Market Insights: Tuesday, July 23rd, 2024.
A sideways day for SPY with price spending most of the day bouncing between support at $554.50 and resistance at $556. In the last hour the market fell off a bit to close the day down 16 basis points at $553.78. SPY rallied off support to $556.74 after the open where it stalled and eventually worked its’ way back down to the $554.50 level where it traded sideways until the close. There was little to do in this tight range as it was mostly chop and noise, as we indicated it would likely be yesterday. We even stated, “big reversal day…or not?” and clearly the not part of that equation was correct. The Nasdaq fared about the same as SPY, losing .35% with the DOW falling .14% with IWM rallying 1.06%. Mag 7 stocks, with the exception of TSLA and NFLX moved higher with NVDA falling .9%. Volume for SPY was extremely light at 34.44 million shares.
10-year Treasury yields were unchanged, down 2 basis points, with Crude dropping .97%, closing under $78. Gold rose .54% with Bitcoin slipping 2.39% as Ether ETF’s came to market and traders rotated out of Bitcoin to the new ETFs. We remain bullish Gold, Silver, and Bitcoin above $60K.
In Monday’s newsletter, we stated our model was expecting prices to stall and likely mean revert. We favored longs off support and mean reversion shorts off resistance and while the range today was quite narrow, the market did precisely what was projected, rallying off support and mean reverting off resistance. Traders with the Market State Indicator saw this set up in real time. But for everyone else, it was a pretty slow and uneventful day, filled with noise and chop. We mentioned and continue to stress between $550 and $560 traders should expect noise and lots of false starts which go nowhere. We continue to reiterate not to be fooled by this rally, given bears are in control until the market firmly overtakes $555. Therefore we remain bullish above $560 and bearish below $550 and like today, in between will be noise with two-way trading. While the bulls really want to take charge, there are some big-name earnings out after the close including TSLA and GOOGL, as well as companies like Visa. These have the potential to move the markets overnight and any hint of weakness will likely push prices lower. We continue to stress the market has moved into a more seasonally bearish period so it would not surprise us to see lower prices over the next few months.
In the premarket at 8:03 am ET, we stated the market had some momentum to push toward $557 and that reaching $560, while possible, was unlikely. We stated should $554 fail, the market could drop to $550. We broke $554 in the last 30 minutes and hit a low on the day of $553.28. Again the premarket report provided additional insight into the day and projected a tight-ranging day with little to trade. We take days like this off to study and improve our craft because when moving day comes, we want to be ready to take advantage of it. Having access to the post and premarket reports should make your trading experience much simpler as well as improve your daily trading plan.
There were no economic reports today and only PMI slated on Wednesday. Google and TSLA certainly can shake things up along with PMI so for Wednesday, be careful to trade what you see. $555 and $560 continue to be levels needed to be overcome for any sustained rally toward the highs. And any break of $550 will bring in lower levels. The market is trading in a bear channel and is up against the upper trend line. As we mentioned yesterday, when this happened in April, the market sold off for six days straight. Relief rallies can be short covering traps so tomorrow be aware of this potential risk. With price closing at $553.78, there is a strong likelihood the market will fall to $550 overnight where we suspect it will find at least, temporary support. But this is where the Market State Indicator becomes quite valuable. Depending on what it prints overnight, we may want to long off support or simply stay short all day. SPY $530 - $532 is in play and while we are bullish above $520 longer term, it’s possible we visit these levels before this pullback is over. Be certain to check the premarket report for more updated information for Wednesday.
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 just below overhead resistance with extended targets below. In this state we favor short trades off resistance at $554 to support at $553.25. We do not take mean reversion longs when the indicator is printing extended targets. The indicator rescaled lower quickly into the close so it’s highly probably prices will fall overnight. In the premarket if the indicator has continued to rescale lower, favor shorts to support. If price instead goes sideways and the indicator stops rescaling lower, and if there are no olive-colored extended targets, we like mean reversion longs off support in the $550 zone. Be careful at this level because this is the DMZ where below $550 our model is decidedly bearish. We would not favor holding trades for long on Wednesday, until we obtained updated information from the indicator and or the premarket report. Be sure to combine all of these pieces of information to determine the best plan of action for the day. For Wednesday our model projects a range of $546 to $556 (white box on chart), about the same size as today. While this size implies trending price action, this needs to be viewed in the context of where price is in terms of major support and resistance. While it’s very possible and even probable price falls tomorrow and continues to fall, we would be a little cautious given the low volume and low VIX environment. These two combined can make for some pretty dramatic swings both ways. Be careful not to get caught in any of the traps which are sure to arise on Wednesday. And of course 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 Wednesday to the upside has Dealers selling $554 to $557 and higher strike Calls, while also buying very small quantities of $559 Calls. This positioning implies the belief that prices will likely fail to overcome $557 but if they do break this level, there is a likelihood price could move to $560. This is the gas in the tank equation we mentioned above. What do the bulls have left to turn this relief rally into a bull trend. Certainly there is no chance, at least as the Dealers see it, that prices will break $560. To the downside Dealers are buying $553 to $549 and lower strike Puts in a 4:1 ratio to the Calls they are selling implying more concern about lower prices. They were balanced coming into today. Dealers appear to want to believe there could be another leg to this rally, but are positioning for lower prices. Any failure of $552 and Dealers believe prices could drop to as low as $549 fairly quickly.
Looking to Friday, Dealers are selling $561 to $565 and higher strike Calls in very large size while also buying $554 to $560 Calls in small size. Dealers are certainly adding to their long Calls hoping the markets reward positive economic and or earnings with a push to as high as $565. To the downside Dealers are buying $553 to $545 and lower strike Puts in a 4:1 ratio to the Calls they are selling, adding to their downside protection. Dealers are prepared for price to fall, should $552 fail. This positioning has changed overnight to a more bearish undertone. Today is day 355 without SPY having a 2% sell off day with a record of 377 days. It seems even more likely the S&P and therefore SPY is destined have a 2+% sell off day 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.
