Market Insights: Monday, July 22nd, 2024.

A big reversal day for SPY, or is it? SPY gapped at the open over $4, rallying strongly overnight as Biden stepped out of the race for President. One would think Trump is better for the markets and perhaps that view is what is pushing the market up today. But it could also be the rotation out of Tech is overdone. Tech led the gains today while bond yields rose. SPY initially sold off from $554.37 at the open, but found support @ $551 and pushed right back to $554.37 before falling once more a bit lower to $551.02, the low of the day. Then the market decided it was done playing around and marched back to the high of the day at $555.27, settling at the close at $554.65, up 1.03%. Earnings continue to be strong and as we said Friday, there is nothing fundamental, except for higher-than-average PE ratios, that would cause the market to turn decidedly bearish. The Nasdaq gained 1.54% while the DOW rallied .32% with IWM popping 1.59%. Mag 7 stocks, with the exception of AAPL and AMZN, moved higher, including NVDA which was up over 4.75%. Volume for SPY was lower than average at 41.79 million shares, perhaps leaving a bit of doubt as to the strength of this reversal.

10-year Treasury yields jumped .31% with Crude dropping 2.33%, closing near $78. Gold was flat, down .1% closing just below $2400. Bitcoin too was flat dipping .07% but remaining over $68K. We continue to remain bullish Gold, Silver, and Bitcoin above $60K.

In Friday’s newsletter, we stated our model expected a relief rally and a trending day, possibly on Monday which is precisely what we got today. We stated if $550 held, the market would likely trade to $555 which needed to be reclaimed for any rally to be sustainable. We favored selling rallies but also favored mean reversion longs off lower support. Certainly selling $555 twice today were great trades, and the long off $550 in the noon hour was also a great trade. We stated not to be fooled by any rally and that bears are in control until the market firmly overtakes $555. And today on cue, the market hit $555 and failed more than once. Our model continues to see any move above $555 attempt to push to $560, where the market is likely to stall. Therefore we remain bullish above $560 and bearish below $550. In between will be mostly noise with two-way trading. While the bulls did good work today, and likely have some energy left for tomorrow, in the short term the bears are still in the driver’s seat until the $560 level can be reclaimed. Our model once again predicted today’s price action and provided all of the major levels to trade to and from with directional biases. We reiterate the market has now moved into a more seasonally bearish period so prepare accordingly. As you will see below, our Market State Indicator adjusted in real time several times today to provide perfect trading opportunities for profits all day.

In the premarket at 8:30 am ET, we stated the market was looking to recover but progress may be short lived. And shortly after the open, the market fell off the $555 “zone” all the way to support in the $550 range. We stated we favored longs above $552.85 and shorts below to $550. This two-way trading proved to be the perfect plan for the day once again. Readers who followed the advice provided in both the post and premarket reports had another great day.

There were no economic reports today and little news on Tuesday. Earnings have been solid and with Google and TSLA due tomorrow after the close, the market could move either way on Wednesday. $555 and $560 continue to remain levels needed to be overcome for any sustained rally toward the highs. The market is trading in a bear channel and is up against the upper trend line. When this last happened in April, the market sold off for six days straight as the relief rally was just a trap. Therefore we continue to advise caution until price clears $560 on volume. With price currently @ $555, our model suggests looking for longs off $552 should the market pull back overnight. But it also suggests shorts from $559 for a mean reversion to $555. We reiterate SPY $530 - $532 is in play in this current environment, even though longer term we remain bullish above $520. We have not had the model identify much lower targets in some time so be cautious. And be certain to check the premarket reports for more updated information for Tuesday.

Looking at a 2-minute chart of SPY with our Market State indicator, the indicator is currently in a bullish trending market state with prices closing above extended targets. With price above extended targets and the indicator failing to reset higher, it’s likely the market will stall at these levels and mean revert toward support below. The indicator rescaled several times today in the premarket moving from a bearish trending state to a bullish trending state, all the while printing extended targets above. In the premarket this was an indication that prices would rally. But by the open, price had exceeded the extended targets significantly without rescaling higher which gave us reason to believe a mean reversion short from major overhead resistance at $555 was the proper strategy. And sure enough this played out not once but twice, with price falling to the indicator’s support levels to the penny. In a bullish trending state we favor longs off support and the trade @ noon played out to perfection. Combining the information provided by the indicator with the post and premarket levels made it an easy day to trade both long and short. For Tuesday our model projects a range of $550 to $560 (white box on chart), larger than today, so perhaps more trending price action on Tuesday. That said, the $550 to $560 range is no mans land and is likely filled with traps both long and short. We advise caution in this range and favor trading only the extremes, selling the highs and buying the lows near our levels. While our model continues to favor the short side, the bulls still have some gas in the tank for a possible push higher tomorrow. For real-time updates to this information, incorporate the Market State indicator into your daily routine for trade direction and accurate price levels to trade to and from.

Dealer positioning for Tuesday to the upside has Dealers selling $557 to $560 and higher strike Calls, while also buying very small quantities of $555 to $556 Calls. This implies some minor belief, like our model above, there is energy left for the bulls to push a bit higher, but not likely beyond $560. In fact there is reason to believe based on Dealer positioning, $559 is the ceiling for tomorrow. To the downside Dealers are buying $553 to $548 and lower strike Puts in a 1:1 ratio to the Calls they are buying implying a balanced to slightly bullish market view for Tuesday. Again Dealers may think the relief rally has room to run until it reaches $560. Any failure of $552 and prices look poised to drop to as low as $548 fairly quickly. We see this a low probability for Tuesday, at least based on Dealer positioning.

Looking to Friday, Dealers are selling $560 to $565 and higher strike Calls in very large size while also buying $555 to $559 Calls in small size. Dealers seem to want to see some follow through to today’s rally, but are not willing to spend their money to do so. So they are selling massive quantities of Calls, implying little to no chance we break the all-time high this week. To the downside Dealers are buying $553 to $545 and lower strike Puts in a 2:1 ratio to the Calls they are selling. This implies some balance in the market this week with Dealers prepared for price to move either way. But Dealers do not anticipate any new highs or substantial lows until price breaks below $548. Therefore based on Dealer positioning, this could be a sideways week without much movement either way. Again the $550 to $560 zone is likely chop filled and Dealers want to see some resolution to this zone before committing capital one way or the other. Today is day 354 without SPY having a 2% sell off day with a record of 377 days. After a 3% sell off and a 1% gain today, SPY could easily drop 2% in one day and again, it would not be a big deal. It seems likely the S&P and therefore SPY is destined have a 2+% sell off day with probabilities suggesting this will happen between now and mid-August.

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.