Market Insights: Wednesday, July 31st, 2024.

Another exciting day for the markets with lots to unpack. SPY gapped up close to $7 overnight, pausing at $547.50 until multiple economic reports released in the premarket added to the day’s excitement. By the open SPY was trading over $549 on its’ way to $553.50, the high of the day. SPY closed at $550.81, up a whopping 1.63% and above $550, an important level for the bulls to reclaim for the bull trend to continue. Fueled by strong earnings, a weaker than expected employment report, a stronger than expected housing sales number and a weaker than expected employment cost index report, contributed to the markets’ move higher. But the biggie for the day was Chair Powell stating in no uncertain terms that the “totality” of incoming data justifies a rate cut as soon as the September meeting. This was all the news the market needed to push beyond to the dividing line between the Bulls and the Bears. The Nasdaq ripped 2.63% with the DOW rising .24% and IWM gaining .58%. It seems the news of a megatech decline was overdone. All Mag 7 stocks as well as NVDA, which ripped 12.81% higher, gained. The exception was MSFT who fell on an earnings disappointment. Volume for SPY was above average at 64.44 million shares, reinforcing today’s move back toward Bull territory.

10-year Treasury yields continued their decline, falling sharply 2.4% with yields closing in on 4%. Crude jumped 5.02% on fears of a supply disruption due to conflicts in the Middle East. Gold rallied 1.69% moving just below $2500 with Bitcoin sliding2.08%, back below $65K. We continue to remain bullish Gold, Silver, and Bitcoin above $60K.

In Tuesday’s newsletter, we stated we did not believe prices would continue to trade sideways for too much longer…an understatement! We also stated that probabilities for today favored prices moving to $545 overnight and that the market would likely trade sideways until FOMC. While we got to $545 in the premarket as indicated, and while SPY did move sideways until 9 am ET, once the market digested the mornings economic news releases, the market moved higher. And when FOMC was released, that trend continued. We have made it very clear that when new information is introduced into the market, trade what you see, as our model does not have the benefit of new information and therefore its’ predictions can be made moot. While the model’s major levels all remained valid today with the market finding resistance at $548 and $550, breaking above $550 on volume potentially changes the market dynamic in the near term.

In the premarket at 8:08 am ET we stated the market was postured for a rally and favored longs from support and shorts only after a clear rejection at resistance AND after the majority of the day’s news had been released. The model targeted a max high on the day of $554.30 and a low of $545. While $545 was a level also identified in the post market yesterday, traders should understand that resistance becomes support when price reclaims a level. The bounce in the premarket at $545 should not have come as a surprise to anyone with price reclaiming this previous resistance level. With the model targeting a high today of $544.30, a level the market hasn’t seen in over a week, certainly provided fuel to today’s move higher and the conviction to get long and stay long. Given the model at 8 am did not incorporate the news of the day, use of these levels more loosely is best. Certainly having access to the Market State Indicator today was quite helpful given it updates in real time.

Tomorrow the market has more news to digest with Unemployment Claims and PMI. But the Monthly Non-Farm Employment Report on Friday will be the next major market mover. If employment does show further weakness or at least concurs with today’s ADP report, the market should continue to rally, given this reinforces the Fed’s decision to cut rates in September. The Bear channel that has been in place since the market highs was broken by today’s rally and another day of sideways to higher prices will begin a new Bull channel. One day doesn’t do enough to redraw the channel. But two or more days with price outside the Bear channel, particularly if SPY exceeds $555, and the channel will be redrawn. META did enough today with its earnings to gain on the day, and with AAPL and AMZN due out tomorrow, these two behemoths could certainly add to today’s rally. The question still remains however, will even a few days rally present an opportunity for market participants to unload high PE stocks or will the market simply move back toward the all-time highs. We continue to believe in the possibility longer term that traders will continue to unload stocks into any rally, but perhaps we won’t realize this market wide until the Fall. While our model makes relatively short-term predictions, we see August as a month where the market may attempt to resume the Bull trend, perhaps even reaching the all-time high. But it’s more likely than not this will be sold as we enter the more Bearish September and October. We continue favoring taking profits as the market rallies, given we believe a better opportunity to buy will present in the Fall. With price today closing at $550.81 probabilities for Thursday favor the market continuing to rally, albeit at a much slower pace than today. Perhaps the market moves more sideways than up for at least a day. Traders will begin to position themselves toward the end of the day tomorrow for the Friday Job’s report. Expect some volatility to present toward the end of the day on Thursday. Once again, we recommend checking the premarket report for more updated information for Thursday, but also recommend utilizing the Market State Indicator for updates in real time.

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 mid-range. In this state we favor longs off support at $549.77. As we predicted yesterday in the post market recap, the Market State Indicator did rescale in the premarket to a ranging state, which then rescaled again at 4 am ET to a Bullish trending state while printing extended targets above. As our readers know, when the indicator rescales multiple times and prints extended targets, the herd is getting with the trend and it’s time to buy support and ride the trend for all it’s worth. While this was a great trade premarket, by the open with prices at the extended targets, the best move was to wait for a pull back to overhead resistance (resistance becomes support) and to get long at the $547.50 level and stay long for the rest of the day. Once extended targets stopped printing above resistance, it was time to take profits. This occurred at 3 pm ET where the market topped out at $553.50, the highs of the day. This set up a nice mean reversion short to support at $549.77. This is how best to use the Market State Indicator to earn each day. Trade the levels you see to and from and use the extended targets as clues to determine if a trend will continue or will mean revert. For Friday while we do favor longs off support, currently there are no extended targets above overhead resistance therefore any rally Thursday may be short lived. We continue to favor mean reversion shorts as long as this state continues, selling overhead resistance at $553.50. Again today, the Market State Indicator provided actionable information which gave traders the confidence to trade today’s action. For Thursday our model projects a range of $544.50 to $558.50 (white box on chart), which is still quite large, given today’s volatility. This implies more trending price action on Thursday. And while we did state today one direction would dominate the day, tomorrow we expect a bit more two-way trading, favoring the long side off support, but also taking mean reversion short from overhead resistance. 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 $551 to $555 and much higher strike Calls. They are no longer buying Calls. They are however selling small quantities of $550 to $543 Puts. This implies Dealers are fairly confident Thursday prices will continue to rally and remain above $548. But they also believe $555 is likely the max high for the day. While we won’t go so far as to say $548 is a floor, we do believe $555 is a ceiling for Thursday. To the downside Dealers are buying $542 to $540 and much lower strike Puts in a less than 1:1 ratio to the Calls they are buying/selling, implying a bullish view of the market for Thursday. Dealers have added significantly to their Put positions for tomorrow, but still not in any size compared to the Calls they are buying/selling. Again this implies a bullish day for Thursday, which does coincide with our model.

Looking to Friday, Dealers are selling $555 to $560 and higher strike Calls, while also buying tiny quantities of $546 to $554 Calls. This positioning implies belief by the Dealers that the market may rally by Friday to at least $555, which would validate today’s break above $550 as a resumption of the Bull trend. Recall we have mentioned repeatedly $555 is the level where Bulls firmly take control of the market. Between $550 and $555 is no man’s land with two-way trading likely. Below $550 (more accurately $548) the market is Bearish. Keep these levels in mind when trading the next market move. To the downside Dealers are buying $545 to $530 and lower strike Puts in massive quantities, in an over 10:1 ratio to the Calls they are buying/selling. This positioning is heavily Bearish and implies should $545 fail to hold, the market will move right back down to $538 and perhaps lower. Clearly Dealers remain concerned rallies will be sold.

But 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.