Market Insights: Monday, August 5th, 2024.

A massive gap for SPY today, opening down over $21, getting absolutely crushed overnight on fears of a recession, the Yen carry trade unwinding and geopolitical risks facing the Middle East. While we still have a couple more weeks of earnings releases, most of the heavies that have supported the market have already reported and the soft-landing scenario has been replaced with fears of a recession, even with the Fed slated to cut rates in September. The VIX jumped over 64% today while SPY blew right through major support at $520, reaching a low of $510.27 before bouncing to close down 2.91% at $517.38. The Nasdaq too got hammered dropping 3.38%, while the DOW fell 2.6% and IWM fell 3.15%. Nothing was spared today with every Mag 7 stock, including NVDA, losing at least 2% with some falling more than 7%. Volume for SPY was huge at 141.65 million shares, putting an exclamation point to today’s decline.

10-year Treasury yields fell slightly to 3.78%, down .19%. As we stated Friday, we believe this drop in yields is overdone and while yields may trend a bit lower, longer-term yields will make their way back toward 5%. One would think Crude would rally hard on the risk of additional conflicts in the Middle East, and while Crude did close up .41%, initially it was down over 1% before a late day rally. Gold too fell .88% while Bitcoin got destroyed falling 9.17%, dipping below $50K before finding a bit of support. We are holding on Bitcoin until it moves back above $60K, but remain bullish Gold and Silver.

In Friday’s newsletter, we stated we would not be surprised if the market experienced further weakness today. We mentioned that the $520 level was quite important to the structure of the Bull trend and a failure of this level would turn our model decidedly Bearish. While the market did attempt to pause and reclaim $520 several times today, closing below this level is bad news for the Bulls. We stated there was little to keep the market from falling to $520 if the $538 level failed, which happened last Friday. We suggested for today to sell into any rally. There were a number of opportunities to do so after the open right at the $520 level. When major support breaks, it becomes major resistance so selling this level after the open proved to be the perfect trade at least twice today. We also stated today would be a strong trend day and to get with the trend and ride it. Once again our model provided extremely accurate major levels and a directional bias and type of day. When utilized properly, this information is highly actionable and should be incorporated into your daily plan.

In the premarket at 8:09 am ET we stated there was ample fear in the market and not to chase any longs, even if the market attempted to rally. We stated below $520 to look for shorting opportunities and that the market would likely find support at $510.50. The market did find support at $510.50 in the premarket as stated, rallying all the way back to the $520 level just after the open. As we often state, when the pre and post market recaps contain the same information, take it as gospel and trade in size and with conviction. Today shorting $520 at least once if not twice proved to be a home run, made easy with the information contained in these newsletters. Again combining the post market recap with the premarket analysis will provide every trader actionable intelligence for your daily plan.

ISM was released today at 10 am ET and was better than forecast which likely caused the brief rally from the lows to the $520 level. There is nothing material on the economic front due to be released on Tuesday or Wednesday, and there are few major earnings releases until Thursday morning when LLY reports. So unless further war breaks out in the Middle East, the market will likely trade between major support and resistance levels for the rest of the week. SPY is now at the bottom of the Bear trend channel in place since the market highs, and may find a bit of a reprieve on Tuesday, as suggested in Friday’s post market recap. While the market is down just 9.7% from its’ highs, this pullback has already exceeded the April pullback which increases the odds the market revisits the April lows of $493.86. Our model sees this as a better than 65% probability. The 200 DMA is just below the current price at $500 and will act as a magnet to draw price lower. SPY is unlikely to move to $500 in a direct line, given August volumes are notoriously light which exaggerates moves both ways. But we suggest traders continue to prepare for lower prices and sell into rallies. Below $520 the next major level of support is $500 and below that, the April lows of $494. Above $520, the market will attempt to move back toward the $538 level. This may be quite difficult this week. $528 will be hard to overcome on the way to $538. Therefore we favor selling $528 should the market provide a relief rally on Tuesday. Whether this pullback is more than an average 11-12% decline is still too early to tell. But certainly there is a case to be made that the Bull trend the market has enjoyed since Covid may turn into a Bear trend. With the market hovering near the $518 to $520 level into the close, it is clear market participants understand the importance of this level. As such the Bulls will defend this level and it’s probable on Tuesday, the market will attempt to rally toward $528. But again, we plan to sell into any rally as the Bears are complete control of this market. As we state often, we recommend reviewing the premarket report Tuesday morning 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. The indicator did rescale lower in the premarket and printed extended targets which indicates a strong trend, confirming shorting $520 was the best approach to trading today’s action. But the indicator did not change its’ levels for the entire day, implying the potential for an interim bottom. While we still favor shorts off resistance at $520.23 and $528.55, we also favor mean reversion longs back toward the $520.23 level. Because the market did in fact reach the extended targets today at $511.91, we do not recommend a mean reversion long off the $520.23 level. Instead we suggest taking a mean reversion long on a retest of the extended targets from earlier in the session. The best set up for a mean reversion long from this level is a failed breakdown. This is a difficult and challenging set up with low odds of success. Therefore if you are not completely comfortable with this trade, we suggest you continue to favor shorts from overhead resistance and pass on any mean reversion longs on Tuesday. For Tuesday our model projects a range of $501.50 to $530.75 (white box on chart), which is huge due to the current extreme volatility. This certainly implies more heavy trending price action on Tuesday, therefore get with the trend and stay with it. For real-time updates and given the market has been moving significantly overnight, we highly recommend using the Market State Indicator in real time to gain a material edge to this market.

Dealer positioning for Tuesday to the upside has Dealers selling $518 to $530 and higher strike Calls while buying also selling $515 to $500 Puts in a 1:1 ratio to the Calls they are selling. This implies Dealers believe Tuesday prices may recover to perhaps $525. Volume is quite thin so be forewarned. With thin volume Dealers may have other positioning using Futures to protect risk. To the downside Dealers are buying $499 and lower strike Puts in extremely small quantities. This implies very little concern of further weakness and a belief the market will bounce on Tuesday and not fall below $505. Again with such low volume, do not rely heavily on this positioning for Tuesday. On a day where the market drops 3%, most options are ITM and are exercised by the end of the day. As such Dealers tend to load up the next day and protect overnight risk using Futures.  

Looking to Friday, Dealers are selling $520 to $535 and higher strike Calls, while also selling $511 to $500 Puts. Dealers are also buying $547 to $553 Calls should prices exceed $535. This positioning implies Dealers see a potential floor in the market at $510, but also believe the upside this week will be limited to $525. To the downside Dealers once again have very little Put protection, given Puts are currently very expensive. It’s highly likely Dealers have shorted the Futures markets to protect from downside risk. And as we stated on Friday, options volumes for Dealers are light as of today’s close due to positions being exercised, as well as the cost of buying Puts. And like Friday, be very careful using this information on Tuesday. We believe you are better served to follow our model’s price predictions until Dealer positioning normalizes.  

Therefore we highly recommend you check the premarket analysis Tuesday morning 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.