Market Insights: Friday, August 2nd, 2024.

A massive gap for SPY today, opening down $6.24, falling overnight and with the 8:30 am ET Jobs Report which came in much lower than expected. The unemployment rate rose to $4.3%, the highest since October 2021. This bad economic news stoked fears of a broader economic slowdown which could lead to a potential recession, as the rise in the unemployment rate brings into play the so-called Sahm Rule. This rule states that the economy is in recession when the three-month average of the jobless level is half a percentage point higher than the 12-month low. The unemployment rate was 3.5% in July 2023 before it began its gradual ascent. The three-month unemployment rate average moved up to 4.13% and therefore many analysts believe the economy is already in a recession. After initially bouncing off $533 after the Jobs report release, SPY found resistance at $537, a bit shy of the $538 level we mentioned as support (now resistance), and fell during the morning session to the low of the day of $528.60. By noon the market had done enough damage to any hopes of a Bull revival and moved sideways to up a bit to close at $532.90, losing 1.86%. The Nasdaq once again took it on the chin, dropping another 2.43%, while the DOW fell 1.51%. And again, just like yesterday, IWM dropped the most, losing 3.54%. While the belief is lower rates are good for small caps, a recession is not. Every Mag 7 stock except AAPL, fell on the day with AMZN dropping a whopping 8.78%. People buy less in a recession and the result is AMZN giving way. NVDA too dropped another 1.78%. Volume for SPY was almost double its’ average at 82.79 million shares, which again reinforces the Bear case.

10-year Treasury yields fell to 3.792%, down 4.63% as certainty the Fed will reduce rates is now a given. We believe this drop in yields is overdone. While yields may trend a bit lower, longer-term yields will eventually make their way back toward 5%. Crude too fell 2.84%, settling below $75 while Gold dropped .1% with Bitcoin dropping 5.93%, closing in on $60K. We continue to remain bullish Gold, Silver, and Bitcoin above $60K.

In Thursday’s newsletter, we stated we felt the market had changed its’ mantra and bad news would now be viewed as bad news, causing the market to fall further. We stated a failure of $538 would bring into play $530, a level we have mentioned for a couple of weeks. We also stated the Jobs report would likely resolve the question of market direction after a few big down days followed by big up days. And certainly with the market reaching the $530 level before finding any support, any confusion regarding who is in charge of this market is all but over. We stated we favored shorts for Friday off resistance and suggested riding the trend given the expected range for the day was extremely wide. We also warned that Dealers were buying massive quantities of protective Puts in sizes we had not seen in a long time, and were positioned for prices to reach as low as $525. So while today’s new information had a material impact on the direction of the market, it did not change the levels we have discussed several times. The market fell, but did find support in the $530 range. We always advise readers to trade what you see and today, you saw a market that sold off from the $538 level that went into the free fall we suggested would happen. Our model’s levels all remained valid and now the question is, what comes next? We will address that below.

In the premarket at 8:10am ET we stated the market appeared likely to continue moving lower. We stated if $535.60 failed, the model would become much more bearish. With SPY opening at $535.75, when this line in the sand gave way, it provided an excellent opportunity to jump on the short trend and ride it to the $530 and beyond level we have been mentioning for a couple of weeks. By combining the post market recap with the premarket analysis for Friday worked like a charm, and provided our readers actionable information on how to best navigate today’s decline.

Monday ISM is due to be released at 10 am ET and it’s likely to deliver more bad news for manufacturing and therefore the economy. It would not surprise us in the least to see further weakness on Monday. SPY is now in the middle of a broadened Bear channel in place since the market highs, with plenty of room both lower and higher. The next major level of support to the downside is $520, which is a very important level. Our model longer term remains bullish above $520. But should this level fail, there is a high probability this is no longer an average 11-12% pullback, but a new longer-term Bear trend. We recommend watching this level closely for clues of what is to follow. Our model still has a high probability this 6.4% decline from the highs is nothing more than a healthy pullback. But that view will change very quickly if the $520 level fails. And there is little to stop the market from dropping to $520, should this sell off continue…perhaps a small pause at $525. As such we suggest you sell into rallies as the Bears are fully in control. But that does not mean the market won’t deliver spectacular Bull rallies on the way down. While it’s a bit premature, our model has a better than even chance we see such a rally back to at least $538 on Tuesday. But as we state often, we recommend reading the premarket report on Monday for updated information before the open.

Looking at a 2-minute chart of SPY with our Market State indicator, the indicator is currently in a Bearish trending market state. There are no extended targets below and the indicator did not rescale lower all day on Friday. In this state we favor shorts off resistance at $536.49 and $540.74. But we also favor mean reversion longs back toward the $538 level. The indicator on Friday rescaled lower several times overnight and printed extended targets. This is an indication that the Bear trend was strong and should be respected. By the open, extended targets had stopped printing and price was sitting at support. This may have posed a challenge for some, not sure if they should sell or buy the $537 level. Simply put, when price exceeds a level, in this case falling below support, that support level is no longer support but is now resistance. The odds favor selling this level. But without extended targets below, taking first profits more quickly is the proper play, especially since the $530 level has been identified by the model as major support. This trade was pretty much one and done for the day, but it was a good one, getting short @ $536.50 and riding it to $530. Remember your job is not to capture entire moves, be it 100 points or 10 points. Your job as traders is to be profitable, and trade to and from the levels, and in the direction we identify. We knew the levels to trade well before today, and the Market State Indicator showed us the direction and reinforced our plan to sell overhead resistance. That is all that was needed to earn substantial profits on the day. For Monday with price at a major support level and without extended targets below, look for a failed breakdown with price looking like it wants to fall further, but failing. This will be the cue to go long and ride it back toward $538. Once there, we continue to favor shorts. Certainly utilizing the Market State Indicator in real time will provide a significant edge to this information. For Monday our model projects a range of $520.75 to $542 (white box on chart), again, a massive range which implies heavily trending price action. Once again get with the trend and stay with it. But for real-time updates, incorporate the Market State indicator into your daily routine to provide yourself a material edge every day.

Dealer positioning for Monday to the upside has Dealers selling $546 to $555 Calls in small size, while buying $533 to $545 Calls in size. This implies Dealers believe Monday prices may recover, but perhaps not beyond $545. To the downside Dealers are buying $531 to $525 and lower strike Puts in a less than 1:2 ratio to the Calls they are buying/selling, implying a bullish view of the market for Monday. It seems Dealers believe the $530 level may hold on Monday and prices will attempt to recover.

Looking to next Friday, Dealers are selling $546 to $565 and higher strike Calls, while also buying $535 to $545 Calls in size. This positioning implies a belief by Dealers that should the market reclaim $535, it will continue to rally to at least $546. To the downside Dealers are buying $532 to $520 and lower strike Puts in a 1:1 ratio to the Calls they are buying/selling. This positioning is balanced to slightly Bullish for next week and implies should $530 fail to hold, prices will reach at least $525. Options volumes are a bit light as of the close Friday due to positions being exercised. As such we would be careful using this information as gospel.

Instead we highly recommend you check the premarket analysis on Monday in addition to reading 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.