Market Insights: Wednesday, October 9th, 2024
Market Overview:
The U.S. stock market surged on Wednesday as two major indices hit fresh record highs ahead of a key inflation report. The Dow Jones Industrial Average jumped over 450 points, a 1.03% gain, while the S&P 500 climbed 0.7%, both closing at all-time highs. The Nasdaq followed with a 0.60% increase. Investors are keenly anticipating the release of the Consumer Price Index (CPI) on Thursday, which could shape the Federal Reserve’s next move. The minutes from the Fed’s recent meeting showed that while most officials favored a 50-basis point rate cut, some supported a smaller reduction, highlighting the mixed signals about the economy's future. The broader sentiment remains cautious, with investors debating whether the economy is heading for a "no landing" scenario, where growth continues and inflation risks resurface. Meanwhile, Google-owner Alphabet faced scrutiny as the Department of Justice weighs a potential breakup, dampening its stock performance.
SPY Performance:
SPY opened at $573.18 and rallied to a high of $577.71 before closing strong at $577.08, up 0.68% for the session. Trading volume was below average, with 34.68 million shares exchanged. SPY’s break above key resistance at $574 reflects bullish momentum, though traders remain cautious with significant CPI data on the horizon. The move to $577 marks a critical test for bulls, with potential resistance just ahead.
Major Indices Performance:
The Dow led the pack with a 1.03% gain, closing at a new record high. The S&P 500 followed with a 0.7% increase, also setting an all-time high. The Nasdaq posted a more modest gain of 0.60%, while the Russell 2000 underperformed with a 0.26% rise. Tech stocks fueled much of the day's rally, although broader market sentiment was bolstered by optimism ahead of Thursday’s CPI report. Defensive sectors lagged behind, while tech and industrials took center stage.
Notable Stock Movements:
The "Magnificent Seven" had a mixed day with Alphabet (GOOGL), Tesla (TSLA), Meta (META) and NVIDIA (NVDA) all losing ground while the others rallied led by Apple (AAPL). Alphabet is facing headwinds due to a call by the DOJ to break up the company.
Commodity and Cryptocurrency Updates:
Crude oil dipped by 0.35%, reflecting lower demand expectations and some de-escalation of geopolitical tensions. Gold also slipped 0.35%, as traders moved away from safe-haven assets amid growing risk appetite. Bitcoin dropped 2.20%, falling just above $61,000, as the cryptocurrency market faced renewed pressure from tightening monetary conditions.
Treasury Yield Information:
The 10-year Treasury yield rose by 1.05%, closing at 4.076%. Despite ongoing inflation concerns, the bond market remained stable ahead of Thursday's CPI report. Traders are looking for clearer signals from the Fed’s rate policy before making significant moves.
Previous Day’s Forecast Analysis:
Recap of Previous Forecast:
Tuesday's forecast anticipated SPY to trade within a range of $570 to $577 with a clear bullish bias as long as it remained above $570. The primary targets identified were $573, $574.75, and $577 with the expectation that momentum could stall near the upper resistance. It was advised that long trades would be most effective as SPY held above $570, suggesting a strong upward push if buying pressure persisted. A break through $574.75 would signal further gains, potentially extending to $577 if momentum carried SPY past this critical level. However, the forecast also highlighted the importance of caution, noting that any failure to hold above $570 could lead to choppy price action and increased volatility, especially with geopolitical risks and upcoming economic data. The analysis specifically pointed out that a stall or reversal near $574.75 could result in profit-taking, urging traders to lock in gains before this resistance was fully tested. Conversely, if SPY dropped below $570, a downside target around $567 was mentioned, though it was considered less likely unless the broader market sentiment shifted abruptly. The bullish outlook was tempered by a potential range-bound session, with the forecast warning traders about market traps near key levels. Traders were also encouraged to monitor external factors like Fed commentary and geopolitical news, which could influence market direction. Overall, the bias remained positive, favoring upward momentum.
Market Performance vs. Forecast:
SPY followed the forecast closely, breaking through the initial resistance at $573 and climbing further to close at $577.08, aligning well with the forecasted bullish sentiment. While the forecast identified $574.75 as a critical resistance level, SPY surpassed this, signaling stronger momentum than initially anticipated. Traders who took long positions near $570 saw significant gains as the forecast played out, demonstrating the accuracy of the projected range.
Prior Day’s Forecast Final Thoughts:
Tuesday’s forecast was highly accurate, with SPY adhering closely to the identified levels. The break above $574.75 and the subsequent move toward $577 provided ample opportunity for profit-taking. Traders who followed the forecast’s advice, particularly around long entries above $570, were able to capitalize on a strong upward move.
Premarket Analysis Summary:
Today’s premarket analysis predicted SPY to range between $571.45 and $575.75, with a likely upward drift throughout the session. The expectation was that as long as SPY held above $571.45, bulls would remain in control, with targets set at $574 and $575.75. However, a failure to hold above $571.45 would expose SPY to lower levels near $570.25, with shorts favored only in extreme downside scenarios.
Validation of the Analysis:
SPY’s performance adhered well to the premarket analysis, with the index staying above $571.45 and ultimately closing just below the upper target at $577.08. This upward drift aligned with the projected range, giving traders ample opportunities for long trades based on the premarket’ s key levels.
Looking Ahead: Economic News Releases:
Thursday’s CPI report is the focal point for traders, with inflation data expected to drive market sentiment. Any surprises could result in sharp market movements, particularly as traders try to gauge the Federal Reserve’s next steps. Additionally, unemployment claims data will provide further insight into the labor market, which remains a key concern for the Fed.
Anticipated Market Impact:
The CPI data could either reinforce or challenge the Fed’s current trajectory on interest rates. A higher-than-expected inflation reading might fuel fears of prolonged rate hikes, whereas a softer number could bolster hopes for a dovish Fed pivot. Traders should brace for increased volatility post-report.
Guidance for Traders:
With heightened volatility expected around the CPI release, traders should consider scaling down position sizes and tightening stop-losses. The market could swing sharply in either direction, so it’s essential to remain flexible and ready to adjust strategies quickly.
Market Sentiment and Key Levels:
Currently, SPY is trading near $577, with bullish momentum intact. Key resistance lies at $577.75, and should SPY break this level, SPY could head toward $580 where our model suggests prices will stall. On the downside, $575 serves as immediate support and as long as price remains above $570, bulls are in complete control. But the CPI data could trigger sharp reversals if inflation surprises to the upside.
Expected Price Action:
For Thursday, SPY is expected to trade between $571 and $580. A break above today’s highs would signal further gains, while a fall below $575 could expose SPY to lower support levels near $571. Certainly below $571 prices could fall to $566 or lower, although we see this as a low probability for Thursday. The options market sees SPY moving higher into Friday to as high as $580. However, given the looming CPI report, traders should prepare for potential sharp price swings and be sure to trade what you see after this report.
Trading Strategy:
Long trades are favored as long as SPY holds above $571, with targets at $577 and $580. If SPY fails to break $577.75, traders could consider mean reversion shorts targeting $571.50 and $567. The CPI report will likely drive market direction, so smaller position sizes and tighter stop-losses are recommended to manage risk.
Risk Management and Warnings:
With the VIX sitting at 20.86, volatility is expected to rise sharply following the CPI report. Traders should tighten stop-losses and avoid overleveraging, especially near key resistance and support levels. Be prepared for sudden reversals.
Model’s Projected Range:
The model projects SPY to trade between $567.50 and $577.25 expanding significantly from today. The market is heavily Call dominated, indicating a bullish outlook. As long as SPY holds above $570, the market could test resistance at $580. A break below $570 would expose SPY to downside risks. With such a large range expect trending price action tomorrow and be extremely careful with any countertrend trades. In a market like this we favor only trading with the trend.
Market State Indicator (MSI) Forecast:
Current Market State Overview: The MSI is currently in a Bullish Trending Market State with price closing at the top of the range. Extended targets are printing above signaling a very strong trend with the herd participating. Price has pulled back slightly to the MSI upper channel which should act as support. The MSI rescaled higher today several times all the while printing extended targets above. The size of the MSI range is a bit narrow so the trend, while strong, could be fading in strength. Resistance is at $576.85 with support at $574.26.
Key Levels and Market Movements: At the open, the MSI was in a Bullish Trending Market State with price trading mid-range after traversing the range before the open. After the open price pushed through the resistance and printed extended targets, which was our clue to get long and stay long. Price quickly reached these extended targets at $575 after which the MSI began a series of rescalings higher with extended targets. This again reinforced the long bias and we held onto long trades expecting to reach our $577 resistance level, indicated in the post and premarket reports. IT was almost too easy to reach this level by noon after which price chopped around until late in the day, with a final push higher with extended targets printing above. We did not take any mean reversion short trades today given the strength of the trend and the MSI. There was a failed breakout at 1:30 pm ET which some of our users did take for a quick scalp to mid MSI range. 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 bulls are in complete control and the market is poised to move higher. The bears are not participating in the market and short trades should be avoided except from major overhead resistance and only if there are not extended targets above. Volume today remained below average which does not necessarily reinforce today’s move higher. We continue to favor long trades and mean reversion trades from major resistance and will look for entries from MSI support levels currently $574.26 and $576.78. We expect the MSI to rescale after CPI and users should adjust these levels in real time accordingly.
Dealer Positioning Analysis:
Summary of Current Dealer Positioning: Dealers are selling $578 to $580 and higher strike Calls implying a potential ceiling for tomorrow at $580. Today’s $577 ceiling held quite well. To the downside, Dealers are buying $576 to $572 and lower strike Puts in a 6:1 ratio to the Calls they are selling implying a slightly bearish view of the market for Thursday, and slightly more bearish than today. Dealers options positions were called out today so positioning for tomorrow is likely to change significantly in the morning.
Looking Ahead to Friday: Dealers are selling $577 and $585 and higher strike Calls implying any rally by Friday will stall at $585. To the downside, Dealers are buying $576 to $567 and lower strike Puts in a 20:1 ratio to the Calls they are selling. This implies a very bearish view of the market heading into Friday. Dealer protection has increased significantly since yesterday as Dealers appear to be very concerned these recent all-time highs are due to correct. This heavily bearish view is due to the low cost of downside protection available. There are several macro and other risks which could possibly derail this market’s push higher and while positioning is very bearish, Dealers are taking this stance to protect from any major shock to the market, not because they have reason to believe the market will actually fall. In fact their positioning also supports higher prices from here. Given how inexpensive Put protection is at these levels, any long book should be doing the same and buying Puts just in case. Dealer positioning changes daily so be sure to check in with the premarket report before the open for the latest updates.
Good luck and good trading!