Market Insights: Wednesday, July 24th, 2024.

A huge red day for SPY with price dropping overnight close to $5 and continuing to fall until thirty minutes before the close, reaching a low of $540.29 before closing at $541.23, down 2.27%. A relentless red day and the worst since 2022 with the first 2% drop in 356 trading days. This streak was the longest for SPY since 2007 and something we have been mentioning for weeks. Tech fared worse than the S&P with the Nasdaq falling 3.64% ending its’ streak of more than 400 days without a decline of 3% or more. Selling picked up steam as the day progressed with volumes increasing all day, further solidifying today’s drop. More selling is likely to follow. Investor’s feared comments by ex-Fed chief Dudley warning of a recession if the Federal Reserve didn’t cut rates soon, was partially to blame for today’s decline. But earnings from V, GOOGL and TSLA are what likely fueled today’s drop. We stated the last two days “big reversal day…or not?” and once again, the not part of the equation won out today. The DOW also suffered, dropping 1.25% with IWM falling 2.13%. Mag 7 stocks took it on the chin including NVDA which fell 6.8%. Volume for SPY was high at 74.46 million shares, again a harbinger of things still to come.

10-year Treasury yields rallied .82%, as to be expected, with Crude virtually unchanged. Gold fell .47% with Bitcoin falling .92% at $65K. We are bullish Gold, Silver, and Bitcoin above $60K.

In Tuesday’s newsletter, we stated our model expected prices to fall overnight and that $550 was the line in the sand, above which we favored small mean reversion longs and below, favored getting short and staying short all day. We reiterated not to be fooled by this rally, given bears are in control until the market firmly overtakes $555. With the market opening at $548.86, following the plan and going short, proved to be the perfect trade once again. The market paused at $548 but continued to press lower to the $545 zone before this level gave way with price continuing to the lows of the day in the last hour. On days like this we do not even think about mean reversion longs and simply look for levels to jump on the trend and stay with it. Yesterday we stated V, GOOGL and TSLA “have the potential to move the markets overnight and any hint of weakness will likely push prices lower”. We also stressed the market “has moved into a more seasonally bearish period so it would not surprise us to see lower prices”. Once again, our model provided plenty of warnings for our readers to capitalize on today’s decline for massive gains.

In the premarket at 8:41 am ET, we stated the market opened with a strong bearish lean and that breaking $548.10 would lead to substantially lower prices. We stated getting above $550 would be a struggle. Certainly the break of $548.10 just after the open concurred with yesterday’s post market report and as we say all the time, when both reports contain similar information, it’s money in the bank so get on the trade and ride it for all it’s worth. And today was no exception. The pre and post market reports are designed to make trading simpler and are based on sophisticated algorithms that seek and identify the highest probable outcome for the day. While nothing is 100%, our accuracy is outstanding and surely high enough for every trader to profit.

PMI was released today with better than anticipated growth, primarily coming from the Services sector. Overall the report was a mixed bag given employment is growing at a slower pace and outlook is falling due to political uncertainty. Markets do not like certainty so expect more volatility until the elections. Thursday has Advance GDP, Unemployment Claims and slew of corporate earnings. But the bigger event is Friday’s Core PCE which is a Fed favorite so prepare for more volatility on Friday. The market is trading in the middle of a bear channel with plenty of room to the downside. We mentioned yesterday, if this pullback is like April when the market sold off for six days straight, expect more weakness for at least a few more days. With price closing at $541.23, there is a likelihood the market falls overnight where we suspect it will find, at least temporarily, support. This is where our Market State Indicator becomes quite valuable. Depending on what the indicator prints overnight, we may want to long off support or simply have another day where we trade short all day. As we have stated for several days, SPY $530 - $532 is in play and even though we remain bullish above $520 longer term, it would not surprise us to see price fall to these levels. Price is currently at the 50 DMA so it’s likely the market takes a breathe tomorrow before plotting its’ next move. Probabilities favor a continued decline to at least the 100 DMA, even though this did not happen in April. But this is not April as we are in a seasonally bearish period and there is lots of uncertainty about the election. Typical pullbacks exceed 13% and so far, this isn’t even 5%. We would caution anyone thinking it’s time to buy the dip. But be sure to check the premarket report 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 right at support with extended targets below. In this state we favor short trades off resistance at $545.54 to support at $542.18. We do not take mean reversion longs when the indicator is printing extended targets. The indicator rescaled lower only once today, continuing to print extended targets below support. For tomorrow it’s very important to get a read from this indicator during the premarket to see if extended targets continue to print. If not, a small mean reversion long off support has a 40% chance of being successful. If extended targets continue to print, fade any rallies back toward the extended target at $538.08. There isn’t much support below the current level until $534, and then $532 below that. So we continue to favor shorts until the market reclaims $550. $550 remains the dividing line…below we favor shorts, between $550 to $555 we favor two-way trading and above $555 we favor small longs to $560. For Thursday our model projects a range of $535.50 to $548 (white box on chart), expanding from today, which implies more trending price action for Thursday. Given we lost multiple major support levels today and are at the 50 DMA, it’s possible Thursday is a consolidation day, with a slight gain. But again, do not fall for any rally as these are likely traps which have a high probability of failing.

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 Thursday to the upside has Dealers selling $542 to $550 and higher strike Calls, while also selling small quantities of $540 to $510 Puts. This positioning implies the belief that prices are likely at a temporary floor and it’s unlikely we will see much more weakness on Thursday. That said, Dealers are not overly optimistic prices will rally either given they are selling Calls so close to the money. It appears Dealers believe any rally will stall at $544 while any decline will at least pause at $535. Should price break $550, Dealers are back to buying Calls to participate in a rally to $560, although based on the numbers they are trading, they see this as an extremely low probability for Thursday. To the downside Dealers are not holding many Puts in any real size. They made all kinds of money today and simply have not yet added back to their downside Put protection. That doesn’t mean that first thing in the morning, they won’t load the boat. Puts are very expensive right now and it’s likely Dealers want to see how things shake out a bit before getting overly aggressive with Put buying. Of course Dealers are required to hedge their bets so we suspect this positioning changes quite a bit at the open and perhaps overnight, as it’s quite likely Dealers have moved into Futures to cover any overnight risk.

Looking to Friday, Dealers are selling $557 to $565 and higher strike Calls while also buying $542 to $556 Calls. They are buying more Calls than they are selling which implies some belief that prices will start to move higher by Friday. This fits our model’s general belief that we may see a day or two of consolidation with slightly higher prices, before moving lower. To the downside Dealers are buying $540 to $530 and lower strike Puts in a 2:3 ratio to the Calls they are buying/selling. They are holding more long Calls than downside protection which implies Dealers believe the market will rally to at least $557 by Friday. Be very careful interpreting this information however, as it’s highly likely this is skewed and Dealers have moved heavily into Futures due to the cost of Puts. This positioning is contrary to what our model sees this week, so when there are opposing views, always err on the side of caution. Like positioning for tomorrow, it’s very likely Dealer positioning changes at the open. TradeHawk is a free tool that everyone can download so we highly recommend you learn to use this product and take cues from our interpretation of this data so you can do it yourself in real time.

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.