Market Insights: Friday, July 12th, 2024.
SPY opened up $1.15 today after a hotter than expected PPI reading showing inflation at the wholesale level accelerated to its highest rate since March 2023. That is bad news for rate cuts one day after the government announced the rate of consumer price inflation declined. The PPI is the Feds favorite indicator so perhaps rate cuts that were all but guaranteed yesterday are no longer a given. While SPY spiked lower on the news in the premarket, by the open prices started to rise and continued higher until @ 2 pm ET, reaching $563.67 before finally falling to close up .63% on the day at $559.99. Once again, this price action, a big rally that reverses to end mid-range is typically a bearish sign. While we didn’t get any follow through to the downside today, it would not surprise us to see further follow through to the downside next week. Mag 7 stocks initially all rallied except META, but ended the day mixed with GOOGL, MSFT, NFLX, META AND AMAZN all ending in the red. TSLA and APPL were the exceptions while NVDA also rallied 1.45%. The Nasdaq held on to some of its gains as well, closing up .59% while the DOW rallied .62%, with the Russell once again outperforming the other indices, rallying 1.17%. The Russell breaking above $212 technically supports higher prices for this index so perhaps the great rotation into small caps this time is the real deal. Volume for SPY was higher than average at 52.86 million shares.
10-year Treasury yields fell another .64%, dipping below 4.2% for the first time since March. Crude gave back yesterday’s gains, falling .76%, remaining above $82. Gold pulled back .19% but remained above $2400 with Bitcoin also rising .37% and holding above $57K. We remain bullish Gold and Silver and Bitcoin above $60K.
In Thursday’s newsletter, we stated our model was bullish above $555 and stated we favored a bounce from the lows to $558. We felt a failure of $555 was a low probability for the day and the probabilities of a new high were nonexistent. We also stated after PPI we would expect the market to attempt to reach our lower extended target at $554.83 with support at $556.50, and that we favored a mean reversion long off these levels. And in the premarket, the initial reaction to PPI was a move lower to $555.18 where the market reversed on a failed breakdown and moved straight up to $561.43, before pulling back to set up another leg to the highs of the day. A perfect set up from PPI for those who had these levels and knew what to expect. And while PPI led some to believe bad news is bad news, as we have stated in the past, often times the first move after an economic news release is a trap and to fade these moves. Given we had a plan to take a mean reversion long, set up in yesterday’s post market recap, certainly today that trade was easy on to take with first targets at $558.30 and trailing to at least $561.40. We continue to recommend utilizing our Market State Indicator, which updates our model’s levels in real time, which once again today provided a perfect picture of how to trade the move off today’s lows.
In the premarket at 8:44 am ET, we stated SPY would look to unwind the downside pressure from yesterday and reclaim higher support; translation, go long. We also stated that once price started to slip or failed to continue to higher targets, we expected price to fall back downward. We favored longs off $557 with an initial target at $560.55 with the potential to reach $562.35. And once again, to the penny, longs off $557 rallied initially to $561.88 before pulling back to support at $560.45, before marching to the highs of the day. At the highs, the market moved sideways for two hours before finally succumbing and falling back downward, as we suggested would happen in the premarket report. Once again, the premarket report provided actionable information for both the long trade at the open (for those who do not trade the premarket) to our upper targets and the short trade off the highs falling some $4. Put the two reports together and you had the perfect plan of action for the day once again. Add the Market State indicator and see in real time these levels.
Monday does not have any material economic releases but Powell is speaking once again and it’s possible he tempers his dovish stance after today’s PPI reading. Powell speaks at noon ET so be mindful his words may move the market. SPY is currently at $559.99 and we continue to remain bullish above $555. A failure of $558 will likely retest the lows from Thursday at $555.83, and certainly a failure of $555, and the market will attempt to reach $551. For Monday we expect prices to settle down and trade in a range between $556 and $563. Probabilities continue to support higher prices with price trading in the bull channel from the April lows. And while we did not get the follow through today needed for the bears to claim victory, today’s price action was not great for the bulls. Monday it’s likely the market tests both the lows and the highs of today, but ends the day relatively unchanged to slightly higher. This behavior will effectively match what happened on and after April 4th which led to further declines into the end of April. Markets like to look left to know what comes next so do not be surprised if the market ranges Monday, ending slightly higher, only to sell off on Tuesday or Wednesday. There are several major earning releases next week which represent a broad swath of the economy, including banks, NFLX and Healthcare. All of the big banks today beat on earnings and revenue, yet they all sold off on guidance. Our model projects only a slight chance of new highs on Monday with the market taking directional cues from earnings for the next several weeks. The markets are also moving from the most seasonally bullish period to a seasonally bearish period from August through October. Be certain to check the post and premarket reports for updated information which will guide you through this more perilous period.
Looking at a 2-minute chart of SPY with our Market State indicator, the indicator is in a ranging market state with prices closing midrange. Support is $558.35 where we will look for longs and resistance is $561.88 where we will look for shorts. Notice we switched the chart to ETH for today and will typically do so on days where major economic news are released premarket. This provides more granularity for the indicator to make its’ predictions. Today the Market State Indicator rescaled at 9:50 am ET from a bearish state to a ranging state which was the first indication prices were going to move higher. It continued to rescale seven more times higher in rapid succession to a bullish trending market state while also printing extended targets. Again as we state often, this indicates a strong trend with the herd participating in the move. In other words, get long and stay long. Once the extended target was hit at 13:44 pm ET, no more extended targets printed and the indicator stopped rescaling higher which was the cue to get short for a mean reversion trade. The indicator rescaled once again lower to a ranging state which provided confirmation to hold onto the short trade into the close. The Market State indicator once again provided simple and clear indications of the long off the PPI lows as well as the short at today’s highs. For Monday our model projects a range of $557 to $566 (white box on chart), narrowing a bit from today implying more sideways price action on Monday.
Dealer positioning for Monday to the upside has Dealers selling $562 to $563 and higher strike Calls while also buying small quantities of $561 Calls. This implies Dealers believe prices on Monday may resume their march higher but perhaps rally only as far as $563. To the downside Dealers are buying $559 to $555 and lower strike Puts in a 3:1 ratio to the Calls they are selling implying some concern prices will continue to fall. A 3:1 ratio is still somewhat balanced so it’s likely Dealers positioning confirms our model’s projections of a ranging market on Monday with a slight long bias.
Looking to next Friday, Dealers are selling $561 to $565 and higher strike Calls in size implying the market is likely to move sideways to up next week to as high as $565, but more likely stalling at $562. To the downside Dealers are buying $558 to $545 and much lower strike Puts in a 4:1 ratio to the Calls they are selling, adding to their protection on growing concerns prices will move lower by next Friday. Dealers are heavily hedged below $545 as well so should $555 fail, they expect a pullback to possibly $545. Today is day 348 without the market having a 2% sell off day with a record of 377 days. The probability exists this record will break 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.
