Market Insights: Tuesday, August 6th, 2024.

Today the market sighed a bit of relief as SPY opened up over $2, after getting hammered yesterday on fears of a recession, the unwinding of the Yen carry trade and global risks in the Middle East. The markets were calmed by dovish comments by Fed speakers and a rally overnight in Japan, which reversed much of the damage done in that market yesterday. SPY spent much of the overnight session hovering around the important $520 level before rallying sharply shortly after the open. A classic failed breakdown at the open saw SPY falling to the lows of the session at $517.87, trapping shorts into thinking today would be a repeat of yesterday. But the market reversed hard, squeezing through the $520 level and by 1 pm ET, reaching $528, where it traded sideways until a late pop to the session highs at $529.75. Finding $528 difficult to reclaim, the market reversed course and fell into close, ending the day up .92% at $522.15. The Nasdaq saw similar action rising .98%, while the DOW gained .76% with IWM rising 1.11%. Mag 7 stocks including NVDA rose on the day with the exception of AAPL and GOOGL which suffered small losses. Volume for SPY was substantial at 84.83 million shares with funds and institutions repositioning their portfolios for what may follow.

10-year Treasury yields gained 2.74% with yields pushing back toward 4%. We mentioned last Friday and on Monday, the Treasury yield decline was overdone, as we continue to believe yields move higher. Crude fell another 1.28% dropping to  $72.95, lows not seen since early June. While Crude may continue to fall toward $70, our model suggests at $70 the Bulls will step in to support Crude. Gold fell .85% while Bitcoin recovered a more than a third of yesterday’s losses, rising 3.77%, moving back above $55K. We remain bullish Bitcoin above $60K and continue to remain bullish Gold and Silver.

In Monday’s newsletter, we stated the market today would attempt to rally to $528 and to sell any rally at this level. We also stated $520 as an important level that the Bulls would vigorously defend, and to look for mean reversion longs on any failed breakdown from this level or below. Certainly today, our model could not have been more accurate. At the open, the market set up a textbook failed breakdown trade (we have discussed this pattern several times recently) which trapped shorts, only to rally to the $528 level we recommended selling. Once at $528 the market traded sideways and once again, set up a failed breakout mean reversion trade in the 3 pm ET hour. The market then moved virtually straight down to $522 providing our followers with monster gains on the day, both long and short. Additionally yesterday we stated today would be another strong trend day and to get with the trend and stay with it. This is highly accurate and actionable information every reader should incorporate into their daily plan. Because once again, our model provided accurate levels to trade to and from with a directional bias, including the type of day. Trading does not get any easier than this.

In the premarket at 8:01 am ET we stated the market would attempt to regain some upside. We suggested on any move above $521, the market would reach $525.35, where it might slip. We favored buying dips along the way. And once again the premarket report called the first level of resistance SPY reached before falling back to $522.50, where another failed breakdown trade set up for the perfect long to the highs of the day. The premarket report provided additional color and levels to trade, complimenting the post market report. Combing the two and today was simply a perfect day for our model.

There were no material economic news releases today and nothing due out tomorrow. As we stated yesterday, the market this week will trade between major support and resistance levels, which is precisely what transpired today. Expect more of the same on Wednesday. SPY is currently in the lower half of the Bear trend channel in place since the market highs, and the market may take a day to recalibrate. Our models computes the odds of SPY revisiting the April lows at $493.86 at better than 65%. And with the 200 DMA below at $500, this is a tempting target which will draw price lower. We continue to suggest traders prepare for lower prices and sell into rallies. Below $520, major support will be found initially at $500. Below this level the market dips to the April low of $494. With the market currently sitting just above $520, the market will likely trade around this level overnight with some dips lower toward $517. $528 remains a difficult level to reclaim therefore we continue to favor selling $528. For Wednesday our model projects more ranging, two-way price action than trending action, even though volatility remains elevated and moves could be quite large. Bears control this market and surely at any time, they can step on the gas and push price to new lows. But this scenario is unlikely for tomorrow. But things can change drastically overnight. As such we recommend reviewing the premarket report Wednesday 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 was quite active today, rescaling higher several times while also printing extended targets indicating the strength of the herd pushing prices up. But once the market reached the highs of the day, extended targets ceased printing implying it was time to fade the rally, particularly given price was at major overhead resistance. The indicator rescaled lower twice moving through a Ranging state to the Bearish state it is in currently. In this state we favor selling rallies from $522.21. That said, if there are no extended targets below support at $520.15, we also favor mean reversion longs on any failed breakdown back to at least $522.25. For Wednesday our model projects a range of $512.50 to $531 (white box on chart), which has shrunk by one third, even though this range is still quite large. Due to the recent extreme volatility, traders should be prepared for large moves either way given there is still a better than 50% chance volatility reignites at any time. But for Wednesday, absent any macro event, we favor two-way, level to level trading which favors the short side, but which also looks for opportunities for mean reversion longs. For real-time updates to this information, we highly recommend utilizing the Market State Indicator in real time to gain a material edge every day.

Dealer positioning for Wednesday to the upside has Dealers selling $529 to $532 and higher strike Calls in very small size, while also buying $523 to $529 Calls, also in small size. This implies Dealers believe Wednesday prices may once again attempt to reclaim some territory, but likely fail at major overhead resistance at $529. To the downside Dealers are buying $518 to $510 and lower strike Puts in some size. They are also selling $519 Puts in very small size. This type of positioning, scattered with both buys and sells, implies some level of confusion by the Dealers. We often state confusion equals trading range. Therefore this would seem to imply Dealers believe tomorrow may be a ranging day, albeit a large range, but they lack any strong directional bias either way. Dealer options volume is low so once again, we recommend being careful not to read too much into Dealer positioning for Wednesday.

Looking to Friday, Dealers are selling $532 to $550 and higher strike Calls, while also buying $525 to $531 Calls in size. Dealer positioning appears to be hedged quite well for any long scenario which may develop, given they are trading both sides at multiple levels. This positioning implies Dealers hold some belief the market could move higher by Friday, to as high as $539. To the downside Dealers have loaded up on Put protection and are buying $520 to $510 and lower strike Puts in a ratio of  2:1 to the Calls they are buying/selling. This is relatively balanced positioning without an overly aggressive fear of downside risk. This implies Dealers expect more sideways price action into Friday.

But Dealer positioning changes daily, therefore we recommend checking the premarket analysis on Wednesday morning in addition to reading these post-market recaps to understand how Dealer positioning may 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.