Market Insights: Friday, November 1st, 2024

Market Overview:

The Nasdaq and S&P 500 posted a moderate rebound today as investors assessed a surprisingly weak jobs report and were cheered by Amazon’s (AMZN) earnings surge. The Nasdaq Composite (^IXIC) rose 0.8%, the S&P 500 (^GSPC) advanced 0.4%, and the Dow Jones Industrial Average (^DJI) gained 0.7%. This recovery follows Thursday's Big Tech-driven sell-off over AI spending concerns. Friday’s relief rally came despite the US economy adding just 12,000 jobs in October, significantly below expectations, due in part to strikes and recent hurricane impacts. This lackluster jobs data, the last major economic report ahead of the Federal Reserve’s November 7 meeting, had limited impact on market sentiment as traders still see almost certain odds of a rate cut next week. Amazon’s earnings lifted the sector as CEO Andy Jassy reported triple-digit revenue growth in its cloud AI segment, helping counter the Big Tech cost concerns seen in earlier sessions. Intel’s (INTC) earnings surprise and outlook also boosted sentiment, reviving optimism around its ongoing turnaround efforts. On the downside, Apple (AAPL) shares slipped as its earnings and forward guidance left investors underwhelmed. Boeing (BA) stock edged higher after union leaders backed a new deal to end a significant factory workers strike, proposing a 38% wage increase.

SPY Performance:

The SPDR S&P 500 ETF Trust (SPY) saw a modest gain of 0.42% today, closing at $571.02 after briefly reaching a high of $575.55. Opening at $571.25, SPY traded as low as $570.62 before rebounding. Despite Thursday’s strong selling pressure, Friday’s action indicated stabilizing sentiment with volume at 38.8 million shares, slightly below average. Key resistance remains at $575, as does a newly observed support level around $569, where buyers may step in if sentiment remains neutral or positive. This narrowing range may imply a possible sideways movement in the coming sessions unless next week’s Fed decision provides a fresh direction for the market.

Major Indices Performance:

The broader indices showed resilience with the Nasdaq leading gains at 0.8% as Amazon and Intel outperformed, helping counter Thursday’s tech-related sell-off. The Dow, S&P 500 and Russell 2000 also saw moderate increases. Despite the uptick in tech sentiment, Apple, Tesla, and Meta ended lower, underscoring lingering investor caution over tech spending and profitability concerns in AI and cloud computing. The broader market mood, however, remained cautious as investors awaited additional insights from the Fed and upcoming economic data to guide risk appetite.

Notable Stock Movements:

Amazon shares surged over 6% following strong earnings, with its cloud segment experiencing rapid growth, easing some of the sector’s AI cost concerns. Intel also jumped as its earnings beat expectations, spurring confidence in the chipmaker's recovery strategy. Conversely, Apple shares lagged after reporting earnings and guidance that left investors wanting more clarity. Boeing ticked upward after union support for a new labor deal signaled an end to recent strike-related setbacks, potentially improving its production stability. Despite a challenging week, the “Magnificent Seven” tech stocks found some stability, with most registering gains, signaling selective investor optimism.

Commodity and Cryptocurrency Updates:

Oil prices edged up 0.39% amid ongoing supply concerns, while gold dipped 0.22% as the dollar gained strength. Bitcoin declined by 1.18%, though it remained above the $69,000 mark, indicating cautious sentiment in the cryptocurrency space. Bitcoin’s recent high levels seem to be consolidating, with traders likely awaiting fresh macroeconomic cues to dictate direction. Investors in both commodities and cryptocurrencies are keenly focused on next week’s Fed decision and broader economic indicators, which may impact sentiment further.

Treasury Yield Information:

The 10-year Treasury yield saw an increase of 2.29%, ending at 4.385%, indicating ongoing caution within equity markets. A close above the 4.3% level suggests continued challenges for equities, particularly in sectors sensitive to growth and interest rate movements. This elevated yield level remains a point of pressure for stocks, and sustained movements around these highs may signal further bearish sentiment. Market participants are also watching the Fed’s upcoming announcement closely, which could dictate near-term yield trends and broader equity positioning, although a Fed rate cut is unlikely to move longer duration Treasuries lower. The issue for longer dated Treasuries is a supply and demand problem which is unlikely to abate any time soon.

Previous Day’s Forecast Analysis:

Friday’s forecast highlighted the increasing market risk tied to Big Tech earnings and rising bond yields, which had set a cautious tone for SPY’s trading prospects. The analysis advised traders to maintain a defensive strategy, specifically warning that below the $575 resistance level, rallies would be sold, targeting $570 and advised our reader not to be fooled by any short squeeze. This outlook proved prescient, as SPY sold off at the $575 level and approached $570 toward the end of the day, emphasizing the importance of precise entries and conservative risk management. By focusing on levels rather than aggressive positioning, the forecast provided a roadmap for handling the day’s volatility, underscoring the need for a cautious stance amidst mixed signals from both economic indicators and earnings. Traders who adhered to the suggested approach of watching key levels and adjusting entries accordingly benefited from clearer decision-making, allowing them to sidestep the more substantial losses experienced by others chasing rapid moves.

Market Performance vs. Forecast:

Friday’s market action stayed largely within the forecast’s anticipated boundaries, reinforcing the guidance to respect resistance near $575 and to remain cautious with long trades below this level. SPY’s steady descent to $570 confirmed the forecast’s emphasis on tactical, level-to-level trading, where patience and precision are essential. The alignment of SPY’s performance with the forecast validated the cautious approach, as attempts to rally remained capped at $575. This restraint mirrored the guidance to avoid breakout trades and instead target small, manageable entries near forecasted resistance and support. As SPY ultimately closed near $571, the forecast’s conservative stance proved effective, rewarding traders who avoided overly aggressive strategies. The day’s tight adherence to projected levels underscored the ongoing value of disciplined trading and level awareness, particularly as investor sentiment remains clouded by economic uncertainty and high volatility ahead of key Fed and economic updates.

Premarket Analysis Summary:

As of 8:34 AM ET, SPY was trading at $571.56 with resistance targets set at $572, $574, and $577, and downside targets identified at $568.75, $566.75, and $565. The analysis favored a recovery rally toward targets at $574 as the most likely probability. However, with limited upside, a cautious stance was advised noting that further declines would depend on a definitive break of the $568.75 level. Traders were advised to focus on short entries if the price weakened further, though the overall downside appeared limited to $565 in the near term. Market sentiment, while fragile, leaned towards consolidation, with directional shifts likely to emerge from economic data or Fed-related developments in the days ahead.

Validation of the Analysis:

Friday’s market performance confirmed a conservative trading approach, as SPY’s adherence to key support and resistance levels underscored a restrained market sentiment. With SPY staying within a projected range and closing near the middle of its trading range, the analysis’s call for tactical entries at established levels proved beneficial. The $575 level was identified in yesterday’s post market report and aligned perfectly with the premarket’s $574 upper target. This set up the all clear to short this level back to major support at $570. Long-term readers of this newsletter know when both the pre- and post-market align, trade heavier and with confidence as probabilities of success increase exponentially. And today was no exception. The $575 level held and a short set up twice at this level providing two great opportunities for major profits. This reinforces the importance of patience and discipline, particularly when volatility is high and economic events loom large, validating the strategy of entering only on clear rejections at resistance or support levels. Knowing not only the level to trade but also the bias and whether the market will trend or chop is key to profitable trading. We provide all this information each and every day.

Looking Ahead:

SPY is expected to trade within a range of $565 to $577 on Monday, with sentiment influenced by the looming Federal Reserve decision. If SPY can reclaim $575, it may prompt a short-term rally, while failure to hold above key support at $569 could expose SPY to further declines. With the November Fed meeting approaching, traders should anticipate heightened volatility and closely monitor price movements in response to economic releases, notably Tuesday’s ISM PMI and election outcomes.

Guidance for Traders:

With the VIX holding at elevated levels, a cautious approach is recommended. In bear trends, short trades may become more common, while any upward moves may encounter selling pressure. As volatility persists, traders should avoid attempting “falling knife” entries and instead wait for confirmed breaks at major resistance levels before considering long positions. Maintaining conservative position sizes and emphasizing disciplined entries remains prudent, especially given the Fed’s meeting and impending election, which may bring sharp directional shifts.

Market Sentiment and Key Levels:

Resistance at $575 remains crucial for the bulls, with sustained movement above that level necessary to shift sentiment. For now, rallies are likely to be sold below this threshold, while support at $569 and $567 are key. A break below $567 could open a path to $562, indicating further market weakness. With sentiment tilting bearish, disciplined entries at key resistance and support levels remain essential for managing risk amid potential near-term volatility.

Expected Price Action:

The SPY outlook for Monday suggests trading between $565 and $577, with a bearish bias prevailing. Traders should favor long entries on failed breakdown patterns around $569 with small longs until price convincingly reclaims $575. At $575 we continue to favor failed breakouts shorts as its likely SPY spends Monday and perhaps Tuesday in a range between $570 and $575 until there is more visibility from economic news and the election. Elevated volatility calls for larger stops therefore trade smaller than normal with strategic entries at critical levels, as SPY’s price movement may remain choppy without clear directional signals.

Trading Strategy:

For Monday, look for short entries on failed breakouts near $575 and below $569, as bearish sentiment remains dominant. Momentum-based entries should be well-calibrated with wider stops, focusing on trades within established support and resistance levels. Given the VIX’s elevated reading, only clear trend confirmations should prompt positioning changes. Volatility will continue to increase next week and we will look to exit our long VIX $19 Calls on Tuesday. Failed breakdowns have a higher probability of failure than failed breakouts by a fairly large margin. This is due to the simple fact that markets go up 80% of the time and all sell offs are followed by vicious short squeezes. We emphasized this in yesterday’s newsletter and today you witnessed firsthand the results of a short squeeze. But we were clear to state not to be fooled by any rally. We clearly stated any move to as high as $575 would be sold. Today this played out to perfection. This is typical market behavior and our model is smart enough to incorporate it into its forecast and outline the levels for you to stalk for proper and well-timed entries.  

Risk Management and Warnings:

With economic uncertainty and high VIX levels, risk management is critical. Traders should prioritize conservative position sizes and remain vigilant of sudden market shifts. With key economic data on the horizon, market sentiment may fluctuate rapidly, warranting cautious positioning.

Model’s Projected Range:

The model projects SPY’s range between $565 and $577, with a cautious sentiment likely continuing until clear guidance from the Fed’s policy decision. Key levels at $569, $575, and $577 are likely to guide market action, with a downside focus below $569. The market is Put dominated and is trading well below the bull trend channel from the September lows. One more day below this level and a new bear channel will form which will guide price for the next several days. With the projected range narrowing, expect more sideways price action on Monday with short periods of trending action.

Market State Indicator (MSI) Forecast:

Current Market State Overview: The MSI is currently in a Bearish Trending Market State with price well below MSI support without extended targets printing. The range is so narrow, MSI support and resistance are virtually on top of each other, indicating a weak bear trend for Monday. The MSI rescalled to this narrow range at 11 am ET and while MSI support was not visible on a 2-minute chart, when this happens, we suggest moving to a 1-minute chart for more granularity. On a 1-minute chart it was clear at 11 am, the bull trend was over with extended targets no longer printing above price giving us the green light to enter a mean reversion short to our model’s lower targets. The 2-minute MSI did not rescale all day, which leads us to believe Monday will be another day like today with perhaps another short squeeze after testing a bit lower, perhaps as low as $568. MSI resistance is $575.23.
Key Levels and Market Movements: With SPY setting up a textbook failed breakout at 10:30 am the choice was to short this level at that time, or switch to a 1-minute chart and wait until 11 am to get short once extended targets stopped printing. Either way, this trade worked out well. This proves our advice to readers that there is no need to rush into trades. Let price prove either acceptance or rejection of a major level before establishing a position. Too many traders think they will miss a trade if they don’t capture the very top or very bottom. The reality is professional traders are unable to consistently pick tops and bottoms. Instead they trade with the “smart money” and wait for institutions to set up weak traders to trap them to grab their liquidity before reversing price. This happened perfectly today between 10 and 11 am. This is also what forms double tops/bottom and head and shoulders patterns. It’s not a coincidence these patterns present daily. This is institutional money setting up a level they want to buy or sell so trade with them being patient for them to show you the way so you maximize your rewards and increase your win rate. Following this advice today set up at least one very nice short from $575 to $571 and again the MSI confirmed our levels and the timing of our entry. 
Trading Strategy Based on MSI: The MSI's current state suggests the bears are in control, although with the range nonexistent and in a lower time frame in a Ranging Market State, we advise caution at this level. Given we expect more choppy price action Monday, we suggest looking for failed breakout/breakdown patterns to initiate positions. If you do not know what this pattern is, review prior newsletters to see examples of this pattern. These patterns have a high probability of success in a ranging market which is why we advise using them. Should $568 to $570 hold with a failed breakdown, we would take a tactical long in small size to $575 where we would look to reverse. There is little our models sees that would indicate a break above $575 is in the cards for Monday. But below $568 the door is open to much lower prices to at least $564 and then $559. Watch the MSI for a rescale premarket for clues on the best trade for Monday and again, do not be fooled by any short squeeze along the way.  

Dealer Positioning Analysis:

Summary of Current Dealer Positioning: Dealers are selling $575 to $580 and higher strike Calls while also buying $572 to $574 Calls in very small size, indicating the Dealers have a limited desire to participate in any upside on Monday. There appears to be a ceiling at $580 for Monday, however it will be a major undertaking for the bulls to move beyond $575. To the downside, Dealers are buying $570 to $559 and lower strike Puts in a 5:1 ratio to the Calls they are selling/buying, implying a bearish view of the market for Monday. Dealers were correct is assuming a relief rally today and as we suggested, added significant downside protection today to flip from a bullish view to a firmly bearish view for Monday. Looking Ahead to Next Friday: Dealers are selling $582 to $592 and higher strike Calls while also buying $572 to $581 Calls, indicating the Dealers desire to participate in any rally that develops next week from the election and FOMC. To the downside, Dealers are buying $570 to $545 and lower strike Puts in a 5:1 ratio to the Calls they are selling/buying. They have increased their purchase of lower OTM strikes significantly. This implies a bearish view of the market heading into next Friday and a move from neutral today. We have recommended for some time long books purchase downside protection, though at least the election. This is still appropriate given the current climate and uncertainty.

Recommendation for Traders:

The odds of 5 to 6% sell-off are increasing, which sends SPY back to $550. You may recall this level is the dividing line between a bull market and bear market and it would be a perfectly normal pullback given the 20% run SPY has had this year. While our models do not predict that far out in the future, it’s likely the price should reach this level, our model will suggest buying the dip for a rally into year end.      

With SPY trading at the 50DMA odds favor a break toward the 100 DMA. Therefore long are advised to proceed with caution, particularly as the market digests potential implications from next week’s Fed meeting, upcoming economic releases, and the election. Current dealer positioning reveals a preference for downside protection with Puts concentrated between $568 and $560, indicating expectations of further volatility or declines. Traders should remain flexible, favoring tactical trades at key support and resistance levels and closely monitoring dealer flows for any shifts in sentiment. Given the prevailing uncertainty, disciplined entries and exits, along with conservative position sizing, will be essential to managing risk in this volatile environment. As always, premarket updates will be crucial to stay aligned with intraday sentiment shifts and the latest market-moving data.

Good luck and good trading!