Market Insights: Monday, November 4th, 2024

Market Overview:

The Dow Jones led stocks lower in a volatile session as Wall Street braced for the presidential election and an important Federal Reserve policy decision later this week. The S&P 500 (^GSPC) dropped 0.3%, with the tech-heavy Nasdaq Composite (^IXIC) also declining by a similar margin. The Dow Jones Industrial Average (^DJI) saw a more pronounced drop, shedding around 250 points, or 0.6%, reflecting heightened market anxiety ahead of Election Day. This market pullback was characterized by cautious trading, as investors weighed the economic implications of either Kamala Harris or Donald Trump taking office, especially following polls indicating an unexpected lead for Harris in key battleground states like Iowa. Additionally, the dollar weakened significantly, marking its biggest single-day drop in a month as traders recalibrated their election outcome forecasts. Treasury yields eased, with the 10-year yield (^TNX) falling nearly 10 basis points to hover around 4.30%. Alongside the election, attention is also on the Fed’s meeting starting Wednesday, with Chair Jerome Powell widely expected to announce a 0.25% rate cut despite lingering inflation concerns. Meanwhile, oil prices surged nearly 3% as OPEC+ announced a delay in planned output increases amid rising geopolitical tensions in the Middle East.

SPY Performance:

The SPDR S&P 500 ETF Trust (SPY) fell .23%, closing at $569.74 after reaching a low of $567.89 and a high of $572.50. Opening at $571.18, the ETF's price action reflected the day’s mixed sentiment, trading with lower-than-average volume at 33.57 million shares. The trading range for SPY remains narrow, with key resistance at $575 and support at $569, indicating consolidation within a cautious market. Current technical patterns point to potential sideways trading as the market anticipates Election Day and the Fed’s announcement, with a mild bearish lean as dealer flows suggest limited upside interest. Traders may see price action staying within a defined range unless clearer economic indicators or election outcomes signal a change.

Major Indices Performance:

The broader market saw mixed performance, with the Dow leading losses as political and economic concerns weighed on investor sentiment. The Nasdaq and S&P 500 also declined as tech names faced headwinds. Amid the market turbulence, only the Russell 2000 posted a slight gain of 0.51%, suggesting some resilience in smaller-cap stocks. Meanwhile, the “Magnificent Seven” stocks mostly experienced a down day, with only NVIDIA managing a slight gain, highlighting selective optimism in the otherwise subdued tech sector. The sentiment for the overall market remains cautious as investors await clear directional cues from both political and economic events.

Notable Stock Movements:

In individual stocks, the energy sector received a boost, with crude oil prices jumping by over 3% following OPEC+’s production decision. This lifted energy stocks across the board. In tech, NVIDIA managed to post a small gain, standing out among large-cap tech names that mostly struggled under pressure. The weaker dollar supported select sectors, but broader uncertainties held other stocks back, particularly as focus intensifies on Tuesday’s election and Thursday’s anticipated Fed decision. Tesla, Apple, and Amazon saw moderate declines, reinforcing investor caution in Big Tech and growth-driven sectors ahead of a pivotal week.

Commodity and Cryptocurrency Updates:

Oil prices rallied 3.21%, buoyed by OPEC+’s announcement of a delay in production hikes and escalating tensions in the Middle East, while gold dipped 0.12% as investors turned to cash amid political risk. Bitcoin declined by 2.27%, though it remained above $68,000, reflecting restrained sentiment in the cryptocurrency market as traders awaited macroeconomic cues. The recent strength in Bitcoin appears to be consolidating, with analysts watching for market-moving signals later this week with a Trump presidency likely very good for crypto.

Treasury Yield Information:

The 10-year Treasury yield fell by 1.75%, closing at 4.287%. The slide below 4.3% reflected the market’s retreat to safety ahead of the election and Fed policy announcement, as high yield levels remain a point of pressure on equities. This sustained yield level hints at a challenging backdrop for stocks, especially those sensitive to interest rates. Investors continue to await signals from the Fed’s upcoming meeting to discern the likely path for Treasury yields and broader equity market sentiment.

Previous Day’s Forecast Analysis:

Friday’s forecast highlighted the importance of a cautious approach amid a market under pressure from high-stakes Big Tech earnings and rising Treasury yields. The analysis recommended a defensive strategy, with a specific call for traders to respect resistance at $575 and to approach rallies with skepticism, suggesting that moves towards this level would be sold off. The SPY’s reaction to $575 underscored this strategy’s effectiveness, as it sold off upon testing this resistance and drifted toward $570 by the session's end. This approach emphasized controlled entries and underscored the importance of patience and disciplined risk management, especially in choppy market conditions where quick reversals are common and once again reaffirmed the bears control the current narrative and to sell rallies.

Market Performance vs. Forecast:

Monday’s market action aligned well with the forecast’s anticipated trading range, reinforcing the strategic importance of disciplined level-to-level trading. SPY’s price action remained capped at the $575 resistance level, confirming the forecast’s caution against aggressive long trades in this area. The market’s response validated the forecast’s advice to adopt a conservative stance, as SPY ultimately drifted back toward $570 by the session’s close. This adherence to key levels allowed traders who followed the forecast to capitalize on intraday movements with controlled entries and exits, steering clear of breakout trades that lacked follow-through. The day’s tight alignment with forecasted levels reinforced the strength of a patient, tactical approach, proving beneficial in a market clouded by economic uncertainty and heightened volatility. This adherence not only rewarded traders who followed the guidance but also highlighted the ongoing importance of disciplined trading practices, particularly in managing risk and avoiding traps in volatile, sentiment-driven markets.

Premarket Analysis Summary:

As of 7:48 AM ET, SPY was positioned at $571.33 with resistance targets at $572, $574, and $575.75, and downside targets at $570, $568.65, and $566.70. The analysis suggested a slight downside bias, with an emphasis on short entries around resistance if momentum faded. However, potential upside existed if the price stabilized above key support levels. Traders were advised to favor short-term trades given the limited volatility and range.

Validation of the Analysis:

Monday’s market confirmed the importance of a conservative trading approach, with SPY aligning closely with forecasted resistance and support levels. This precision underscored the effectiveness of disciplined entries and exits, as traders who followed these cues were rewarded with lower-risk, higher-probability trades. Given our generally bearish bias and advice to sell all rallies, as SPY reached our upper target of $572, there were several opportunities to short this level to our first target of support at $570 and then $568. A failed breakdown at this level at noon set up a mean reversion long back to $570. Once again, the pre- and post-market reports aligned with their directional bias and levels to stalk for trades, as well as the patterns to look for at these levels. Two perfect opportunities set up as a result of the actionable and accurate information provided.

Looking Ahead:

SPY is likely to trade within a range of $565 to $577 on Tuesday, with sentiment heavily influenced by the election and Fed policy announcement. A break above $575 may offer a short-lived rally, while a drop below $569 could trigger further declines. Traders should remain vigilant for sudden shifts in sentiment, with particular attention to developments on Election Day.

Guidance for Traders:

As market volatility continues, a cautious stance remains advisable. Given the elevated VIX @ 22, short trades may be favorable. Any upward movements should be approached with skepticism until a clear winner in the election is indicated. Traders are advised to prioritize conservative entries and position sizing, closely monitoring market-moving news for potential directional changes.

Market Sentiment and Key Levels:

Resistance at $575 remains a critical level for bulls to reclaim momentum, while support at $569 and $567 are essential to prevent further downside. Below $567, SPY could experience a deeper pullback to $562. $572 has also emerged as a level which must be reclaimed for the bulls to push prices higher. Maintaining disciplined entries at these levels will be key in managing risk amidst the current volatility.

Expected Price Action:

SPY is expected to oscillate between $565 and $577, with a prevailing bearish bias. Long entries may be considered around $569 if support holds, but a breakout above $575 is unlikely without a major catalyst. Shorts on failed breakouts from $572 to $575 are also favored. Volatility remains high, making strategic, level-based trades prudent for managing choppy price action, which means quick profits and two-way trading to produce optimum results.

Trading Strategy:

Tuesday’s strategy centers on identifying short entries near $572 to $575 with support-based trades around $569. The elevated VIX favors careful positioning, with a preference for failed breakout and breakdown trades to capture potential reversals within the trading range. Election nights can be extremely volatile so we recommend being as close to flat as possible heading into Tuesday night.

Risk Management and Warnings:

With the election and Fed meeting creating uncertainty, disciplined risk management is essential. Position sizing and cautious entries will help navigate volatile shifts, with economic and political developments likely to affect sentiment in the coming sessions.

Model’s Projected Range:

The model projects a $565 to $577 range for SPY, with bearish sentiment indicating downside pressure below $569. The range remains unchanged, which implies sideways price action on Tuesday. The market remains Put dominated and is trading well below its bull trend channel from the September lows. Traders should watch these levels closely, as prolonged trading below support will set a new short-term bear channel for SPY, likely to form tomorrow.

Market State Indicator (MSI) Forecast:

Current Market State Overview: The MSI is currently in a Bearish Trending Market State with price closing just below resistance. The range is narrow, indicating a weak bear trend for Tuesday. The MSI rescaled several times lower today, expanding its range which led to today’s sell off to $568 as was forecast to occur in Friday’s newsletter. MSI support is $568.27 with resistance at $570.10.
Key Levels and Market Movements: The MSI began rescaling lower around 11:30 am and printed extended targets below which reaffirmed the triple top formed during the morning session at our forecast resistance level of $572. MSI targets were reached and once extended targets ceased printing, price created a textbook failed breakdown and reversed back to MSI resistance at $570. Users of the MSI knew to enter this trade given extended targets were no longer printing, setting up a quick mean reversion long from $568. The rest of the day price moved mostly sideways in an MSI Ranging Market State which tells our users to sit on their hands for better opportunities. Once again, the MSI led the way for those who understand the proper use of this valuable tool. 
Trading Strategy Based on MSI: The MSI's current state suggests the bears are in control but with price basically trading at resistance, its likely the MSI rescales to a Ranging Market State. We always advise caution in this transition state given the market can move either way in a ranging state. As such we expect more choppy price action on Tuesday and suggest looking for failed breakout/breakdown patterns to initiate positions. Similar to today’s advice, should $568 to $570 hold with a failed breakdown, we favor tactical longs in small size to $570 to $572 where we would look to reverse. There is little our model sees that would indicate a break above $573 is possible on Tuesday. But below $568 the door is open to much lower prices to at least $565 and then $559. We continue to believe rallies should be sold until there is a clear winner in the election. 

Dealer Positioning Analysis:

Summary of Current Dealer Positioning: Dealers are selling $572 to $583 and higher strike Calls while also buying $570 and $572 Calls, indicating the Dealers have some desire to participate in any upside on Tuesday. There appears to be a ceiling at $577 for Tuesday, however it will be a major undertaking for the bulls to move price beyond $575. To the downside, Dealers are buying $569 to $560 and lower strike Puts in a 3:1 ratio to the Calls they are selling/buying, implying a slightly bearish view of the market for tomorrow. Dealers are suggesting tomorrow will be another narrow, chop-filled day trading in a tight range. Dealers have not added significantly to their downside protection since Friday
Looking Ahead to Friday: Dealers are selling $585 to $592 and higher strike Calls while also buying $570 to $584 Calls in some size, indicating the Dealers desire to participate in any rally that develops post-election. While Dealers always play both sides of the aisle, they are positioned in a way heading into Friday which is more optimistic than we have seen recently. To the downside, Dealers are buying $569 to $545 and lower strike Puts in a 5:1 ratio to the Calls they are selling/buying. They have kept their protection fixed since Friday. While the ratio is bearish, the fact that they have not increased their protection is less bearish than what otherwise might be interpreted. We continue to recommend long books purchase downside protection. Dealers however are at least leaving the door open to the market resuming its bull march by the end of the week which is a relatively new development.

Recommendation for Traders:

The election, FOMC and Treasuries above 4.3% all increase the potential of a 5–6% pullback to $550. Dealers however are not forecasting this currently. That can change in a heartbeat and the markets will likely see very strong directional trading post FOMC which may be around the same time the election results are known with some certainty. Until then we remain cautious, taking quick strikes from our major levels. We are still bullish USA and any sell-off for us will be a buying opportunity longer term. We certainly advise checking in the premarket analysis daily for updates to the model and insights into the day’s trading.  

Good luck and good trading!