Market Insights: Wednesday, July 17th, 2024.
SPY gapped down today in a big way, dropping $6.06 as the rotation out of technology picked up its’ pace. The Nasdaq had its’ worst day in close to two years while the DOW closed at a new all-time high. While Trump is expected to be elected President, some of his rhetoric about Taiwan and NATO contributed to today’s decline. With Trump comes chaos as he speaks without much concern about what may follow. Expect more volatility as the norm as Trump becomes more likely to be President. After gaping down overnight, the market bounced at the open but quickly faded and spent most of the day moving lower, closing near the lows of the session at $556.94, dropping 1.4% after reaching a low of $556.61. All Mag 7 stocks took it on the chin today falling from 1.33% to over 5.66%. Darling NDVA also fell 6.62%. As a result the Nasdaq shed 2.94%, while the DOW rallied .59% with the Russell giving up 1.05%. We mentioned after last Thursday markets like to do what they have done in the past and to look at what happened after April 4th for clues. We also suggested Tuesday or Wednesday this week a similar pattern to April may emerge. And on cue, the market delivered, just like it did on April 10th. Four days after a big sell-off it gapped down and once again, four days after last Thursday’s sell-off, here we are once again. Volume for SPY was heavy at 56.98 million shares which reinforces today’s decline.
10-year Treasury yields were basically unchanged, giving up 2 basis points with Crude reversing course and gaining 2.81% on a larger than expected draw on oil reserves, back above $83. Gold pulled back slightly dropping .41% while Bitcoin too gave up 1.25% but stayed above $64K. We continue to remain bullish Gold, Silver and Bitcoin above $60K, although believe Gold will find resistance above $2500. We do see Gold eventually reaching $3000, but it will not be a straight line and will spend some time consolidating @ $2500.
In Tuesday’s newsletter, we stated our model was bullish above $560 and a failure of $560 would work its’ way to as low as $555.83. While we anticipated much the same behavior of the past two days, but with the overnight gap down over $6, and opening below $560, shorts were the only trade for the day. The initial bounce at the open to $560 was a perfect place to short and holding to the lows of the day was the play. We have said for several days the price action from last Thursday created problems for the bulls as they have done just barely enough to keep the trend intact. We also said the market was in a topping formation, at least in the near term as we move into more seasonally bearish territory. The clues and warnings have been there for days and we hope our readers took heed. As you will see below, our Market State Indicator adjusted in real time today at the open to provide perfect trades for the day.
In the premarket at 8:34 am ET, we stated the overnight drop looked like it may reverse with buyers stepping in to prop the market up. Certainly at the open this happened with SPY popping close to $2. We also stated below $560, $555 was in play, validating the post market report from yesterday. As we state often, when both reports share similar information, take notice, and follow the advice provided. Of course as stated, below $560 the market fell over $4 making this an easy day to follow the actionable advice from these newsletters.
Thursday Unemployment Claims will be released premarket without much else, other than more Fed speakers in the afternoon. Therefore there doesn’t appear to be any major external catalysts to drive the market one way or the other. Very possible on Thursday we see a bit of a relief rally in both SPY and QQQ with SPY possibly reaching $560 to $562. SPY is currently at $558.10 rallying a bit in the aftermarket. We continue to remain bullish above $560 with any failure potentially retesting the lows from last Thursday of $555.83. A failure of $555 and the market will fall much further and much more quickly. Certainly today after the quick rally at the open, by 10 am ET the party was over for the bulls and the bears took hold and pressed getting close to but not quite to Thursday’s lows. This is actually good news for the bulls. No matter the amount of pressure exerted on the Nasdaq, SPY held above last Thursday’s low and the DOW made a new high. This is bullish and like April 11th, it’s very possible Thursday provides some relief to today’s decline. But do not get fooled by a rally tomorrow or Friday. It’s very likely with price now below the trend channel that has been in place since the April lows, and also sitting on the low subchannel trend line, price may bounce, but this pullback is likely far from over. In April we dropped over 5% from the then highs so something similar would put SPY at $532ish. That would effectively close the gap from June 12th which is certainly in play on further weakness. And yet above $520 the bull trend is still technically intact. There may be more short-term pain, but we would use these deep pullbacks as buying opportunities. Be certain to check the premarket reports for more updated information for Thursday.
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 near resistance at our extended targets at $556.94. Initial resistance is $558.44 with the next level being $559.95. There are extended targets still printing below which implies the herd is participating in this sell-off. Therefore the likelihood for Thursday is prices attempt to rally to as high as $560 and at least initially, sell back down to $556.94. The indicator rescaled five times today and all were as a bearish trending state. Once extended targets began printing at 10:06 am, our clients knew to get short and stay with the trend, adding at resistance, holding for major gains. This short trade set up several times today from the short @ 10 am to the additional short opportunities at 10:15 and certainly at 11 and 2:30 pm. Plenty of trading opportunities were provided by this indicator in real time. By combing this tool with the actionable information outlined in the post and premarket reports, we say quite frequently, trading does not get much easier than this. So again for Thursday we favor shorts from overhead resistance and will only consider longs above $560. What happens in the premarket is important for tomorrow morning so watch the Futures markets for clues. We do not favor a mean reversion long given our indicator is still printing extended targets. Should that cease, a mean reversion to $560 certainly has a 40% chance of success. For Thursday our model projects a range of $552 to $562.50 (white box on chart), expanding significantly so expect trending price action, meaning get with the trend and stay with the trend. And certainly for real time updates to this information, incorporate the Market State indicator into your daily routine, for trade direction and levels to trade to and from.
Dealer positioning for tomorrow to the upside has Dealers selling $563 to $570 and higher strike Calls, while also buying $557 to $562 Calls. This implies Dealers believe prices on Thursday have the potential to bounce and push to as high as $563. Dealers are buying Calls in a 1:1 ratio to the Calls they are selling. To the downside Dealers are buying $556 to $551 and lower strike Puts in 2:1 ratio to the Calls they are selling implying little concern prices will continue to fall on Thursday. Again this is a relatively balanced ratio which implies little fear of lower prices, particularly with Dealers buying Calls to participate in any upside. Should prices fall below $555, certainly Dealers are positioned to make money on a material sell off, much like they were today. They were heavily hedged coming into today and while once the $562 level failed, Dealers profited handsomely from their positioning.
Looking to Friday, Dealers are positioned much the same as today, selling $562 Calls while at the same time buying $557 to $561, and $563 to $564 Calls, then above $564 they are back to selling Calls from $565 to $570 and beyond. Complex positioning to the long side. But it seems to imply a rally to $562 is likely by Friday, where it may stall. But if the market does not stall, Dealers are prepared to profit from a break above $562 with a rally to $565, where they see the likely top for the week. Dealers are not selling Puts for Friday. $562 is a line in the sand for Dealers and has been this entire week, so long above $562 and short below. To the downside Dealers are buying $556 to $545 and much lower strike Puts, still in a greater than 10:1 ratio to the Calls they are selling, continuing to hold significant downside protection. As we stated yesterday, Dealers continue to believe $562 is the dividing line between bulls and bears and are positioned to make money above and below this level. We stated yesterday that Dealers were positioned for profits if price fell below $562 to $555 so certainly today, they had a very good day. While the Nasdaq fell over 2% today, this is day 351 without SPY having a 2% sell off day with a record of 377 days. With the Nasdaq resetting its’ streak, seems like the S&P and therefore SPY is destined to follow soon. Probabilities suggest this record will break in August.
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.
