Market Insights: Friday, July 26th, 2024.

A solidly green day for SPY with the market moving higher overnight, gapping up over $4 at the open and continuing to rise to overhead resistance at $547.17. An inline Core PCE report at 8:30 am ET contributed to about half of today’s gains. After reaching the high of the day, SPY retraced some, but managed to hold onto much of its’ gains, closing up 1.12% at $544.44. Like it did yesterday, moving above $547 has been a difficult task, but certainly today is good news for bulls who have been pretty much left for dead. The Nasdaq also managed a gain, moving over 1% higher as most Mag 7 stocks rallied, with the exception of NFLX, TSLA and GOOGL. NVDA too gained on the day. The DOW and IWM had a solid day, gaining 1.64% and 1.65% respectively. Volume for SPY was a bit higher than average at 53.65 million shares, giving some credence to todays’ move higher.

10-year Treasury yields fell 1.46% with Crude dropping 2.35%, closing at $76.44. Gold jumped 1.37%, remaining just below $2400 with Bitcoin popping a whopping 3.15%, moving above $67K. We are bullish Gold, Silver, and Bitcoin above $60K.

In Thursday’s newsletter, we stated our model projected prices would rise overnight to $540 to $542 and the market opened at $542.28. While we favored shorts from resistance at $541.75, the market pushed above this level in the first hour of the day, before breaking higher to the days’ highs. We stated yesterday to watch price action after the release of Core PCE for clues to the day, and once again remind clients when there is materially new information introduced to the market, trade what you see as the model’s predictions do not have the benefit of this new information. Watching the market as PCE was released gave clear indications that the market favored the news, creating a double bottom at $541.75, which led to the highs of the day. We also stated yesterday that today would be a trending day which means get with the trend and stay with the trend. Taking a long off support may have been difficult for many. But taking a mean reversion short from the highs at $547.19 certainly fit the plan for the day, given we advised clients all week to fade rallies to $548 - $550. In fact yesterday we posted an image of a failed breakout/breakdown trades with yesterday providing a perfect set up for a failed breakdown. Well today did the exact opposite providing a textbook failed breakout trade at 1:28 pm ET. If you missed this post, we suggest you review yesterday’s newsletter to learn this setup. Failed breakouts have a higher probability of success than failed breakdowns and today was simply a perfect mean reversion short off resistance levels we have discussed for days. These patterns have the potential to generated massive gains for those who master them.

While today’s rally is reason for Bulls to cheer, the market stopped once at major overhead resistance and closed the day below the Bear trend channel in place from the all-time highs. Bears still have the edge in the current market, until the Bulls can push above $550 on volume. Even if they are able to achieve that on Monday, Between $550 and $555 will be mostly noise and difficult, choppy trading. The $548 to $550 levels remain the line in the sand, above which we favor small longs and below which, we favor getting short and staying short. Once again, our view has not changed for Monday. In fact Bears still have the edge, even above $550 until the market firmly overtakes $555. Below $538 there is little to keep the market from giving way.

In the premarket at 8:32 am ET we stated the market was postured for a rally, and that we did not anticipate a drastic move for today. We stated the max high would be $549.35 and favored long entries off support. This morning’s report was materially different from the overnight post market recap given in the post market, we favored shorts while in the premarket, which had the benefit of PCE information, we favored longs. When this happens, go with the most recent information and adjust your plan accordingly. Longs off $541.77 certainly played out to perfection, while the mean reversion failed breakout short from resistance too, provided the perfect trade. This is why we provide two reports for you to digest before the open. We want you to have the most current actionable information for you to incorporate into your daily plan.

Monday does not have any economic news releases so the day should be somewhat quieter than today without an external catalyst to push the market one way or the other. SPY closed at the top of the Bear trend channel that has been in place since the market highs and is at a decision point for Monday. Does the market break out and move back to a Bull trend, or does it fall back to the middle of the channel and continue lower. August is a month which seasonally is mixed. There is no statistical edge to using seasonality in August. Certainly September and October are seasonally weak months. So while the market may resume its’ march higher and breakout of the current Bear channel, the move will likely be short lived and the markets will realize further weakness in September and October. We recommend selling into rallies if you have not done so already with a view of buying back positions at lower prices in the Fall. With price today closing at $544.44, probabilities for Monday favor the market attempting to rally once again to the $548 level, perhaps trapping bulls into thinking the pullback is over, before falling back to the $541 level. Using the Market State Indicator will once again be extremely helpful early Monday to see how overnight price action changes the levels indicated. We continue to stress SPY $530 - $532 is in a viable target for this pullback. Be sure to check the premarket report for more updated information for Monday.

Looking at a 2-minute chart of SPY with our Market State indicator, the indicator is currently in a ranging market state with prices closing mid-range. This is a transition state where prices tend to fall from overhead resistance and rally from lower support. Given today’s move higher, probabilities for Monday imply at least an attempt to move back to today’s highs. We favor long trades off support at $541.77 and small shorts at $545.35. The indicator rescaled higher today to a ranging state after PCE and again to a Bullish trending state when price broke above $545. The Bullish trending state however, did not last very long as the indicator then rescaled lower, higher, lower indicating the herd was not with this push up to today’s highs. That information confirmed the failed breakout trade mentioned earlier, providing traders with confidence they were making the right decision is shorting from today’s highs. The indicator quickly rescaled lower to a ranging state which held into the close. The Market State Indicator provided actionable information and when coupled with the levels provided in these daily reports, our traders knew precisely how to trade today’s price action. As we stated above, there is little support below $538 until $534, and then $532. While for Monday we favor longs off support, we also favor shorts from $548 until the market reclaims $550. For Monday our model projects a range of $537.50 to $551 (white box on chart), a tad smaller than today, but still implying more trending price action for Monday. We believe it’s more likely Monday is a consolidation day with little chance the market exceeds $551 to the upside or $540 to the downside. 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 Monday to the upside has Dealers selling $549 to $554 and higher strike Calls while also buying tiny quantities of $548 Calls. This positioning implies prices will likely fail to move materially higher than $549 on Monday. With Call premiums increasing in value, Dealers are once again selling large quantities of these Calls. To the downside Dealers are buying $544 to $540 Puts in a 1:1 ratio to the Calls they are selling, implying a balanced to slightly bullish view of the market for Monday. This seems to concur with our model’s view that Monday prices may attempt a slight rally, but are more likely stabilize and consolidate for a day. Should $542 give way, Dealers believe the floor for Monday is $540.

Looking to next Friday, Dealers are selling $552 to $560 and higher strike Calls, while also buying $545 to $550 Calls. They are selling Calls in a 2:1 ratio to the Calls they are buying. This positioning implies the potential for a rally by next Friday to at least $552, possibly breaking above the $550 line in the sand we keep mentioning, but still remaining below $555. Remember of $555 the Bulls take control of the market. To the downside Dealers are buying $544 to $525 and lower strike Puts in a 5:1 ratio to the Calls they are buying/selling. This positioning is decidedly bearish and indicates should $538 fail to hold, the market will in fact start it's next major leg lower. This positioning is far different from today so there is clearly an increased level of concern for next week that these rallies are just head fakes.

But as you can see, 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.