Market Insights: Thursday, July 25th, 2024.
Another red day for SPY, which perhaps felt worse than the numbers display. SPY opened up slightly, fell out of the gate to $537.64 before violently reversing, rallying all the way to the high of the day by 1 pm ET to $547.46. But as markets like to do, the squeeze was short lived and immediately sold off to end the day near the lows of the day at $538.41, down .52%. Big up and big down = big confusion and certainly many were left confused by today’s price action. Closing near the lows of the day is an ominous sign for the markets, at least in the short term. The gap from June 11th closed which likely prompted the morning reversal. But closing back down near the lows certainly leaves doubt as to when the market will find a bottom. Tech continued to struggle, dropping 1.06% with the DOW gaining .20% and IWM rallying, up 1.25%. All Mag 7 with the exception of TSLA fell as well. NVDA too lost another 1.72%. Volume for SPY was once again heavy at 61.06 million shares.
10-year Treasury yields eased 1% with Crude gaining 1.09%. Gold fell 1.4% closing below $2400 with Bitcoin gaining .9%, closing in on $66K. We are bullish Gold, Silver, and Bitcoin above $60K.
In Wednesday’s newsletter, we stated our model projected prices would fall overnight and advised clients the market would trap traders both ways in the current environment. We stated the best strategy for today was to fade rallies down to our extended targets at $538.07. We also suggested a mean reversion long off support had a 40% chance of success and would consider this long under the right conditions (more below). We also stated today would likely be a trending day which means get with the trend and stay with the trend. And the market did fall overnight, finding support at $539 before the open, trading sideways for over an hour until the open, when it quickly flashed lower, beyond overnight support to the $538.08 level identified in yesterday’s post market recap. This flash lower set up a textbook failed breakdown and trap for the bears by immediately reversing all the way to the highs of the day. We posted last week what a failed breakdown looks like. But in case you missed it, here it is once again:
If you look at the breakdown at 10:08 am ET on SPY, you will see the exact patten above where price looked like it was breaking down further, just to fail and make a hard reversal. Failed breakouts have a higher probability of success than failed breakdowns. But certainly this is a pattern all traders should learn to master. Today this pattern generated massive gains for those who understand it.
As we have stated for several days, don’t get fooled by rallies given the bears are firmly in control of this market. That view hasn’t changed for Friday. We recommend selling rallies at resistance. $548 to $550 is a level we have identified several times as the line in the sand, above which we favor small longs and below which, we favor getting short and staying short. Again nothing that happened today has changed this view. Certainly selling the rally from $547.46 was another perfect trade given the market dropped like a rock back to support at $538. Bears will maintain control until the market firmly overtakes $555. Below $538 there is little resistance to much lower levels. Should $538 give way, we favor shorts to $534 with a reasonably high probability of the market continuing to $530. We once again will consider mean reversion longs, but only from lower levels given $538 held once and a second test is unlikely to generate the same results as today. Again the market is in a seasonally bearish period so expect lower prices still, at least until August.
In the premarket at 8:59 am ET, we stated the market did not appear to be positioned for another round of selling. While we also stated a strong recovery was unlikely, some degree of stabilization was likely. We stated $538 is likely the max low for the day and $546.25 was likely the max high. The market fell to $538 at the open then rallied to $546 and beyond. Again two major levels with the days’ bias in advance of the open for traders to incorporate into their daily plan. The $538 was also identified in the post market recap and as we state all the time, confluence of information is money in the bank. If both reports agree, load the boat at the levels identified. This is actionable information that every trader should learn to incorporate into their daily plan.
Today, very strong 2nd quarter GDP numbers were released in the premarket showing the strength of the economy. This economic good news should have been met with selling pressure, but instead the market initially rallied 1% before ending the day basically flat. Tomorrow Core PCE will be released and if the numbers are weaker than expected, the Feds should be able to reiterate their rate cut plans for later this year. A hot PCE and the market will drop like a stone. We advise traders to watch this report carefully in the premarket to gauge the markets’ reaction. SPY is trading in the middle of a bear channel with plenty of room to the downside and today is day seven of the selloff from the all-time highs. In April the selloff lasted 14 days, so if history repeats, perhaps we are halfway through this pullback. That said, we got to the 50 DMA this time in six days vs nine days, so perhaps there are three or four more days of selling pressure before the market bounces…if history repeats. Price today closed near its’ lows at major support so probabilities for Friday favor the market attempting to rally overnight to $540 and perhaps to $542. Again our Market State Indicator can be quite helpful early tomorrow to see how overnight price action modified the indicator. We reiterate SPY $530 - $532 is in a viable target for this pullback. Price is currently below the 50 DMA so probabilities once again favor a sideways to slightly up day on Friday, allowing the market to gain momentum for its’ next push lower. We mentioned yesterday the average pullback exceeds 13% so there is certainly more room to the downside. Be sure to check the premarket report for more updated information for Friday.
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 below support, at the extended target at $538.17. In this state we favor short trades off resistance at $539.96 and $541.75. We do not take mean reversion longs when the indicator is printing extended targets, which at the close were still printing. The indicator rescaled lower overnight. But after the failed breakdown, rescaled to a bullish trending market state several times, indicating extreme strength to the 1% push to the highs of the day. The indicator also printed extended targets which further reinforced the strength of the “herd”. At the highs, there were no longer extended targets and given the market had reached a major resistance level of $538, mean reversion shorts had a 40% chance of success. The indicator then rescaled lower to a ranging state, then to a bearish trending market state reinforcing the move back to the lows. Once again, the Market State Indicator provided material information to be used in concert with the levels provided in these daily reports for our traders to have a very profitable and successful day. As we stated above, there is little support below $538 until $534, and then $532. We continue to favor shorts from resistance until the market reclaims $550 with this level being the dividing line between the bulls and the bears. For Friday our model projects a range of $533.50 to $548 (white box on chart), expanding further from today implying more trending price action on Friday. At some point we will have a consolidation day but rallies remain trap filled with a high probability of failing so be forewarned. 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 Friday to the upside has Dealers selling $556 to $565 and higher strike Calls in very small size while also buying larger quantities of $539 to $555 Calls. This positioning implies the belief that prices will temporary rise on Friday to as high as $555. This seems very optimistic for Friday. Instead our interpretation is that Calls are very inexpensive so Dealers are not selling but instead buying in case a rally does develop. To the downside Dealers have loaded up on Puts as we suggested they would do in yesterday’s post. Dealers are buying $538 to $530 Puts in a 1:1 ratio to the Calls they are buying/selling, implying a balanced view of the market for Friday. Certainly this would support our model’s conclusion that prices may stabilize here for a day or two and even possibly recover a bit on Friday. But should $537 fail, Dealers are positioned to make all kinds of money on the way down.
Looking out to next Friday, Dealers are selling $549 to $555 and higher strike Calls, while also buying $539 to $548 Calls. They are selling more Calls than they are buying, however they are certainly spending money on the long side to be able to participate in any rally next week. Positioning implies a possible rally by next Friday to at least $550, which is that line in the sand we keep mentioning. To the downside Dealers are buying $538 to $525 and lower strike Puts in a 2:1 ratio to the Calls they are buying/selling. Again this positioning has shifted materially from yesterday. This positioning is somewhat balanced, implying the belief a possible floor in the market will present next week. While Dealers have Put protection materially lower than today’s close, it appears they believe should $538 fail to hold, the market will fund support at $530, again another level we have identified for a few days.
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.
