Market Insights: Tuesday, July 16th, 2024.

SPY opened up $1.34 today on the continued belief that Trump will be elected President, stronger than expected retail sales and better than expected earnings from several banks. The market initially fell after the open after finding resistance at $563.50, but quickly found support at @ $562 and moved higher. At 11 am ET the market once again sold off, retesting $562.50 before an afternoon push on Fed Kugler’s comments that the Feds do not want the labor market to cool too much. This pushed SPY to yet another new all-time high of $565.16, ending the day a tad lower at $564.86. There was major rotation into value with Mag 7 stocks mixed on the day. AMZN, AAPL and TLSA continued to rally while all others fell, including NVDA. The Nasdaq fell 6 basis points, while the DOW rallied 1.85% with the Russell continuing to shine, up a whopping 3.41%. We mentioned Friday and yesterday that IWM breaking above $212 technically supports higher prices and that the rotation into small caps this time may possibly be the real deal. Volume for SPY was light at 36.47 million shares, which isn’t horrible by summer standards.

10-year Treasury yields continued to slide falling 1.72%, closing below 4.2% with Crude also falling 1.39%, closing below $81. Gold continued to push higher, closing up 1.92% closing in on $2500. Bitcoin moved higher by .48% trading above $65K for the first time since June 20^th. We continue to remain bullish Gold and Silver and Bitcoin above $60K, although believe Gold will find resistance above $2500.

In Monday’s newsletter, we stated our model was bullish above $558 and a failure of $558 would retest the lows at $555.83. We stated we expected two-way trading today and certainly this is what we got most of the day. We stated higher prices were likely to reach as high as $565, making a new all-time high and once again this is what the market delivered. We stated we believed the range would expand and would look for longs above $560 to $563, and that would only short below $560. The market stayed above $560 all day so it was long only today from support which worked well right into the close. Today was similar to yesterday in that it was choppy two-way trading, but with a decidedly bullish stance. Our Market State Indicator adjusted in real time today to the day’s price action and provided very clear information on the best approach to trading today’s market.

In the premarket at 9:14 am ET, we stated SPY would trade in a similar fashion to yesterday and if $563.25 held, it was likely the market would move higher. We stated we favored longs above this level and certainly today both in the 11 am hour and 2 pm hour, the market provided perfect entries for this actionable advice. Finally in the premarket we reiterated that short trades would be slippery and dangerous and did not recommend chasing the short side. Days like yesterday and today are challenging and trading countertrend should only be taken by the most experienced traders who can adjust to price in real time. Longs were the easy trade all day and our model provided the highest and best probabilities for the day for our clients.

Wednesday there is no material economic news releases so the day is likely to be more of the same, with some possible movement coming from Fed speak from Barkin, Waller and earnings reports. We don’t expect any major surprises on Wednesday. SPY is currently at $564.86 and we are bullish above $560. A failure of $560 has a 40% probability the market will work its way toward the lows from last Thursday at $555.83. Certainly a failure of $555, and the market will fall substantially further. For Wednesday we expect price to continue to trade much like today with two-way trading between $560 and $568, with higher prices probable. Price continues to trade in the bull channel from the April lows and there is still room to the upside. We continue to make higher highs and higher lows in a very tight microchannel, which is a sign of market strength. Do not underestimate the strength of this market. We continue to see probabilities favoring higher prices and the longer we move away from last Thursday’s decline, the less relevant it becomes. Be certain to check the post and premarket reports for updated information.

Looking at a 2-minute chart of SPY with our Market State indicator, the indicator is currently in a trending market state with prices closing near resistance at $565.16. The range is narrow with support at $563.80, There are no extended targets above resistance implying the likelihood price will mean revert, most likely in the post market, potentially reaching support at $563.80. As you can see from the image above, the indicator rescaled to a trending state premarket and provide perfect levels from which to go long and levels to take profits. For much of the afternoon session the indicator was in a ranging state, again much like yesterday, which was simply chop and to be avoided until, as advised in the premarket report, price broke on volume above $563.25, reaching new highs. During the 2 pm and later hours, extended targets printed which further reinforced the strength of the bull trend, implying get long and stay long to $565, a level we have identified several times the past few days as a level which would be quite difficult to overcome. For Wednesday we continue to favor longs above $562 to $565. Below $563 its likely the market retests $562.50 where we would once again seek longs. We continue to advise avoiding short trades. We do, however, believe there is the potential for a mean reversion short from the all-time highs, but only on a failed breakout. We provided an image last week of how to best trade a failed breakout. We suggest you study this image to understand what we mean when we say a failed breakout or failed breakdown. For Wednesday our model projects a range of $560 to $569 (white box on chart), the same size as today, implying similar price behavior on Wednesday as today. Again more two-way trading is likely with a long bias. The market state indicator will remain in bullish trending state with price above $563.80 and below will likely change to a ranging state, which will certainly be filled with chop. We do not recommend trading Wednesday when the indicator flips to a ranging state as it will likely be much like today without clear targets. The Market State indicator provides highly valuable and actionable information in real time with the directional bias for your trades including levels to trade to and from and we continue to recommend our clients learn to utilize this tool to be more effective day in and day out.

Dealer positioning for tomorrow to the upside has Dealers selling $565 to $570 and higher strike Calls. This implies Dealers believe prices on Wednesday may resume their march higher to perhaps as high as $570, potentially making another new high. As we stated above, price is trading in a three-day micro channel with higher highs and higher lows, which is an indication of strength. Until price drops below $562, there is a high probability price will simply continue to grind higher. To the downside Dealers are buying $564 to $560 and lower strike Puts in a less than 1:1 ratio to the Calls they are selling implying virtually no concern prices will fall on Wednesday. A balanced ratio is 2 or 3:1 so less than 1:1 implies little fear of lower prices. Certainly our model sees the next level to overcome for the bulls to be $570 where we see prices stalling, at least for tomorrow. Dealer positioning confirms our model’s assessment.

Looking to Friday, Dealers are selling $565 to $570 and higher strike Calls while also selling $562 Puts in some size. Dealers are selling Calls in a 2:1 ratio to the Puts they are selling implying a conviction that this week, prices will stay above $562 and below $570. To the downside Dealers are buying $560 to $550 and much lower strike Puts in a 10:1 ratio to the Calls they are selling, holding significant downside protection. 10:1 is quite a bit of protection but it’s important to look at this in the context of the upside analysis. When Dealers sell Puts, they are confident higher prices will follow, especially with the ratio above. Therefore the 10:1 Put to Call ratio to the downside is strictly a hedge, even if it’s quite a large hedge. Dealers firmly believe $562 is the likely floor in the market this week with higher prices to continue. But if $562 fails, very quickly Dealers positioning will turn quite profitable with prices attempting to reach last Thursday’s $555 lows. Put protection is relatively cheap and Dealers have taken advantage of this by being heavily hedged below $562. Today is day 350 without the market having a 2% sell off day with a record of 377 days. Dealers seem to be increasingly aware that probabilities suggest this record will break in August, but it is highly unlikely to occur this week.

But Dealer positioning changes daily so be sure to check in with Market Sentiment Newsletter premarket as well as checking 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.