Market Insights: Monday, July 1st, 2024.
SPY opened up $1.41 after finding support again late Friday at $543 like it has all last week. The market didn’t move higher however, and instead once ISM PMI was released at 10 am ET, sold off to the $543 level, where it once again found support. After three attempts to break this level, SPY marched steadily higher to close down .21% at $545.34. PMI came in weaker than expected as financing costs for manufacturing is taking a toll on interest rate sensitive sectors of the economy. There have been several reports of firms laying off staff as the economy, while still strong, weakens. For example in Arizona, a few of the larger layoffs include Northrop 543 staff, Evernorth 261 staff and Kalil Bottling 546 staff. Employers with more than 100 workers must provide 60 days’ notice before laying off 50 or more employees at a single location, and we are starting to see some signs across the country that inflation and higher rates are finally having the desired effect. While today’s bad economic news is bad for the economy, the market rallied on the news after initially selling off, given as this trend continues to evolve, the Fed will be forced to cut rates later this year and into 2025. Whomever wins the white house will be a lame duck President and will likely push through all kinds of pork barrel programs to reward their donors, leading to more inflation and further increases in the national debt. This could present a significant challenge for the stock market in 2025, even with falling interest rates. Today all of the Mag 7 stocks rallied except for NFLX which fell slightly. As expected, the Nasdaq gained .66% with the DOW fell 13 basis points with the Russell dropping .84%. Volume for SPY was lower than average at 38.68 million shares but normal for a shortened holiday week.
10-year Treasury yields moved significantly higher, up 1.57%, gaining over 4% over two days and moving right back to 4.5%. We have stated for some time, long-term yields will continue to rise given the amount of debt the Treasury needs to finance. We would not be surprised to see 5% 10-year bond yields. Crude was up 2.42% continuing to rally on fears of an expansion of Middle East wars with Gold also rallying 23 basis points. We continue to buy dips in Gold and Silver. Bitcoin too rallied .9% to close above $63K. We remain bullish Bitcoin above $60K.
In Friday’s newsletter, we continued to state our model is bullish above $542. We recommended selling overhead resistance at $545 and taking profits at $543, reversing long off $543 looking to book profits at $545. We stated the range for the day would be tight, with choppy price action and that the market would test both $545 and $543 with opportunities to trade both ways. And right on que, the market delivered by selling off from the open to $542.60 before rallying to $544.48, before selling off again to $542.52, before once again rallying to $545.13 by noon. In the afternoon session the market traded in a very tight range, moving sideways for the rest of the day with only one opportunity to sell a fake breakout at $545.60 @ 2 pm. Again the post-market report provided the type of day, levels to trade and where to take profits. We say this a lot but it doesn’t get any easier than this.
In the premarket at 8:19 am ET, we stated the market would have a muted weak with longs from $543 to $545, precisely in line with the post market report. We stated trading would be slow and choppy and to trade accordingly. While the post and pre-market report are often very close in the information they provide, when they are exactly the same, like today, the odds heavily favor trading exactly as indicated given the model did not find anything which made it update the post market plan. Again reviewing both newsletters allows traders to develop a solid trading plan for the day. Adding the Market State indicator provides a visual representation of the levels published in these reports. This information is highly accurate and provides extremely powerful, actionable information in real time.
For Tuesday our model continues to remain bullish above $542. Below $542 the market will experience a pullback to at least $540. $543 continues to provide very strong support and is only waiting on an external catalyst to break. This is the 7th day this level has held which is an anomaly…it will not hold forever and in fact price is now below the trend channel in place since the end of April. Another day below this channel and the channel will be redrawn. This is consolidation within consolidation and once $543 does give way, the market will turn bearish short term. But in the meantime, this level continues to hold and as such, we will continue to trade long off $543, reversing short at $545, trading this range just like we did today. When this $543 level does give way, it’s likely the market will start to pull back between 5 and 10%. Expect even more chop on Tuesday given it’s the last full trading day before the holiday as Wednesday is a half day. Thursday the markets are closed and Friday we the Jobs report will be released, which should bring some excitement. Tuesday Powell is speaking at 9:30 am ET so watch how the market reacts to his talk. While unlikely, he does have the ability to change the markets’ dynamics with his words so be prepared should he deviate from his mantra.
Looking at a 2-minute chart of SPY with our Market State indicator, the indicator is currently in a bearish trending market state with prices closing at the top of the range. In a bearish trending state we favor selling overhead resistance and taking profits at support. Support is $543.13 and again, it’s likely there will be opportunities to the long side on Tuesday from this level. The bearish range is narrow and while our model projects a range on Tuesday from $541 to $548 (white box on daily chart), it’s more likely the market trades in a narrower range as indicated on the Market State Indicator. There are no extended targets (olive lines) below lower support which again, implies more ranging behavior, favoring shorts off $544.79, taking profits and reversing long at support at $543.13. The indicator today rescaled to a ranging state a few times as price traded @ $545. If price continues to hold above $545 on any volume, the market will attempt to move toward the upper range target of $548.10 and we recommend buying $545 should this develop.
So for Tuesday probabilities favor the market once again testing both sides of the bearish range, selling $545 while buying $543. A failure of $543 will bring in lower levels to as low as $537, a low probability on Tuesday. While we favor short trades on Tuesday from $545, above $545, the market will attempt to rally back to $548 to perhaps as high as $549. This is a bullish week for the markets so watch for a breakout of $545 with a retest of this level to go long. For updates to these levels and an update to the plan for Tuesday, be certain to check the Premarket Market report before the open.
Dealer positioning for Tuesday to the upside has Dealers buying $546 and $547 Calls while selling $548 to $550 and higher strike Calls, implying a ceiling on Tuesday of $549. Market Makers are buying Calls in a 2:1 ratio to the Calls they are selling, implying a possible rally on Tuesday to higher levels. Dealers do not typically buy Calls without confidence that prices will move higher. To the downside Dealers are buying $545 to $542 and lower strike Puts in a 6:1 ratio to the Calls they are selling, moving to a more bearish posture for tomorrow. Should $543 fail, Market Makers will profit from any flush lower that develop. But again, buying such large numbers of Calls makes a flush lower a low probability. Dealers believe the market will trade in a range from $542 to $549, although they certainly have added some downside protection from today, just in case the $543 level fails.
Looking out to next Friday, the day after a holiday, Dealers are buying $546 to $549 Calls, while selling $550 to $553 Calls in large size, implying a belief the market will drift higher by Friday, potentially making a new all-time high this week. Certainly Dealers understand the first two weeks of July are bullish and are positioned for higher prices by week’s end. This positioning has changed materially from Friday. To the downside Dealers are buying $545 to $540 and lower strike Puts in a 2:1 ratio to the Calls they are selling, implying little fear of lower prices. A 2:1 ratio is actually a balanced ratio, particularly when looking at the Calls Dealers are also buying. Remember the market has not had a 2% sell-off day in 340 days and with a record of 377 days, the market is due for a bad day, most likely after the seasonally strong first two weeks of July. Stay tuned for the plentiful, actionable information we provide each day and learn to incorporate all this valuable information into your daily trading plan.
Remember Dealer positioning changes each day, so be sure to check our Market Sentiment Newsletter premarket and review these post-market recaps to understand how dealer positioning will affect the day’s price action. Pre-market analysis is posted by 9:15 AM and these post-market recaps are posted each evening. We strive to deliver actionable intelligence you can use each day in your trading. Good luck and good trading.
