Market Insights: Friday, August 9th, 2024.

SPY opened $0.84 lower, testing support at $528 before gradually climbing to reach the day's high of $534.51. After a week of extreme volatility in both directions, the market took a breather today, with SPY trading in a relatively narrow $5 range, bouncing between $529 and $534. SPY ultimately closed up 0.44% at $532.99. The Nasdaq mirrored this performance, gaining 0.51%, while the DOW inched up 0.13%, and IWM slipped 0.21%. Most of the "Magnificent 7" stocks saw gains, though NVDA experienced a slight dip. SPY's trading volume was lower than average at 45.56 million shares, but given the increased average volume this week due to heightened volatility, today's volume was typical for summer trading.10-year Treasury yields slid 1.2% with Crude gaining 1.13%. Gold moved .18% higher while Bitcoin pulled back 1.44% with price once again above $60K. We remain bullish Bitcoin above $60K and are bullish Gold and Silver.

In Thursday’s newsletter, we predicted that today the market would take a breather as participants adjusted to the new, higher range between $525 and $550. We anticipated resistance around $535 and suggested that two-way trading would be the strategy of choice as volatility subsided. True to form, SPY delivered exactly this scenario.

We also mentioned a preference for a mean reversion short from $530 once our Market State Indicator stopped signaling extended targets. This setup materialized perfectly at the open, with prices dipping to support at $528—just as we had forecasted for initiating long positions. Our call for a mean reversion short at the open, followed by a reversal long at $528 to $530, played out precisely. On a choppy day like today, securing two winning trades within the first hour is all a trader needs to turn a profit.

Additionally, another opportunity presented itself at 1:40 pm ET with a mean reversion short on the failed breakout at $535—again, a key resistance level we identified. This was facilitated by one of our favorite trading patterns. For those new to these reports or unfamiliar with this setup, we’ve included it below for your review.

These three opportunities highlighted in yesterday’s post-market recap showcase the power of integrating our model’s levels, directional bias, and day type into your daily trading plan.

In our premarket analysis at 8:34 am ET, we noted that the market appeared fatigued, with our model predicting no significant moves in either direction. We projected that prices would likely hover around the $530.50 range but could reach $534 or slightly higher. We also identified $528 as a key support level where we favored longs if prices dipped below $530. Once again, the market followed the premarket blueprint almost to the letter, aligning perfectly with the previous post-market recap.

For seasoned readers, it's evident that when our premarket and post-market reports convey similar insights, it signals that our model hasn’t detected any new factors to alter its outlook. Consequently, the probability that these levels and biases will be accurate increases, giving traders more confidence in their decisions. On days like these, we tend to trade with larger positions and less stress, knowing our forecasts are likely to pan out. While no model is flawless, we understand that when our newsletters align, the chances of success rise significantly. This is the level of confidence and strategic clarity that every trader should strive for.

Once again, there are no economic news releases scheduled for Monday, so the market is likely to continue trading within the $525 to $550 range identified by our model. The ongoing battle between Bulls and Bears will likely persist until a decisive price break occurs. While next week has the potential to shift the market with PPI and CPI reports due on Tuesday and Wednesday, Monday is expected to be another range-bound day, possibly retracing some of Thursday’s significant gains.

Key levels to watch include $530, which acts as a dividing line between major resistance and support, and $535, which needs to be overcome for any substantial upward movement. A break below $525 could see prices revisiting $520. Although the market is not yet out of the woods, we anticipate a period of stability with generally choppy, upward price action over the coming week.

SPY is currently in the upper half of the Bear trend channel that has been in place since market highs. After testing the upper channel today, there is limited upside within this channel, making it likely that prices will stall and pull back on Monday. The market will need to build momentum to break out of this channel to establish a new Bull trend, which could take several days of two-way trading.

The 200 DMA at $501 continues to be a magnet for price, while the 50 DMA at $543 is also a strong influence, pulling prices higher. The tug of war between these levels is likely to continue until one side prevails. For Monday, our model suggests two-way, range-bound trading, with short trades recommended below $520. Within the $525 to $535 range, there should be opportunities to trade both long and short, while a break above $535 could see prices reaching $538. We recommend reviewing the pre-market report on Monday morning for the latest updates before the market opens.

Looking at a 2-minute chart of SPY with our Market State Indicator (MSI), the indicator is currently in a Bullish trending market state without extended targets above. Price is mid-range with support at $530.38 and resistance at $534.14. The MSI indicator rescaled higher twice today and briefly printed extended targets above, implying a strong trend which would reach the model’s overhead resistance levels. Users of the MSI understand when the model rescales quickly with extended targets, the “herd” is participating in the trend and the best course of action is to ride price for maximum gains. But the extended targets disappeared as quickly as they came which set up the mean reversion failed breakout at 1:40 pm ET. For Monday, our model projects a range of $524.50 to $539.75 (white box on chart), which continues to shrink in size. When volatility spikes by 400% as it did this week, it often takes several days for it to dissipate, especially since many quantitative strategies are volatility-based and tend to scale back significantly during such spikes. Conversely, as volatility increases, these same strategies often adjust dynamically, intensifying their positions and typically driving prices lower. This was evident on Friday and Monday. However, with the VIX now trending below 20—having dropped over 11% today—the market is likely to return to more typical trading behavior. That said, traders should remain cautious and be prepared for two-way price action on Monday, as large intraday moves are still possible. With the VIX above 21, volatility remains elevated, and any new stress could quickly alter the market dynamics. But absent any macro event, we favor two-way, level to level trading, favoring the long side. For real-time updates to this information, we highly recommend utilizing the Market State Indicator to gain a material edge each day.

Dealer positioning for Monday indicates a slight upward bias, with Dealers selling $536 to $543 Calls while simultaneously buying $534 to $535 Calls. However, due to significantly reduced volume, these levels should be interpreted cautiously. Despite this, the positioning suggests that Dealers anticipate prices trending higher on Monday, but expect resistance around the $536 level. On the downside, Dealers are purchasing $531 to $525 and lower strike Puts at a 2:1 ratio compared to the Calls they are selling. This suggests a balanced outlook with limited market movement in either direction, aligning with our model’s prediction of choppy, sideways trading for Monday.

Looking ahead to next Friday, Dealers are selling $548 to $555 and higher strike Calls while purchasing $533 to $547 Calls. This positioning suggests that Dealers expect the market to rally next week, potentially reaching up to $550. On the downside, Dealers are acquiring $532 to $510 and lower strike Puts at a 7:2 ratio compared to the Calls they are buying and selling. This indicates a somewhat balanced outlook, with a clear preference for downside protection in case of a significant market drop. These levels are consistent with our model’s projections.

Dealer positioning changes daily, so we recommend reviewing our pre-market analysis on Monday morning in addition to reading these post-market recaps. This will help you understand how Dealer positioning might influence the day's price action. The pre-market analysis is available by 9:15 AM, and these post-market recaps are posted each evening. Our goal is to provide you with actionable insights that you can apply to your trading every day. Good luck and good trading.