Market Insights: Wednesday, October 30th, 2024

Market Overview:

The Nasdaq, S&P 500, and Dow Jones closed slightly lower today as markets digested Alphabet’s (GOOG, GOOGL) strong earnings alongside new economic data that contributed to a mixed outlook for the Federal Reserve’s upcoming interest rate decision. The Dow Jones Industrial Average (^DJI) dropped around 0.2%, while the S&P 500 (^GSPC) declined by more than 0.3%, and the Nasdaq Composite (^IXIC) fell nearly 0.6%. Government data showed that U.S. economic growth decelerated to an annualized rate of 2.8% last quarter, just shy of expectations, though consumer spending remained robust amid cooling inflation. ADP reported strong private payroll growth for October, adding uncertainty ahead of Friday’s pivotal jobs report. In Big Tech, Alphabet’s stock rose nearly 3% after quarterly results confirmed the company’s ambitious AI investments are yielding returns. Meta (META) and Microsoft (MSFT) also reported after-hours, each surpassing Wall Street’s estimates. While Microsoft’s stock advanced, Meta’s extensive spending projections appeared to dampen investor enthusiasm.

SPY Performance:

The SPDR S&P 500 ETF Trust (SPY) ended Tuesday at $580.01, slipping 0.3% with trading volume below average at 34.58 million shares. The ETF opened at $581.29, peaked at $583.32, and reached a low of $579.29, reinforcing the $580 level as a key support. Resistance at $583 also remains intact, as the day’s dip signals investors’ cautious tone amidst earnings season. With the restrained movement expected to persist until larger economic data arrives, SPY’s current range-bound pattern suggests the importance of tactical trades within these boundaries.

Major Indices Performance:

Wednesday’s performance saw the Dow Jones, S&P 500, and Nasdaq all close modestly lower, with the Nasdaq down 0.6%, reflecting broader uncertainty in Big Tech and economic data releases. The Russell 2000 mirrored this sentiment, declining by 0.12%. Despite Alphabet’s strong earnings, which buoyed expectations for other tech earnings, markets remained sensitive to the economic data, reinforcing a largely cautious investor stance that favored limited risk-taking across rate-sensitive sectors.

Notable Stock Movements:

Alphabet and Microsoft both outperformed expectations, with Alphabet shares up nearly 3% as AI spending appeared to support growth. Meta reported after-hours as well, meeting earnings targets but raising concerns with higher spending plans, resulting in modest after-hours volatility. Amidst these Big Tech moves, Tesla (TSLA) joined other leading tech names in a subdued trading day, as the broader market awaited further catalysts from additional earnings releases and economic indicators.

Commodity and Cryptocurrency Updates:

Oil prices rebounded 2.8%, as geopolitical concerns appeared less pressing, while Gold advanced 0.65%, touching new highs amidst economic data indicating robust consumer demand. Bitcoin continued its bullish trajectory, increasing 0.3% and maintaining a position above $72,000, buoyed by persistent risk-on sentiment in the crypto market.

Treasury Yield Information:

The 10-year Treasury yield edged up by 0.62%, closing at 4.3%. This level has historically posed challenges for equities, and the upward shift hints at investor expectations of a steady or even hawkish Fed policy. Recent history suggests the market may sell off 5 to 6% when treasuries exceed this level. As labor market data signals strength, the Fed may also find less justification for dovish adjustments in the near term further pressuring equities.

Previous Day’s Forecast Analysis:

Tuesday’s forecast emphasized caution within the $580-$583 range, projecting limited movement as earnings data and economic indicators unfolded. SPY’s performance aligned with this guidance, as the ETF briefly dipped below $580 but quickly found support, remaining under $583 resistance for the day. This restricted range echoed the forecast’s call for conservative, range-bound trading, effectively rewarding those who employed targeted entries near $580 and exited around $583. Notably, SPY’s inability to break key resistance at $583 reinforced the forecast's guidance to avoid chasing upward momentum, as the day’s economic data and subdued volume limited SPY’s upside potential. This range-bound performance validated our forecast’s emphasis on securing small, tactical gains within the day’s support and resistance levels, reaffirming the prudence of a “wait and see” approach as the market prepares for a potentially decisive reaction to this week’s upcoming earnings and economic releases.

Market Performance vs. Forecast:

SPY movements closely adhered to the forecasted range, respecting both support at $580 and resistance near $583. As projected, the ETF's constrained price action offered clear entry points at $580 from a failed breakdown pattern just after the open with profit-taking opportunities near $583, making it an ideal setup for traders utilizing a range-bound strategy. A head and shoulders pattern at $583 mid-day also set up a perfect mean reversion short to $580 by the end of the day. SPY’s limited fluctuations reinforced the previous guidance against chasing breakouts, as momentum remained insufficient to challenge higher resistance levels. This alignment with forecasted levels emphasized the effectiveness of small, strategic trades, particularly in an environment defined by mixed earnings and economic data. The day’s predictable oscillations rewarded traders who remained disciplined, capitalizing on anticipated support and resistance while awaiting more decisive shifts from earnings season or economic updates later in the week. This consistent performance within the forecasted range highlighted the value of cautious, tactical trades as SPY continues to operate in a tight channel pending further market catalysts.

Premarket Analysis Summary:

As of 8:30 AM ET, SPY stood at $581.77, with nearby resistance identified at $583.20 and initial support at $580.70. The analysis suggested continued consolidation and range-bound behavior, anticipating that SPY would experience limited directional movement without a definitive catalyst. The focus for the day leaned toward cautious short entries near resistance, particularly if momentum failed to surpass the $583.20 level, while locking in profits on potential dips to support near $579.20. Today underscored a preference for trading within well-defined boundaries, particularly as market sentiment remained hesitant amidst high-profile earnings and upcoming economic releases. The analysis maintained a neutral-to-bearish outlook absent a stronger directional signal.

Validation of the Analysis:

Wednesday’s trading aligned closely with the premarket analysis as well as the post market report. Long term readers of these newsletters know when the post and premarket analysis coincide, increase size and confidence as probabilities increase that these levels will in fact deliver the desired results. Today SPY respected both the $580.70 support and $583 resistance without a decisive breakout in either direction. This range-bound behavior validated the guidance, highlighting the day’s preference for conservative trading within key support and resistance levels. For traders who adhered to the suggested approach of locking in gains near support and resistance, the day’s pattern rewarded patience and disciplined entries. The close adherence to forecasted levels underscored the analysis’s emphasis on steady, tactical positioning, as traders benefitted from range-bound strategies while waiting for signals from larger market-moving events.

Looking Ahead:

SPY is likely to remain within the $575 to $585 range as the market anticipates additional economic data, including Core PCE and Non-Farm Payroll on Friday. Wednesday’s GDP was strong but below estimates giving the Fed some cover to continue to reduce rates. ADP employment on the other hand was strong. Given the mixed economic signals, PCE and certainly the Jobs report on Friday set up the market for a major directional move. And this is without the looming election in less than a week. Maintaining a watchful eye on SPY’s price behavior around these events will be critical to executing informed trades.

Guidance for Traders:

With the VIX at 20.34, cautious long positions near $575 and $578 are advisable, while resistance near $583 and $585 continue to support potential short entries. Positioning should remain flexible given the anticipated increase in volatility. Yesterday we recommended buying short-dated VIX $19 Calls. Doing so has already generated material rewards. Our portfolio holds several of these Calls and we will look to exit on any spike to VIX 25 or above, or to exit on Monday or Tuesday, given we expect the election to deliver an increase in volatility. 

Market Sentiment and Key Levels:

SPY’s tight range, with resistance at $585 and support near $575, reflects investor reluctance to pursue major moves ahead of pivotal data. While sentiment leans cautiously bullish above $580, strong resistance suggests continued restraint. Should SPY break above $583, it may test $585, but a downturn below $575 could target $570, underscoring the need for disciplined entries around these thresholds. With Treasuries moving above 4.3%, our model suggests a 5% or larger pullback is probable if Treasuries hold above this level or continue to move toward 5%.

Expected Price Action:

Thursday’s SPY outlook predicts continued two-way trading within $575 to $585, with bullish tilts anticipated upon strong earnings and favorable economic reports. Overnight moves may trend slightly lower, keeping SPY within $578 and $580. An upward breakout could encounter resistance without a clear catalyst which may come from PCE or at any time. Caution is warranted with quick tactical entries at major support and resistance levels. Expect Thursday to deliver a bit more trending price action possibly expanding the current range.

Trading Strategy:

A dual strategy is recommended, focusing on longs near $575 targeting $580, and shorts near $585 if resistance holds. For short-term trades, capturing small reversals near breakout levels at $583 or higher is advisable. Increased directional movement is anticipated starting Thursday, with sentiment currently favoring the bulls, but only slightly.

Risk Management and Warnings:

Heightened VIX levels and geopolitical uncertainties underscore the need for prudent risk management. Conservative position sizing and protective measures can guard against potential volatility from forthcoming data and election updates. Trade small or not at all and be prepared the market to reverse quickly in an attempt to trap directional traders.

Model’s Projected Range:

For Wednesday, the model’s SPY range is $574.25 to $586.75, with Call activity dominant, indicating upward pressure within a largely sideways pattern. The range has expanded from today implying more trending price action on Thursday. Key levels at $575, $578, $580, $583, and $585 remain critical. SPY remains in its bullish trend channel established from the September’s lows but is tenuously travelling along the lower channel. A break of this channel will likely be the start of a deeper pullback, especially if volume materializes and interest rates continue to move higher.

Market State Indicator (MSI) Forecast:

Current Market State Overview: The MSI is currently in a Bearish Trending Market State with price closing at overhead resistance. The range is a bit narrow, implying a weak trend. The MSI entered the day in a Ranging Market State which rescaled to a Bearish Trending State at the open. While bearish, the range was very narrow without any extended targets below. SPY quickly reversed after a textbook failed breakdown pattern just after the open and the MSI rescaled to a Ranging State then a Bullish Trending Market State which remained until 1 pm ET. As price bounced off support, it finally gave way and the MSI again went through its transition state to the bearish state we found ourselves in at the close. There are no extended targets below currently but we would be cautious at this level and observe the MSI to see if it begins to print extended targets below. MSI support is $579.42 with resistance at $580.26.
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 given there were no extended targets below. A quick move to $582 and the MSI rescaled higher to a Bullish Trending Market State, giving our users confidence to hold onto longs for $582.77, MSI resistance. A failed breakout late in the morning session and a head and shoulders pattern set up another textbook mean reversion short from major overhead resistance at $583. MSI users waited for extended targets to stop printing to initiate a short entry. Two perfect trades at our major levels again made so much easier with clear and actionable information from the MSI.
Trading Strategy Based on MSI: The MSI's current state suggests the bears are attempting to exert some influence heading into PCE. Every dip in recent memory has been bought therefore probabilities favor the same as SPY retests the $578 level. We suspect overnight the market finds a base and trades sideways while it waits for PCE premarket. At that time it will be critical to observe the MSI to know what comes next. With a 70% probability price will move from one end of the MSI to the other when in a trending state, should the MSI continue to rescale lower, we favor shorts below $578 to $575. Should the MSI find support at these levels, and not print extended targets below, we favor longs back to $580. Price did drift higher last night as suggested but quickly moved back to the range that has been in place for much of October. This range is vulnerable to break and it’s very possible Thursday is the start of SPY moving out of this choppy, less than 2% range that SPY has found itself in since the end of the first week of October.

Dealer Positioning Analysis:

Summary of Current Dealer Positioning: Dealers are selling $587 to $588 and higher strike Calls while also buying $581 to $586 Calls, indicating the Dealers desire to participate in any upside on Thursday from PCE. There appears to be a ceiling at $588 for Thursday with $585 also increasing in strength. Any break above $583 is likely to stall at $585 and certainly not exceed $588. To the downside, Dealers are buying $580 to $569 and lower strike Puts in a 4:1 ratio to the Calls they are selling/buying, implying a bearish view of the market for Thursday. Dealers have been flip flopping positioning and have moved back toward bearish from neutral. Whenever you see this type of uncertainty, it’s the hallmark of a rangebound market. We do expect this to change perhaps as early as tomorrow.   
Looking Ahead to Friday: Dealers are selling $587.50 to $590 and higher strike Calls while also buying $581 to $587 Calls in some size, indicating the Dealers desire to participate in any rally that develops as we head into Friday. Dealers are clearly positioned for prices to move up this week to as high as $590, although we see this as a very low probability. To the downside, Dealers are buying $580 to $569 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 Friday and more bearish than today. Dealers have increased their downside protection but are playing both sides of the market positioned to capitalize on whichever way the market moves. Again Dealers have flipped from more neutral to more bearish as we head into Friday. As such we continue to recommend any long book purchase downside protection though at least the election, particularly in light of Dealers flipping flopping their positioning.   

Recommendation for Traders:

Key levels at $580 to $583 form a “range within a range,” and we expect price to break this band perhaps in the premarket on Thursday. Cautious entries near support and resistance are advised. But once the range does break, we are likely to experience much more trending price action which will provide opportunities for those on the right side of the market. With the ongoing Dealer positioning adjustments and the market reacting somewhat unfavorably to today’s economic news, be sure to check in with the premarket for any shifts in sentiment.

Good luck and good trading!