seven, while Trump Media & Technology Group extended Monday’s rally with another double-digit jump, fueled by political developments. Alphabet’s strong quarterly results set a promising tone for upcoming earnings from the remaining megacap tech companies.

Commodity and Cryptocurrency Updates:

Crude oil declined by 0.77%, as geopolitical risks in the Middle East appeared contained for the time being. Gold climbed 1.18% in response to softening labor data and continued demand for inflation hedges, while Bitcoin surged by 4.02%, pushing above $72,000 and reflecting strong risk-on sentiment within crypto markets. Bitcoin looks primed for a move to $100K. While our model is not forecasting this with a high degree of probability, it is on its radar screen, which is a new development.

Treasury Yield Information:

The 10-year Treasury yield fell by 0.65%, closing at 4.248%. This yield movement suggests investors are bracing for potential easing in labor demand, which may prompt the Fed to reconsider aggressive rate hikes.

Previous Day’s Forecast Analysis:

Monday’s forecast anticipated that SPY would remain within a constrained range, testing support at $580 and resistance at $585. This prediction proved accurate, with SPY moving toward $582.50 but unable to sustain upward momentum to challenge the $585 level, underscoring the forecast’s emphasis on cautious trading. As expected, the market oscillated within the projected boundaries, giving traders limited but profitable opportunities to enter and exit at key levels. The forecast’s call for a “wait and see” approach aligned well with the day’s subdued activity, as investors braced for the wave of Big Tech earnings and significant economic data later in the week. This tight movement also highlighted the broader sentiment of restraint as the market processes mixed signals from both earnings expectations and economic data, validating the range-bound forecast and supporting strategies that capitalized on smaller, predictable movements.

Market Performance vs. Forecast:

SPY adhered closely to the forecasted range, holding above the $580 support level for most of the day with only a brief dip to $578.35 after the open. We suggested longs on any failed breakdown patterns from $580 to $583 stating there was now a range within the range and if you wished to trade, look for failed breakout and breakdown patterns as a trigger to enter positions. This set up perfectly right after the open for long to $582.77. The $583 level held firm as the market did not have the momentum necessary to challenge the $585 resistance level. This constrained performance highlighted the market’s reluctance to commit to a breakout or breakdown ahead of key earnings and economic reports. The alignment with forecasted levels underscored the effectiveness of Monday’s guidance, particularly for traders who utilized range-bound strategies and positioned themselves conservatively at anticipated points of entry and exit. As expected, the market’s oscillations rewarded those adhering to the strategy of cautious trades within this tight range, reaffirming the outlook that broader directional moves would remain on hold until a more decisive catalyst emerged. This price action validated the forecast’s emphasis on waiting for clearer signals amid an environment marked by both anticipation and restraint.

Premarket Analysis Summary:

As of Tuesday’s premarket analysis at 7:47 am ET, SPY was positioned at $580.54, setting the stage for a session with expected resistance near $581 and immediate downside pressure likely to target $578.25. The analysis advised traders to approach the day with caution, favoring short entries from notable resistance points if SPY failed to regain momentum above the bias level at $581. We stated should SPY hold above this threshold, an upside move to $584.45 was possible, although more likely later in the day if an upward rally gained strength. This guidance underscored a preference for measured, opportunistic entries given the blend of mixed signals, earnings anticipation, and potential volatility associated with the week's economic data releases.

Validation of the Analysis:

Tuesday’s session closely validated the premarket forecast, with SPY encountering support at $578.35 and reversing toward resistance near the $583 mark by the close. This behavior aligned with the guidance for cautious, range-bound trading, as SPY showed limited ability to break through key levels. Traders who followed the recommended approach of conservative entries and exits near projected support and resistance saw their patience rewarded, as SPY respected anticipated boundaries throughout the session. The adherence to forecasted levels underscored the importance of sticking to a disciplined trading strategy amid uncertain conditions and confirmed the benefit of waiting for clear breaks before committing to larger moves.

Looking Ahead:

The market remains anchored in a $575 to $585 range, awaiting pivotal economic data and earnings from other major tech firms. A break above $580 could steer SPY toward $585, while a slip under $575 could prompt a test of $570. Given looming Core PCE and Non-Farm Payroll data, plus the Fed’s November meeting, volatility is expected to increase, particularly around earnings releases. Wednesday GDP and ADP Non-Farm Employment Change will be released which have the potential to rattle the market. We except a strong GDP reading on Wednesday which could work against the market, as it may signal to market participants that the Federal Reserve will be less interested in reducing rates at its next meeting. Be certain to observe price behavior around these events and to trade what you see.

Guidance for Traders:

With the VIX at 19.34, traders should proceed cautiously. Longs near $575 and $578 and shorts around $585 continue to be viable within the current range. Close attention to Treasury yields and major economic reports is essential, as these factors heavily influence rate-sensitive sectors. Increased volatility is anticipated post-market Wednesday, likely testing both ends of our projected range. We favor short dated VIX $19 Calls as both a hedge and a potential alpha generator between now and the end of next week.

Market Sentiment and Key Levels:

SPY remains within a tight trading band, with significant resistance at $585 and solid support around $575, underscoring the market's tentative sentiment as traders await clearer catalysts. The sentiment appears cautiously bullish above $580, though attempts to push higher have encountered resistance, suggesting lingering hesitation around key technical levels. A sustained move above $580 could signal a test of $585, where resistance would need to be overcome for a more extended rally. Conversely, a break below $575 might prompt a slide to $570, aligning with the market’s guarded approach in response to upcoming economic reports and Big Tech earnings. Traders are advised to approach these levels with range-bound strategies, staying flexible as the market remains sensitive to shifts in sentiment influenced by both data and earnings. $580 to $583 is the first line of defense for both the bulls and the bears. A break above or below these levels on volume will likely dictate the market’s next move near term.

Expected Price Action:

For Wednesday, SPY is expected to remain within the broader $575 to $585 range, with two-way trading likely to dominate amid limited trending action. While broader market sentiment tilts bullish, with inflation data and earnings on the horizon, near-term trading is expected to break out of this range. Overnight moves may skew slightly higher, with support anticipated around $580, keeping SPY trading between $580 and $585 as investors cautiously monitor key levels. Any sustained push upward may meet resistance unless a clear catalyst emerges from the earnings or economic data. That said, our model forecasts weighs the probability of continued upward price pressure on strong earnings and solid economic news at better than 60%.

Trading Strategy:

In this environment, adopting a two-way strategy remains advisable, as SPY has shown a tendency to reverse at major levels without clear follow-through. This includes seeking long entries near $575 with targets around $580 and considering short entries closer to $585 if resistance holds. Should SPY break below $575, this could present additional shorting opportunities, particularly if supported by bearish sentiment from key earnings or data. For now, quick exits are recommended in cases of failed breakouts around $583 or higher, as the market's tight range and choppy behavior increase the likelihood of rapid reversals. Given these conditions, flexibility and discipline will be essential in capturing gains while avoiding overexposure in a market lacking clear directional momentum. While we have been advising traders to feel comfortable with two-way trading the last several days, we do expect this to change on Thursday when the market is likely to trade more directionally. Currently the direction favors the bulls but this could change quickly.

Risk Management and Warnings:

With heightened VIX levels and geopolitical tensions, robust risk management is crucial. Position sizing should remain conservative as market volatility rises. Traders should consider protective measures on positions in light of economic releases and election news such as buying Vix Calls or SPY Puts.

Model’s Projected Range:

The model’s forecast for SPY on Wednesday is a range of $576.25 to $587.75, with Call dominance suggesting some upward pressure but limited expansion and therefore more sideways price action. Key levels remain at $575, $578, $580, $583, and $585. SPY continues to trade in its existing bull trend channel from the September lows with price riding along the lower channel. The channel has held up extremely well the last five days. But riding along an upper or lower boundary is tenuous so we advise caution. Watch for this channel break on any volume for clues to whether the bull trend continues and the market makes new highs or whether price reverses and starts to move lower. Volume has been muted therefore a wait and see approach is the best approach.

Market State Indicator (MSI) Forecast:

Current Market State Overview: The MSI is currently in a Bullish Trending Market State with price closing mid-range. The range is narrow, implying a weak trend. The MSI rescaled several times before the open to a Bearish Trending Market State and printed extended targets below which implied a very strong, momentum-based decline with the herd participating. But the MSI range was extremely narrow and once SPY approached major support at $580, the extended targets ceased printing and SPY set up a classic failed breakdown pattern, trapping shorts and reversing long. This is a classic pattern all traders need to master. The MSI then began a series of rescalings higher with periods where extended targets printed above. This drove SPY to the day’s highs late in the session. SPY respected the MSI at each rescaling and moved from support to resistance each time. The MSI has a 70% probability of this occurring each and every time in a trending state. Once extended targets stopped printing at the day’s highs, SPY ran into resistance at $583 and fell back to MSI current support at $581.98 with resistance at $582.77.
Key Levels and Market Movements: With SPY setting up a textbook failed breakdown at the open at major support, the MSI gave the green light to go long when it stopped printing extended targets below. A quick move toward $580 and the MSI rescaled several times higher, giving our users confidence to hold onto longs or reenter long at MSI support. Once extended targets printed above, we knew to stay long and ride price into the close. A complex trading day that was made quite easy by the MSI telling us when to mean revert and when to take profits.
Trading Strategy Based on MSI: The MSI's current state suggests a bull trend with price likely testing MSI resistance overnight. Probabilities favor price drifting higher given the strong earnings out of Google are likely get overseas investors interested in our markets. If extended targets start to print once again, we favor long trades from support to $585. $583 is vulnerable to break as it has been weakened by the number of attempts to break though. It’s very possible Wednesday sees the market move out of the range within a range of $580 to $583 with price pushing toward $585. Above $585 the door is open to $590, although for Wednesday we see this as a low probability.

Dealer Positioning Analysis:

Summary of Current Dealer Positioning: Dealers are selling $583 to $588 and higher strike Calls while also buying $582 Calls, indicating the Dealers desire to participate in any upside on Wednesday. There appears to be a ceiling for Wednesday at $588 given the amount of new money that has reinforced this level. Therefore any break of $585 is likely to stall at $588. To the downside, Dealers are buying $581 to $567 and lower strike Puts in a 2:1 ratio to the Calls they are selling/buying, implying a neutral view of the market for Wednesday. Dealers continue to move from bearish to more neutral positioning as the week progresses. Dealer do hold quite a bit of downside protection but in the near term appear to be more optimistic that prices will move higher, finding a wall of resistance at $588.  
Looking Ahead to Friday: Dealers are selling $587.50 to $590 and higher strike Calls while also buying $582 to $587 Calls in some size, firmly indicating the Dealers desire to participate in any rally that develops by this Friday. Dealers are clearly positioned for prices to move up this week to as high as $590.  $585 and $588 will surely give price trouble breaking through but these levels have been tested several times over the past few weeks and Dealers appear to think these levels will break with SPY making new all-time highs. To the downside, Dealers are buying $581 to $565 and lower strike Puts in a 4:1 ratio to the Calls they are selling/buying. This implies a slightly bearish view of the market heading into Friday but significantly less bearish than today. Dealers have moved from a bearish view toward a more neutral view and it appears likely Dealers will continue to move toward neutral as we head into Friday. We continue to recommend any long book purchase downside protection to at least through the election, particularly in light of Dealers flipping flopping their positioning the last few days.    

Recommendation for Traders:

Key levels at $580 to $583 form a range within a range, supporting conservative trading until an external event disrupts the current trend. Bullish sentiment remains intact above $550. We expect price to break out of this range within a range this week and possibly on Wednesday. Until then smaller, cautious positions are advised. Dealer positioning changes daily so be sure to check in with the premarket analysis before 9 am ET for timely updates.

Good luck and good trading!