Market Insights: Monday October 7th, 2024

Market Overview:

US stocks experienced a sharp decline on Monday, with the Dow tumbling nearly 400 points (-0.94%) and the 10-year Treasury yield surging past 4%, setting the tone for a cautious week. Despite hitting a record high last week, the Dow Jones Industrial Average led the downward charge, reflecting mounting concerns about upcoming inflation data and the onset of earnings season. The S&P 500 dropped 0.90%, and the Nasdaq fell by 1.17%, weighed down by the tech sector. Amazon (AMZN) slumped over 3% while Microsoft (MSFT) slid 1.5%, driven lower by a ruling that Google must open its Play Store to competition. Nvidia (NVDA) stood out, bucking the trend among the "Magnificent Seven" with modest gains. Oil prices soared by 3.48%, driven by escalating tensions between Israel and Iran, with fears that the conflict may disrupt oil supplies further exacerbated by Hurricane Milton's advance toward Florida. Traders have reassessed the likelihood of a significant Federal Reserve rate cut, now favoring a smaller 0.25% reduction following the robust jobs report from last week.

SPY Performance:

SPY opened at $571.30, fluctuating between a high of $571.96 and a low of $566.63, eventually closing at $567.80, down 0.90%. Volume remained relatively subdued, with 41.71 million shares traded—lower than average. SPY remained below key resistance at $573, indicating a struggle for the bulls to maintain upward momentum as uncertainty around upcoming economic data looms.

Major Indices Performance:

The Russell 2000 showed the smallest loss, falling 0.77% as small-cap stocks fared slightly better amid broad market declines. The Dow Jones Industrial Average and Nasdaq followed, down 0.94% and 1.17%, respectively, led by Big Tech underperformance. Sectors like technology and consumer discretionary dragged down the broader indices, while energy stocks benefited from the oil rally. The market’s cautious stance heading into inflation data releases and geopolitical concerns defined today’s sentiment.

Notable Stock Movements:

Among the "Magnificent Seven," Nvidia (NVDA) was the only gainer, rising modestly amid market turbulence as tech stocks bore the brunt of market pessimism.

Commodity and Cryptocurrency Updates:

Crude oil surged 3.48%, extending its largest weekly gain in over a year as traders feared supply disruptions due to the Israel-Iran conflict and the impact of Hurricane Milton on Gulf oil operations. Gold, often viewed as a safe haven, fell 0.40%, reflecting a shift in investor sentiment as they prioritized liquidity. Bitcoin dropped 0.96%, closing just above $62,000, as cryptocurrencies faced headwinds amid tightening monetary conditions and reduced risk appetite.

Treasury Yield Information:

The 10-year Treasury yield spiked by 1.49%, closing at 4.018%, as bond markets reacted to a shift in rate expectations following Friday’s strong jobs data. With inflation concerns persisting, the climb in yields signals the market's focus on the Federal Reserve’s next moves regarding interest rates.

Previous Day’s Forecast Analysis:

Recap of Previous Forecast:

Friday's forecast projected SPY trading between $570 and $575, with $570 as the key support level and $573.35 as resistance. The outlook favored bullish momentum if SPY held above $570, potentially targeting a breakout toward $575. In contrast, a drop below $570 was expected to test support near $567.65. The broader market was anticipated to exhibit cautious optimism amid geopolitical risks and economic data, with traders advised to stay flexible.

Market Performance vs. Forecast:

Monday’s market action largely adhered to the projected range. SPY opened near the expected bias level of $570 but struggled to maintain momentum, testing the forecasted downside. It breached $570 mid-session, sliding to a low of $566.63 before closing at $567.80, respecting the downside target of $567.65. The forecast accurately predicted a potential pullback given the market's geopolitical and economic uncertainties.

Prior Day’s Forecast Final Thoughts:

The validation of Friday’s forecast was clear, with SPY’s failure to hold above $570 confirming a bearish bias that opened up short opportunities. Traders who acted on the forecast’s advice to short below $570 capitalized on the move toward the $567.65 level. The market's continued sensitivity to geopolitical events and inflation data ensures that key levels like $570 remain pivotal.

Premarket Analysis Summary:

For Monday, the premarket analysis predicted SPY trading in a range of $570 to $574.55, with bias support at $569.75. The analysis favored long trades above $569.75, targeting $573, though a potential stall at $572 was highlighted. The downside scenario projected a fall to $567.20 if support was lost, which materialized later in the session as SPY slipped below the bias level.

Validation of the Analysis:

Monday’s session confirmed the premarket expectations as SPY respected key levels outlined in the analysis. After losing $569.75, SPY followed the downside path to test $567.20, offering opportunities for traders who positioned short below the bias level. The forecast's accuracy provided clear trading setups aligned with the projected range.

Looking Ahead: Economic News Releases:

There are no major economic releases scheduled for Tuesday, though several Federal Reserve officials are expected to speak. Markets will likely remain volatile as traders digest any hawkish comments on inflation and monetary policy, especially ahead of Thursday’s key inflation report.

Anticipated Market Impact:

Fed speeches could introduce volatility, especially if officials signal concerns about inflation or hint at further rate hikes. Absent major data, the market may remain range-bound, but any unexpected developments from the Middle East or Federal Reserve commentary could spark sharp moves.

Guidance for Traders:

Traders should keep a close watch on SPY’s key support at $565 and resistance near $570 and $573. If SPY holds above $570, long trades remain favorable with an upside target of $573. A break below $565 could lead to more aggressive selling, especially if geopolitical concerns or hawkish Fed rhetoric dominate the narrative.

Market Sentiment and Key Levels:

SPY is trading around $567, with sentiment leaning cautiously bearish after Monday’s dip. The key levels to watch are $570 on the upside and $565 on the downside. A sustained move above $570 would signal bullish momentum, while a break below $565 could lead to more downside, particularly if inflation concerns persist.

Expected Price Action:

SPY is expected to trade between $565 and $570 on Tuesday, with bias leaning toward a test of support. If SPY holds above $565, it may attempt to climb back toward $570, though geopolitical risks and Fed commentary could limit upside potential. A break below $565 could lead to further declines toward $563 or lower.

Trading Strategy

Traders should consider long trades if SPY holds above $565, targeting $570 and $573. Tighten stop-losses near these resistance levels to protect profits. On the downside, short trades are favored if SPY falls below $567, with targets near $563. Mean reversion shorts from $570 are also favored on any failed breakout pattern. This pattern developed today at 10:14 am which provided a perfect mean reversion short entry. While the bulls still have the advantage, the bears have an opportunity to push prices lower with price trading below $570. Short term the range between $567 and $570 should be viewed as noise and traders should be cautious in this zone. Expect heightened volatility due to external factors like Fed speeches, so trade cautiously with smaller position sizes.

Risk Management and Warnings:

With the VIX at 22.64, volatility remains elevated, signaling potential sharp swings. Traders are advised to tighten stop-losses around key levels like $570 and $565 to mitigate risk in a potentially volatile environment. Volatility increases historically into elections so be forewarned and prepared for larger intraday swings.

Model’s Projected Range:

The model projects SPY to trade between $561.25 and $574.25 on Tuesday, with Put dominance reflecting a bearish outlook. If SPY holds above $567, it may test $570, but any move below $567 could lead to further downside with the first stop at $565. This range has shrunk some but is still quite large and as such, expect trending price behavior on Tuesday. Price is trading toward the lower end of the bull trend channel in place from the August lows. If price continues sideways for a few more days there is a high probability price will break the channel and trend lower.

Market State Indicator (MSI) Forecast:

Current Market State Overview: The MSI is currently in a Bearish Trending Market State with price closing mid-range. There are no extended targets below signaling a possible reversal to the generally bearish trend. The MSI rescaled lower today several times. Resistance is at $568.62 with support at $567.04. The range is average implying some strength to the bear trend. 

Key Levels and Market Movements: At the open the MSI was in a Ranging Market State with price trading mid-range. This is a transitionary state and as such, we expect choppy price action favoring failed breakout/breakdown patterns. This is exactly what the market delivered, setting up a perfect failed breakout at 10:14 am. This pattern worked extremely well with a first target at $570, our model’s major level. But this gave way and the MSI quickly rescaled lower with the occasional extended target below indicating a strong bear trend which set up shorts to support at $567.20, a level identified in the premarket. Once there extended targets stopped printing and after a double bottom at 15:30, set up a long into the close. These three trades worked extremely well and once again the MSI provided clear and valuable information for our users all day in real time.

Trading Strategy Based on MSI: Given the current state, bears are in control. The zone between $567 and $570 is the current battleground for the bulls and the bears. Be cautious in this zone and look for clues as to the strength of the trend with expanding MSI ranges and extended targets. A contracting range without extended targets is a weak trend so we favor quick profits and mean reversion trades from major support and resistance levels. We continue to favor shorts from overhead resistance at $570 and longs from $566 but suggest caution for all longs below $570 due to the current bearish market tone. Long should be taken on failed breakdown at major levels. Be careful not to caught in a trap set by the bulls.  

Dealer Positioning Analysis:

Summary of Current Dealer Positioning: Dealers are selling $571 to $573 and higher strike Calls while buying $568 to $570 Calls indicating the Dealer’s desire to participate in any rally on Tuesday. But while Dealers have some long exposure, they do not believe prices will exceed $573 on Tuesday. The wall of resistance above has been moving lower and lower indicating the current all-time high may hold for some time. To the downside, Dealers are buying $567 to $560 and lower strike Puts in a 6:1 ratio to the Calls they are selling/buying, implying a bearish view of the market for Tuesday. Dealers have kept their protection consistent since Friday and remain well positioned should the market decide to pullback.

Looking Ahead to Friday: Dealers are selling $574 and $580 and higher strike Calls while buying $568 to $573 Calls, indicating the Dealers desire to participate in any market move higher. But Dealers look to be capping the potential upside at $580. To the downside, Dealers are buying $567 to $550 and lower strike Puts in a 10:1 ratio to the Calls they are selling. This implies a very bearish view of the market heading into Friday. This level has remained constant since Thursday of last week. As we stated yesterday, Dealers are not convinced the market is ready to sustain new all-time highs. While we may briefly see prices above $575, Dealers seem to feel this may be a trap and the market will fail at these levels.

Recommendation for Traders

As Tuesday approaches, traders should focus on key levels around $567 and $570, particularly with the potential volatility from Fed speeches. While long trades are favored if SPY holds above $565 and above $570, we also favor shorts below $570 and from $573. Be cautious of traps as geopolitical risks could quickly shift market sentiment and be sure to check in premarket for an update to these levels.

Good luck and good trading!