Market Insights: Thursday, October 31st, 2024

Market Overview:

The Nasdaq led a sharp decline in US equities today, driven by disappointing earnings from Microsoft (MSFT) and Meta (META) that sparked concerns over rising costs in the Big Tech sector, particularly in artificial intelligence infrastructure. The Nasdaq Composite (^IXIC) plummeted 2.7%, the S&P 500 (^GSPC) dropped nearly 1.9%, and the Dow Jones Industrial Average (^DJI) lost 0.9%, wrapping up the month on a lower note. The earnings releases from Meta and Microsoft, while exceeding Wall Street’s top-line expectations, highlighted the ongoing, and now intensifying, spending on AI that could pressure future profitability. This sentiment weighed heavily on other tech giants like Amazon (AMZN) and Apple (AAPL), set to release earnings after Thursday’s close, and Nvidia (NVDA), which also fell over 4.5%. Bond yields climbed as well, with the 10-year Treasury yield reaching 4.33%, a level that has historically posed resistance to equities. Additionally, the Personal Consumption Expenditures (PCE) index released Thursday, a key inflation measure ahead of the Federal Reserve’s upcoming decision, showed a 2.7% annual rise in core PCE for September, above expectations. Lower-than-anticipated jobless claims, which fell to a five-month low, added to market anxiety, reinforcing concerns of a strong labor market ahead of Friday’s critical jobs report.

SPY Performance:

The SPDR S&P 500 ETF Trust (SPY) slid 1.94%, closing at $568.77 as it dipped below several key support levels. Opening at $575.49, SPY briefly reached a high of $575.63 before selling pressure pushed it to an intraday low of $568.45, ending the day near this bottom. Trading volume surged to 48.89 million shares, indicating strong bearish momentum as market concerns intensified around Big Tech earnings and rising yields. Resistance at $575 remains firm, with the ETF’s current drop opening up a lower trading range that could see support tests near $565 if sentiment remains negative.

Major Indices Performance:

US indices faced broad-based declines, with the Nasdaq leading the charge downwards by 2.7%, underscoring investor anxiety over Big Tech’s rising expenses. The S&P 500 followed with a 1.9% loss, while the Dow posted a 0.9% drop, and the Russell 2000 fell by 1.69%. The “Magnificent Seven” tech stocks suffered significant losses, all declining except for Netflix, highlighting investor reluctance to hold riskier assets amid mounting cost pressures in AI investment. Persistent inflation concerns coupled with upcoming economic releases further subdued optimism, promoting a risk-off stance in tech-heavy sectors.

Notable Stock Movements:

Microsoft and Meta shares fell sharply following their earnings reports, which showcased solid revenue yet highlighted escalating costs in AI spending. Nvidia joined the tech slump, dropping over 4.5% as enthusiasm around AI was tempered by financial realities. Amazon and Apple, set to report earnings after the close, also saw declines ahead of their announcements. Meanwhile, Netflix managed to hold ground despite the sector-wide downturn, as it largely evaded the cost-intensive AI pressures weighing down its peers.

Commodity and Cryptocurrency Updates:

Oil prices jumped 2.86%, reflecting market expectations of supply constraints amid geopolitical tensions. Gold saw a notable drop of 1.54%, partially driven by a strong dollar and rising Treasury yields, as investor sentiment shifted towards cash and bonds. Bitcoin declined by 2.36%, though it managed to hold above the $70,000 mark. Persistent concerns over macroeconomic conditions seem to have driven profit-taking in the cryptocurrency space, with Bitcoin’s consolidation near its recent highs suggesting a tentative pause in its upward momentum.

Treasury Yield Information:

The 10-year Treasury yield rose by 0.49%, closing at 4.286%. This increase signifies cautious market sentiment, as higher yields traditionally present challenges for equities, particularly in growth-sensitive sectors. A sustained move above 4.3% could further pressure stocks, given historical correlations with pullbacks exceeding 5% when yields maintain these elevated levels. Combined with mixed economic indicators, the current yield trajectory underscores concerns that the Federal Reserve may adopt a steady or even hawkish stance, affecting equity outlooks. Should yields approach 4.5%, the broader market is likely to pull back more significantly.

Previous Day’s Forecast Analysis:

Wednesday’s forecast urged caution amid ongoing earnings releases and the upcoming PCE data, suggesting that SPY could finally expand beyond the $575 to $585 range it has been confined to since early October. The analysis warned that a break below $575 would likely trigger a test of $570, given elevated Treasury yields and their historical correlation with potential pullbacks of 5% or more. Although the forecast leaned slightly bullish, it also emphasized the heightened risk due to increased volatility, advising traders to base entries on a real-time assessment of both earnings and economic reports. The alignment of SPY’s movement with forecasted support and resistance underscored the prudence of a watchful, cautious approach in a volatile market, particularly amid mixed signals from earnings season and economic data.

Market Performance vs. Forecast:

The forecast’s emphasis on respecting the $575 support level proved highly effective as Thursday’s performance underscored weakening market sentiment, with SPY’s steady decline through key support validating the guidance on cautious short entries. Traders who followed the suggested risk-managed approach were rewarded, as the ETF’s descent aligned closely with forecasted levels, highlighting the value of small, strategic trades over more aggressive positioning. SPY’s downward momentum reinforced the analysis, which had projected that a break below $575 could open the door to deeper losses. The ETF closed at $568, amplifying the bearish tone as forecasted. This alignment emphasized the benefits of disciplined entries, particularly near resistance levels, as the expected pullback provided effective gains in a structured framework. The day’s price action reinforced the conservative approach, rewarding those who avoided chasing breakouts and instead capitalized on reliable opportunities amid earnings season volatility. Overall, Thursday’s movement validated the strategic guidance for tactical trades, showcasing the prudence of a cautious, structured approach in an increasingly volatile market environment.

Premarket Analysis Summary:

As of 8:10 AM ET, SPY stood at $576.29, with nearby resistance levels identified at $577.30, $579.75, and $581.25, and initial support pinpointed just above $575. The premarket analysis indicated a likely upward move if SPY could hold above $575, yet cautioned that the broader sentiment remained fragile. The analysis noted that while buyers might push SPY toward the $577.30 resistance, further gains would face significant headwinds without a strong catalyst. Short entries were advised at the upper targets if SPY encountered resistance, particularly given the recent uptick in volatility. This setup encouraged traders to watch for quick reversals near resistance, especially if economic data failed to provide clear directional support. On the downside, the analysis suggested that if SPY broke below $575, there would be an increased chance of a sell-off. As such, the analysis favored short trades only on clear rejections of upper targets, keeping an eye on $575 as a pivotal level for the day. The morning’s cautious tone highlighted the value of tactical trades amidst uncertainty, positioning traders to benefit from both support and resistance moves within well-defined boundaries.

Validation of the Analysis:

Today’s performance underscored the importance of tactical, level to level trading as SPY adhered closely to forecasted support and resistance levels around $575, a scenario our premarket guidance outlined. The anticipated support provided a solid entry point for short positions, rewarding traders who acted with caution in the face of heightened volatility and Big Tech earnings pressures. This alignment with the analysis highlighted the day’s preference for a disciplined approach. The validation of these levels further reinforced the value of small, strategic trades as momentum increased amidst mixed economic signals and investor caution. Consistent adherence to forecasted support and resistance areas underscores the efficacy of staying within well-defined boundaries in an uncertain market, especially when broader market sentiment tilts bearish ahead of pivotal economic releases and Fed updates.

Looking Ahead:

Heading into Friday, SPY is likely to trade in a range between $562 and $578, with heightened attention on the upcoming Non-Farm Payroll report, expected to be a decisive influence on market direction. Should SPY remain below $575, downward pressure could intensify, particularly if economic data suggests a robust labor market. However, a bounce-back to $575 would signify resilience near key support levels. With the Federal Reserve’s meeting on the horizon, traders should monitor SPY’s reactions closely to prepare for potential trend shifts.

Guidance for Traders:

Given the VIX’s elevated 23.16 level, further caution is advised. The bears have taken control in the near term and relief rallies are likely to be sold. In downtrends and bear markets, SPY doesn’t actually spend that much time directly selling. The sells in downtrend are short, rapid affairs: price goes “elevator down” for a full session. Then it short squeezes, spends sometimes days trading sideways, then it does it again. The result is comparatively little time spent actually selling, and therefore, failed breakout shorts are rare even in the context of a bear market. Today it was elevator down which puts the bears in control until major resistance is recovered. This means all support will fail for at least several hours if not the entire day. As such do not be in a rush to enter longs after a major sell off as this is an attempt to “catch a falling knife” which is dangerous to say the least. Instead wait for a major level to be reclaimed as the uncertainty around economic data and the upcoming election suggests heightened volatility, making it prudent to size positions conservatively and enter trades cautiously. Traders holding VIX Calls from prior guidance may find gains achievable on continued volatility, as the VIX remains poised for further spikes amid looming market risks.

Market Sentiment and Key Levels:

$575 represents a major level which needs to be reclaimed before the bulls can take charge once again. Below this level, the market will likely sell all rallies. We do not favor longs with price below $575 and instead would look to sell these rallies. But with the market at the 50 DMA and after a 2% sell-off, short squeezes are typically violent encounters and any shorts taken now at major support should be done tactically and with precision. These trades are perhaps the most difficult to execute as you may be short one minute and reverse long the next. Losses are typically higher in this environment so if you are not comfortable trading in this market, don’t. Wait for it to resume the bull trend and take the longs we advise. Currently the $569 level represents support. That does not mean go buy it as the next level down is likely $567 which probabilities state will hold on the first test. And if $567 breaks, the door is open to $562 which is much lower and would put the market in a difficult place. Resistance is at $575 and support at $562 reflects investor hesitation to take on major positions ahead of Friday’s Jobs data. Sentiment remains cautiously bearish below $575 and a break below $562 could lead SPY toward lower targets around $560, underlining the need for disciplined trading around these levels.

Expected Price Action:

Friday’s SPY outlook suggests the possibility of additional selling within the $562 to $573 range with any upward moves likely to be capped at $575 unless bolstered by very strong economic data. With mixed signals from economic indicators, a tentative bearish bias prevails, and quick trades near established levels are favored as SPY awaits a catalyst to affirm its next directional move. Even though the market is trending and will likely continue for another day, failed breakouts are favored for safe entries above $569. Failed breakdowns will have a lower probability of success in this environment so we recommend avoiding long trades until price reclaims $575 on volume and stays there.

Trading Strategy:

For Friday, seek short entries on failed breakouts near $572 and below $569. Traders should be prepared for breakout moves should economic data drive a trend reversal particularly given all sell offs are accompanied by short squeezes. Increased directional movement is anticipated, with sentiment still leaning toward bearishness. Stops will need to be a bit larger given volatility and entries should be strategic at critical levels and with an accompanying failed breakout pattern.

Risk Management and Warnings:

High VIX levels and pre-election uncertainties demand careful risk management. Conservative position sizes and vigilant monitoring of market-moving data can safeguard against rapid price swings. Market sentiment suggests potential traps for momentum-driven trades, making it essential to avoid overextending positions.

Model’s Projected Range:

For Friday, the model anticipates SPY’s range to expand projecting a low of $562.25 to a high of $578.75, with Puts remaining dominant and an increased likelihood of trending action. Critical levels at $562, $572, $575, and $578 will be key. SPY has now firmly broken the bull trend channel from the September lows and it’s very possible will form a new bear trend channel. We have been warning of this for several days with SPY tenuously moving along the lower bull channel. The next two or three days will determine if today’s decline is the start of further weakness.

Market State Indicator (MSI) Forecast:

Current Market State Overview: The MSI is currently in a Bearish Trending Market State with price well below extended targets. The range is narrow and the MSI did not rescale all day which leads us to question the strength of this down move. Extended targets below printed for most of the day and into the close indicating the herd is participating in today’s market rout and will likely push prices lower. MSI resistance is $575.13 and $577.04.
Key Levels and Market Movements: With SPY setting up a textbook failed breakout prior to the open just after PCE, and with the MSI in a bearish state with extended targets below, at the open with price at MSI resistance, long term users of the MSI knew to sell this level as the odds were 70% that price would reach MSI support. $576 represented the first entry short for the day and once MSI support gave way and extended targets began printing, an short at $574 was also appropriate riding price to our major level of $570. We did not take any longs given extended targets continued to print below the MSI. At least one great short and perhaps more with the MSI keeping us out of any profit killing longs.  
Trading Strategy Based on MSI: The MSI's current state suggests the bears are in control, although with the range somewhat narrow and not rescaling lower, its likely once extended targets stop printing, a short squeeze ensues and prices moves toward $575. We favor looking for MSI to rescale to trigger a short of any rally that may develop overnight. Every dip has been bought since September so there is a likelihood the market does at least squeeze shorts and put in a one or two day relief rally. But we would not be fooled by this and instead would look for opportunities to get short below $575.

Dealer Positioning Analysis:

Summary of Current Dealer Positioning: Dealers are selling $583 to $588 and higher strike Calls while also buying $569 to $582 Calls in size, indicating the Dealers desire to participate in any upside on Friday from either the Jobs report or a short squeeze. There appears to be a ceiling at $585 for Friday, however it will be a major undertaking for the bulls to move beyond $572. $585 has virtually zero chance of being reached. To the downside, Dealers are buying $568 to $560 and lower strike Puts in a 1:1 ratio to the Calls they are selling/buying, implying a bullish view of the market on Friday. Dealers seem to believe at least on Friday, the market will experience a relief rally to $572 or higher. Dealers were positioned more heavily bearish yesterday but at the close, these positions ended ITM therefore its likely Dealers have hedged with futures and will adjust this bullish stance before the close tomorrow.  
Looking Ahead to Next Friday: Dealers are selling $586 to $592 and higher strike Calls while also buying $569 to $585 Calls, indicating the Dealers desire to participate in any rally that develops next week. Dealers perhaps believe the worst of the selling will be over by next Friday. To the downside, Dealers are buying $568 to $550 and lower strike Puts in a 2:1 ratio to the Calls they are selling/buying. This implies a neutral view of the market heading into next Friday and less bearish than today. Again this is likely due to options being exercised ITM today. Dealers are moving protection down and increasing it with $565 a major level they wish to defend. A break of this level opens far lower prices. We have been recommending long books purchase downside protection, though at least the election and certainly had you done so, today wasn’t particularly damaging to your portfolio.     

Recommendation for Traders:

With SPY breaking out of its narrow range, traders are advised to look for clues as to what comes next. Does SPY spend several days moving sideways or is today the beginning of a much deeper, 5 to 6% pullback. Our model is mixed. We see both as likely scenarios with the first move being lower still, followed by a short squeeze toward $575 but a likely failure at that level and a new bear channel forming until after the election is resolved. Expect to use larger stops and realize more trend-driven price action, creating opportunities for those with disciplined entries. Dealer behavior indicates caution, suggesting that maintaining flexibility and monitoring Dealer flows can provide additional insights into short-term sentiment shifts. As always, stay vigilant for the premarket updates to stay aligned with any shifts in sentiment or positioning.

Good luck and good trading!