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Market Insights: Thursday, July 11th, 2024.

SPY opened up $.12 today after a favorable CPI reading that came in softer than expected pushed the market to a new all-time high at $562.33. But by the open, prices had begun to fall, and while there was an initial attempt to reclaim the highs @ 10 am, the market decided this bull run needed a breather and the market fell relentlessly for the rest of day, dropping .86%, closing near the lows of the day. This type of price action, a new high that reverses and closes below the low of the prior day is typically bearish and it would not surprise us in the least to see further follow through to the downside on Friday. While the 8:30 am ET release sparked a rally, once support at $561 failed, the market put in a series of lower lows and lower highs, closing at $556.48. Buy the rumor and sell the news has been absent from the market for some time during the strongest bull run in history. Perhaps today is the beginning of a more balanced market. Time will tell. Mag 7 stocks had their worst day in over a year ending the day in the red, with TSLA leading the way, losing 8.50% on reports their robotaxi unveiling would be delayed. NVDA too gave up over 5.5% which of course led the Nasdaq lower, dropping 2.24%. The DOW once again was basically flat, rising .08%, with the Russell outperforming the other indices, rallying 3.59% on confidence interest rates will come down and these interest rate sensitive small caps will finally catch a bid. Volume for SPY was a higher than average at 52.55 million shares, further reinforcing the shift in market sentiment.

10-year Treasury yields dropped 1.82% as it appears more and more likely the Fed will cut rates in September. Crude gained .72% and remains above $82. Gold rallied 1.82% with Bitcoin falling .73%, at just over $57000. We remain bullish Gold and Silver and Bitcoin above $60K.

In Wednesday’s newsletter, we stated our model was bullish above $555 and stated we expected new all-time highs to continue this week. We got another today premarket. We also stated today’s CPI would bring more action to the market and we certainly got that today. We stated $563.02 was a target for today on lower-than-expected CPI reading and the market reached $563.52 in the premarket after CPI was released. We also stated the market would not exceed $565 today and recommended buying dips at $559. Certainly you could have done that at 10:20 am ET as price rallied to $560.32 before continuing to fall. However as we often state, when new information is introduced into the market, trade what you see and adjust our model’s projections accordingly. We continue to recommend using the Market State Indicator which updates the model’s levels in real time. Below you will see how well that worked today. We also stated we would buy $555 which again, you could have done in the afternoon session for a pop to $557.50. But the trades for today were short from the failed breakout to new highs once $561.50 failed @ 10 am. Those who did short cleaned up. As a side note, it is not unusual for SPY to move $7 on CPI days. This is a fairly common occurrence and typically traders want to fade the initial move after a major economic report. Today was no exception…fade the long push higher and hold for a $7 drop. Today is typical of what CPI day’s bring to the market.

In the premarket at 8:51 am ET, we stated SPY could run as high as $565 but if $562.50 failed, look to $561 for support. We also stated any failure of $561 would trigger moves as low as $556.75. The market today reached a low of $555.83. The premarket report provided some indication that once $561.50 failed, the trade was short. This actionable information should be the basis for your plan for the day, but certainly, this information can be complimented by adding the Market State indicator to your arsenal. The Market State indicator updates our model’s levels in real-time.

Friday PPI stats will be released at 8:30 am ET and it’s likely these readings are also softer than expected. Will the market bounce and rally back toward new highs, or will it continue to rotate into small caps with profit taking continuing in tech? With price currently at $556.50, we remain bullish above $555 and therefore favor a bounce to $558. That said, once again, for tomorrow, traders should update their plan post PPI before the open. A 1% or 2% drop in the major indexes is not enough to derail this bull trend so probabilities continue to support higher prices. Price remains in the bull channel from the April lows and without additional follow through to the downside tomorrow, today’s decline could be a one-day event. Tomorrow is an important day to see if the market follows through or bounces. We had a day like today on April 4th with a bearish engulfing candle which dropped over 1%. The next three days the market attempted to rally but never fully recovered, which led to further declines into the end of April. It’s very possible the market follows this same pattern on Friday with a two or three day rally, remaining below the all-time high. If this pattern does develop, the market could then move decidedly lower where we enter a period of falling prices for several days. Probabilities for tomorrow have the odds of further decline or a rally at even. Perhaps Dealer positioning will provide some clues below. Certainly if price dips below $555, the market will experience a pullback to $551. There is little to no chance of new highs tomorrow and we will trade what we see after PPI is released.

Looking at a 2-minute chart of SPY with our Market State indicator, the indicator is in a bearish trending market state with prices closing at lower support of $556.50. There are extended targets below at $554.83 and it would not surprise us to see this level hit after PPI. Today the Market State Indicator rescaled higher on CPI providing the perfect exit for any long, as well as a support level to buy again for the subsequent failed rally. By the open the indicator had rescaled to a ranging state which implies sell resistance and buy support. So selling $561.50 became the trade after the open, in line with premarket advice, and once this level failed, the indicator again rescaled lower three times in rapid succession, printing extended targets below. As we state often, when this tool produces signals like this, respect the trend and hop on for the ride which in this case was much lower. The indicator produced the perfect short at 10:30 am $560.38 with a hold for lower targets. This was just the first bearish trending market state print…the indicator did the same at 11 am and again at 12:20 pm providing levels to short and targets to take profits. Currently resistance is $558.30 with support at $556.50. Without having knowledge of PPI, we favor shorts from $558.30 to $556.50 and perhaps to the lower extended targets where we would look for a  mean reversion long. For Friday our model projects a range of $553 to $561 (white box on chart) implying trending price action on Friday. Should $555 fail to hold, price will dip below the current trend channel and likely seek the lower sub channel at $552.50.

The market will also need to digest earnings premarket from the large money center banks including JPM, WFC, and C in addition to reacting to PPI data. As we stated yesterday interest rate policy alone is not enough to push the market higher without other favorable economic news. The big banks will help provide information for market participants to digest which should lead to fairly good-sized moves on Friday. Trade what you see post PPI and be sure to obtain updates to the model’s levels from the Premarket Market report before the open.

Dealer positioning for Friday to the upside has Dealers selling $561 to $565 Calls in tiny size while also buying $557 to $560 Calls in some size. This implies Dealers believe prices on Friday will rally to as high as $563. Dealers are spending their money to buy Calls in size so they have some confidence the market will bounce tomorrow. To the downside Dealers are buying $556 to $550 and lower strike Puts in a 2:1 ratio to the Calls they are buying implying little concern prices will continue to fall. While Dealers own plenty of downside protection, their positioning certainly implies a rally on PPI to at least $560, reversing part of today’s decline. Any failure of $556 is likely to bring in lower prices to as low as $550, yet Dealers are clearly positioned for a move higher on Friday. As such we would look for the market to attempt to test our lower extended target and fail where we would then look for a mean reversion long off a failed break lower. This is a low probability trade with no more than a 40% chance of success so trade in small size accordingly.

Looking to Friday next week, Dealers are selling $557 to $562 and higher strike Calls while also selling $552 Puts. This implies the market is likely to move more sideways next week with a low of $552 and a high of $562. Dealers have sold quite a few $562 Calls, which implies little chance the market makes a significant new high next week. To the downside Dealers are buying $553 to $545 and much lower strike Puts in a 2:1 ratio to the Calls they are selling, with a balance positioned for the end of next week. Perhaps they believe earnings will support the bull market and today’s shift into small caps is actually healthy for the broader markets. That said, Dealers are heavily hedged for prices lower than $545 so should this level fail, they expect a much deeper pullback. We see this as a remote possibility for next week. But as we stated yesterday, we certainly advise any long book add protection to hedge downside risk. Today is day 347 without the market having a 2% sell off day with a record of 377 days. The probability exists this record will break sometime in August.

Be sure to check in with Market Sentiment Newsletter premarket given Dealer positioning changes each day, and be sure to check 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.