Market Insights: Thursday, August 1st, 2024.

A wild ride for the markets today with chip stocks leading the tech fueled sell off. After initially opening close to $1.75 higher, SPY hit a wall right at $555, the line in the sand we mentioned yesterday and several times in prior posts, and fell like a stone all the way back down to another level we talk about a lot, the $538 level or more specifically, $539.43, before finding buyers and rallying a bit to close down 1.42% at $542.97. The drop started just after 10 am ET after ISM and unemployment numbers came out which showed manufacturing slowing dramatically, and jobless claims rising to an 11-month high. While the market has been rallying on weak economic news, given bad news allows the Federal Reserve a reason to cut interest rates, today the market decided bad economic news was in fact bad news. Given the Feds have already signaled rate cuts are coming soon, these cuts are already priced into the market, so today’s market reaction decided bad news was bad news and reversed course. With the monthly Jobs report due tomorrow, traders used today’s rally to reduce risk before the report’s release. Following suit, the Nasdaq tanked 2.33% while the DOW fell 1.26%. But IWM, which has been the recent favorite child, fell the most, losing 3.23%. All Mag 7 stocks as well as NVDA, fell on the day with the exception of META, which gained over 4.85%. Volume for SPY was above average at 67.47 million shares, higher than yesterday, which reinforces today’s move back into Bear territory. Big up and big down = big confusion so expect more of the same in the coming days.

10-year Treasury yields fell below 4% to close down 3.3% while Crude slid 1.27%. Gold rallied .58% remaining just below $2500 with Bitcoin falling 2.74%, below $64K. We continue to remain bullish Gold, Silver, and Bitcoin above $60K.

In Wednesday’s newsletter, we stated we felt the market would push higher today, albeit at a much slower pace than Wednesday and to expect more sideways rather than up price action. And certainly at the open this is what transpired. But once the poor economic news was released, and the market hit that $555 major overhead resistance level, prices fell to the major support level that has held all week, the $538 level. We recommended traders take mean reversion short trades at $555 given we identified this level as one that was the dividing line between Bulls and Bears. We also felt today would be another trend day which it certainly was. But as we also state often, when new information is released to the market, trade what you see. This meant once the support levels identified yesterday gave way, to stay with the short trend and ride it for all it was worth. The Market State Indicator today came in extremely handy as it clearly showed the transition to a Bear state. But more on that below. Once again today our model’s major levels remained valid with the market finding resistance at $555 and support in the $538 range. We have no reason to believe these important levels will change on Friday.

In the premarket at 8:23 am ET we stated the market appeared ready to continue moving upward, but not as strongly as one would think. We stated $555 was likely the top and stated if weakness emerged, the market would surely consolidate near our lower targets. We suggested shorting $555 on any rejection, which was in line with the post market recap from yesterday. And as our readers know, when the post and premarket newsletters concur, it’s money in the bank and traders should take action to capitalize on this information. Shorting $555 was an absolute home run and the only trade anyone needed today as the market barely paused on the way down to the lows of the day. Once again understanding how to use this information in the proper context provided a massive win for the day.

Friday the market needs to digest the Monthly Non-Farm Employment Report. This once again has the potential to be a major market mover. And while bad news has been good news for the markets, it’s possible this mantra has changed, and bad news will be accepted as bad news, and the market will fall further. We mentioned that one day outside of the Bear Trend channel in place since the market highs would not redraw cause it to be redrawn and sure enough, in one day, price is back to the top of the Bear trend channel. While $538 has held three times since last Friday, a failure on Friday of this level will likely be enough to bring into play the $532 to $530 levels we have mentioned since this pullback started. Today we got the answer to the question will even a few days rally present an opportunity for market participants to unload high PE stocks. Resoundingly the market said yes. But big up followed by a big down day is the hallmark of confusion so we expect to see more volatility and more large swings until the market picks a direction. Markets are messy and this behavoir is not unusual. It’s likely Friday we will see some resolution to this confusion with either a break of $538, which will take us to lows we haven’t seen since June, or we will get right back up to the $555 level, where the Bulls and the Bears will continue to fight it out for dominance. As of today, our model is looking for sideways to down consolidation and we favor shorts from overhead resistance. But again, given the news due tomorrow, trade what you see and be sure to read the premarket report for more updated information before Friday’s open.

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 below its’ extended targets. In this state we favor shorts off resistance at $544.65 and $546.86. The Market State Indicator rescaled several times lower today after 10 am ET and continued to print extended targets the entire day. This shows extreme strength to the Bear state and should be a clear sign to get with the trend and stay with it. Currently and since noon, the indicator has not rescaled lower, but is still printing extended targets below. As such we do not favor a mean reversion trade as long as extended targets are printing. But without the indicator continuing to rescale lower, there is a reasonable probability the market does not move much lower. That said, for Friday, it will be very important to see what the indicator prints after the Jobs report to make proper trading decisions. For Friday trade the levels you see and use the extended targets as clues to determine if the trend will continue or will mean revert. The Market State Indicator today once again provided actionable information which gave traders the confidence to trade wild price action. For Friday our model projects a range of $529.25 to $550.50 (white box on chart), which is the largest range we have seen in some time. This implies trending price action on Friday with extreme levels of volatility. Be careful on days like this and scale down in size. Get with the trend and even reverse if you get it wrong. Trading smaller when the market is extreme is always recommended. 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 $552 to $555 and much higher strike Calls in very small size, given the premium for these is quite low. At the same time, they are buying $544 to $551 Calls in some size. This implies Dealers believe Friday prices may recover a bit, but perhaps not beyond the $552 level. We see this as a potential ceiling for tomorrow. Dealers did call the $555 top today yesterday. To the downside Dealers are buying $543 to $538 and much lower strike Puts in a greater than 10:1 ratio to the Calls they are buying/selling, implying a very bearish view of the market for Friday. Dealers have cleared out many positions with today’s drop and it’s highly likely they will add much more protection in the morning.

Looking to next Friday, Dealers are selling $557 to $565 and higher strike Calls, while also buying $544 to $556 Calls in some size. This positioning implies a belief by Dealers that should the market find support at the $538 level, by next Friday the market will rally perhaps as high as $560. To the downside Dealers are buying massive quantities of $543 to $525 and lower strike Puts in an over 20:1 ratio to the Calls they are buying/selling. This positioning remains heavily Bearish and implies should $538 fail to hold, the market will move to as low as $525. Clearly Dealers remain concerned all 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.