Market Insights: Tuesday October 8th, 2024

Market Overview:
Tech stocks spearheaded a market rebound on Tuesday, with Nvidia leading the charge as oil prices retreated. The Nasdaq Composite soared 1.47%, supported by bullish momentum in major tech stocks. Nvidia extended its gains for a fifth consecutive session, rising another 4% on continued optimism surrounding artificial intelligence. The broader S&P 500 climbed 0.95%, while the Dow Jones Industrial Average posted a modest 0.27% gain. Investors welcomed the pullback in oil prices, which fell 4.15% as Middle East tensions eased slightly, and China's economic rally failed to accelerate. With no new major stimulus measures from China, Hong Kong stocks tumbled, signaling disappointment among traders. Meanwhile, U.S. markets shifted focus back to monetary policy, with the upcoming CPI inflation report taking center stage. Comments from New York Fed President John Williams reinforced hopes for a soft landing, while Fed Governor Adriana Kugler emphasized data dependency for future rate decisions.

SPY Performance:
SPY had a strong session, opening at $570.44 and rallying to a high of $573.78 before closing at $573.17, up 0.95%. Trading volume was lower than average, with 34.77 million shares exchanged. SPY broke above the $570 resistance level, a bullish signal, though momentum appeared to stall near $574, reflecting caution ahead of key economic data. Bulls regained control but remained wary of geopolitical risks and inflation concerns, keeping traders on edge.

Major Indices Performance:
The Nasdaq led the major indices with a 1.47% gain, driven by strength in tech. The S&P 500 followed, reflecting a broad-based recovery. The Dow was the laggard, advancing by 0.27%, as industrials and financials struggled to match the pace of tech-driven gains. The Russell 2000 managed a modest 0.15% increase as small-cap stocks saw muted gains amid the larger market rally. Defensive sectors like healthcare underperformed, while tech and energy saw the most significant movement.

Notable Stock Movements:
Nvidia once again led the "Magnificent Seven," rising 4%, continuing its AI-fueled momentum. Other big names like Amazon, Alphabet, and Apple also posted gains, recovering losses from earlier in the week. Despite rising geopolitical risks, Nvidia has maintained upward momentum, positioning itself as the leading stock in this rebound. Energy stocks, which benefitted from rising oil prices earlier, took a backseat as oil prices fell, but broader tech optimism helped cushion the overall market from any deeper declines.

Commodity and Cryptocurrency Updates:
Crude oil tumbled 4.15% as tensions in the Middle East somewhat de-escalated and Hurricane Milton moved away from key oil-producing regions. This retreat helped ease some inflationary pressures. Gold slipped 0.95%, mirroring a drop in safe-haven demand as risk appetite returned to the market. Bitcoin fell 1.62%, closing just above $62,000, as cryptocurrencies struggled with ongoing monetary tightening and diminishing investor enthusiasm.

Treasury Yield Information:
The 10-year Treasury yield remained steady, dipping slightly by 0.30% to close at 4.017%. Bond market movements were muted as traders awaited Thursday's key CPI report. The slight dip in yields signaled some relief in inflationary concerns, though investors remain cautious with Federal Reserve commentary potentially swaying the bond market.

Previous Day’s Forecast Analysis:
Recap of Previous Forecast:
Monday’s forecast predicted SPY to trade between $569.50 and $574.75, with a bullish bias as long as SPY stayed above $569.50. Long trades were favored with targets at $573 and an extended target at $574.75. If SPY dropped below $569.50, choppy price action was expected, with support at $567 and $565.25. The forecast cautioned that momentum could stall near $574.75, advising traders to take profits before reaching this level. The forecast also highlighted potential sideways movement if SPY failed to hold $569.50, limiting short trades. Long entries were prioritized near support, but upside was constrained by resistance at $574.75. The key levels included $569.50 as the bias level, $573 and $574.75 as resistance, and $567 and $565.25 as support. The sentiment was cautiously bullish with clear resistance levels that could trigger reversals if breached.

Market Performance vs. Forecast:
SPY followed Monday’s forecast closely, opening above the bias level at $570.44, confirming the anticipated bullish sentiment. As projected, SPY moved upward, breaking through the initial target of $573 and continuing to rise, eventually closing at $573.17. This price action aligned well with the forecast’s expectation of a test of the upper resistance levels. The forecast had identified $574.75 as the extended target, and while SPY came close, it did not fully reach this level, reflecting the caution around stalling momentum noted in the premarket analysis. The forecast correctly outlined the importance of $569.50 as the critical bias level, and SPY’s ability to hold above this point early in the session reinforced the bullish outlook. Traders who entered long positions near the bias level were able to capitalize on the steady upward move, with the resistance at $573 providing a logical point for partial profit-taking. Additionally, the forecast’s warning about limited downside risk was validated, as SPY never tested the lower levels, such as $567 or $565.25, keeping the focus on the upside. Overall, the forecast accurately captured the day's price action, highlighting the key levels of $573 and $574.75 as areas of resistance. Traders who followed the forecast’s advice found that the bias level and upward targets held firm, allowing for profitable long trades throughout the session. This further demonstrated the reliability of the forecast in navigating market conditions.

Prior Day’s Forecast Final Thoughts:
Monday’s forecast accurately captured the market’s upward momentum, with SPY’s steady climb validating the key levels provided. The resistance at $573 was tested, offering traders an opportunity to lock in profits. The alignment between forecast and actual performance underscores the importance of monitoring bias levels and key support and resistance zones in this choppy market environment.

Premarket Analysis Summary:
The premarket analysis for Tuesday anticipated a bullish session, provided SPY remained above the bias level of $569.50. The expected range was $569.50 to $574.75, with key targets at $572 and $573. The analysis suggested a push to $574.75 would require significant buying pressure and warned of possible stalling near this level. If SPY failed to hold above $569.50, the market was expected to be choppy, with support at $565.25. Short entries were discouraged unless SPY rejected the upper resistance zone or dropped below $569.50. Traders were advised to enter long positions near $569.50 with targets up to $573. Profit-taking was suggested around $573 to $574.75, as upward momentum could fade. While the analysis didn’t favor short trades, it noted that a break below $569.50 could lead to increased volatility, possibly testing lower support at $565.25. Overall, the premarket outlook leaned bullish, encouraging long trades above $569.50, but urged caution at resistance levels, highlighting the importance of flexibility in case of reversals.

Validation of the Analysis:
Tuesday’s market followed the premarket analysis closely. SPY opened at $570.44, above the bias level, confirming the forecasted bullish scenario. SPY then rallied to hit the projected targets of $572 and $573, stalling just before reaching the extended target of $574.75, exactly as the analysis anticipated. This allowed traders to capitalize on the long positions, locking in profits near $573. The predicted range of $569.50 to $574.75 was spot-on, with SPY staying within this zone. The bias level of $569.50 acted as solid support, and holding above it validated the bullish outlook. The $573 resistance held, as expected, preventing further upside, and confirming it as a key profit-taking level. Although the market approached $574.75, it didn’t breach this level, consistent with the analysis. SPY didn’t test lower support levels like $565.25, reinforcing the view that downside risk was limited unless SPY broke below $569.50. The advice to avoid short trades held true, as there was no significant downside pressure. Once again, the premarket analysis accurately predicted SPY’s movements. Key levels like $569.50 and $573 guided profitable trades, while the forecast helped traders avoid short positions in a bullish market. The analysis proved highly effective, reinforcing its value for traders navigating volatile conditions.

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Bottom of Form

Looking Ahead: Economic News Releases:
Other than FOMC Minutes being related at 2 pm, there is no significant economic data scheduled for Wednesday and traders will be focused on Thursday’s CPI release. Fed minutes as well as commentary from several speakers could introduce volatility, but expectations remain centered on inflation data as the key driver for market direction.

Anticipated Market Impact:
The CPI report on Thursday will be crucial, potentially shifting the Federal Reserve’s stance on interest rates. Markets are likely to remain range-bound until then, but any surprise in the inflation data could spark sharp moves.

Guidance for Traders:
Traders should focus on key support and resistance levels, particularly $570 on the downside and $574.75 on the upside, which will dictate much of the market's price action. Long trades are favored if SPY holds above $570, with targets at $573, $574.75, and $577. Given the current market conditions, it’s crucial to keep an eye on how SPY interacts with the $574.75 resistance. If it breaks through this level, the next upside target is $577. However, if SPY stalls or reverses near this resistance, it could signal a short-term pullback. Given Thursday’s upcoming CPI report, volatility is likely to increase, which may lead to sharper, unexpected moves. Therefore, traders are encouraged to use smaller position sizes to manage risk more effectively, especially when the market approaches key levels. The CPI data could significantly impact the market's direction, so maintaining flexibility in trade setups is essential. Tighten stop-losses around critical resistance and support to protect against sudden reversals, and be prepared to shift strategies if market sentiment shifts suddenly. It’s also important to stay vigilant for any geopolitical news or Federal Reserve commentary that could add further volatility. Fed speeches could trigger market fluctuations, especially if they hint at future interest rate changes. Keep an eye on external factors as these events can create sharp moves that traders can capitalize on or avoid depending on their positioning.

Market Sentiment and Key Levels:
Currently, SPY is trading around $573, showing cautious bullish momentum. The market sentiment leans slightly positive, but it is still fragile as traders await the CPI data on Thursday. Key resistance lies at $574.75. If the bulls break through this level, SPY could test $577 or higher, creating more room for upside potential. However, if SPY struggles to break $574.75, it may indicate that bullish momentum is running out of steam, leading to a pullback to $570 or even lower levels like $567. On the downside, $570 serves as immediate support. If SPY falls below this level, the market could enter a more bearish phase, with targets around $567 and $565. Bears will be eyeing these support levels for a breakdown. The market’s reaction to these levels will determine whether a deeper sell-off is possible or if the bulls can reclaim control. The market remains sensitive to external risks, such as ongoing geopolitical tensions and economic data, so traders should be ready for quick shifts in sentiment.

Expected Price Action:
For Wednesday, SPY is expected to trade between $570 and $574.75. If the bullish sentiment holds, SPY could push toward $577 and make a new all-time high. On the other hand, if SPY rejects $574.75 and falls below $570, we could see a retest of $567 and even $565. A break below $570 would likely trigger more selling pressure, creating opportunities for short trades down to $565. The market is likely to be choppy on Wednesday as traders remain cautious ahead of the CPI release, so don’t expect a smooth ride to higher levels. Traders should be prepared for quick reversals if SPY fails to break above $574.75 or hold support at $570. The interplay between these levels will be the key driver of price action on Wednesday, with external factors like Fed speeches and market sentiment playing critical roles.

Trading Strategy:
In the current environment, the best strategy is to stay flexible and react to how SPY behaves around major support and resistance. Long trades are favorable as long as SPY holds above $570, targeting the key resistance at $573 and the extended target at $574.75. If SPY manages to break through $574.75 with strong momentum, traders should look for an extended move toward $577. To capitalize on these trades, entries should be made near the $570 support level, with stop-losses placed just below this level to protect against downside risk. However, if SPY fails to break through $574.75 and begins to reverse, traders should consider mean reversion shorts, targeting $570 initially and then $567 or $565 on the downside. Short trades should be taken with caution, as the broader market sentiment remains cautiously bullish. Profits on shorts should be taken quickly, especially as market volatility could increase with the upcoming CPI release. The bulls have assumed full control over the market and are likely to push prices to new highs before the market witnesses any significant weakness. Do not fight the trend. Traders should consider mean reversion strategies around $573 and $574.75, particularly if SPY sets up a failed breakout pattern. In the event of a failed breakout, short trades can be initiated, targeting the lower support at $570 or even $567. Mean reversion longs can be considered near $570 if SPY appears to be bouncing off support, with an upside target back toward $573. Increased volatility is expected due to external factors such as economic data and geopolitical risks. Therefore, risk management becomes even more critical. Long positions should be scaled out as SPY approaches $574.75 to lock in profits and reduce exposure to potential reversals. Overall, the market presents opportunities for both long and short trades, depending on how SPY interacts with key levels. Flexibility is crucial, and traders should be ready to switch strategies as market conditions evolve.

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Bottom of Form

Risk Management and Warnings:
With volatility expected to rise ahead of Thursday’s CPI report, traders are advised to tighten stop-losses and avoid overleveraging. The VIX at 21.42 suggests elevated risk, so position sizes should be kept small to mitigate sudden market swings.

Model’s Projected Range:
The model projects SPY to trade between $567.50 and $577.25, with Call dominance reflecting a bullish outlook. If SPY holds above $573, it could test resistance at $577. However, a break below $570 would expose SPY to downside risks, targeting $567.50.

Market State Indicator (MSI) Forecast:

Current Market State Overview: The MSI is currently in a Bullish Trending Market State with price closing mid-range. There are no extended targets above signaling a possible reversal or at least a test of support. The MSI rescaled higher three times today which each reducing the size of the range indicating a trend but not a particularly powerful trend. Resistance is at $573.69 with support at $572.03.
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. SPY quickly tested our premarket level of $569.50 before reversing and moving higher and out of this ranging state. The Bullish Trending Market State, however, was relatively muted given there were no extended targets above and the range was relatively narrow. But users of this tool understand the probability of price moving from support to resistance in a trending state is 70% therefore longs were appropriate from the $570 to $571 level. A failed breakdown at 1:08 pm ET set up the perfect long entry at our major level which we road to MSI resistance at $573. Late in the day the MSI briefly printed an extended target which kept us from a mean reversion short until very late in the day where we scaled a few dollars before calling it a day. Once again, the MSI provided clear and valuable information for our users in real time.
Trading Strategy Based on MSI: Given the MSI’s current state the bulls are in control. The zone between $567 and $570 is the battleground for the bulls and the bears. Above $570 and SPY will see new highs. Below, expect a test of $567 and much of what happens there will dictate what follows. A relatively narrow range for the MSI indicates the trend is not as strong as it appears. In fact volume today was quite low which does not necessarily reinforce today’s move higher. We favor long trades but also mean reversion trades from major support and resistance levels. $575 to $577 will prove to be quite a challenge for the bulls to overcome while a break of $569 could easily see $565. Expect the market to be trap filled the next several days while market participants decide if they want to push prices higher or simply trap the bulls at these elevated prices.

Dealer Positioning Analysis:

Summary of Current Dealer Positioning: Dealers are selling $574 to $577 and higher strike Calls implying a potential ceiling for tomorrow at $577. There is a fairly strong wall of resistance at $575 and higher. Dealers were spot on today with their ceiling at $573. To the downside Dealers are buying $573 to $565 and lower strike Puts in a 5:1 ratio to the Calls they are selling implying a bearish view of the market for Wednesday but slightly less bearish than today as Dealers have reduced their protection slightly going into Wednesday.

Looking Ahead to Friday: Dealers are selling $574 and $580 and higher strike Calls implying any rally into Friday will stall at $580. To the downside Dealers are buying $573 to $555 and lower strike Puts in a 12:1 ratio to the Calls they are selling. This implies a very bearish view of the market heading into Friday. Dealer protection has increased since yesterday. From the day’s positioning to the end of the week’s positioning, it appears Dealers believe the market will make a new high but may not be able to sustain it very long.

Recommendation for Traders:
Traders should focus on our model’s key levels as these will dictate the market's next move. Long trades continue to be favored given the strength of the trend. As long as SPY holds above $570, shorts will not have much potential. That said, caution is advised near the $574.75 resistance, as failure to break through this level could prompt a pullback and should SPY fall below $570, short trades are recommended, targeting $567.50 and $565. Given the upcoming CPI release, volatility may rise, so traders should use smaller position sizes and tighten stop-losses to protect against sharp moves. Be sure to check the premarket analysis for updates on key levels and shifts in Dealer Positioning before trading begins. Good luck and good trading!