Market Insights: Monday, August 12th, 2024.

SPY opened $1.22 higher and quickly tested support at $530 before reversing course to reach the high of the day at $535.73. SPY then continued this back-and-forth choppy price action moving in a very tight range from $532 to $535 for the rest of the day, eventually closing down 5 basis points at $533.27. The Nasdaq performed a bit better, gaining 0.22%, while the DOW fell 0.36%, while IWM slipped 0.90%. "Magnificent 7" stocks were mixed, though NVDA gained over 4%. SPY's trading volume was lower than average at 42.36 million shares as market participants await CPI, PPI, and a potential attack by Iran on Israel. 10-year Treasury yields slid .94% with Crude gaining 3.52% given the geopolitical risk in the Middle East. Gold too moved 1.54% higher while Bitcoin gained .47% with price once again just below $60K. We remain bullish Bitcoin above $60K and are bullish Gold and Silver.

In Friday’s newsletter, we predicted today the market would be rangebound with choppy trading day as the market adjusts to a new, higher range between $525 and $550. We anticipated resistance at $535 and suggested that two-way trading would be the strategy of choice for the day, with support at $530. Once again and right on que, SPY delivered this exact scenario.

We also mentioned a preference for longs but also stated we liked mean reversion shorts from $535 once our Market State Indicator stopped signaling extended targets. Both trades set up perfectly with SPY dropping at the open to $531 and rallying to $535.73. SPY then failed to breakout at overhead resistance which saw prices fall once again back to $532. This back and forth continued all day as the range got tighter and tighter. But in the first 90 minutes, with a couple of easy trades under our belt, our coffers were full and it was time to sit on our hands for the rest of the day. Once again, our model forecast these levels and price action to the T. And like Friday, securing two winning trades is all a trader needs to turn a tidy profit. The opportunities highlighted in Friday’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 8:02 am ET, we stated the market would attempt to reclaim some upward momentum but not in a strong manner. We stated to expect wider than average moves with a slight upward bias as long as $531 held. We stated $535 would be a realistic upside target. And once again, the premarket and post-market reports conveyed similar information which increased the probability that these levels and biases were accurate. Again trade these days heavier knowing our model’s forecasts are likely to pan out. Certainly today, this actionable information provided traders the confidence to trade an otherwise challenging day. Once again, the market followed the premarket and post market blueprint to the letter.

Tuesday premarket sees Core PPI and PPI reports released which are surely potential market movers. This is a day to trade what you see. Absent this information, the market is likely to continue to trade within a range with the upper and lower boundaries remaining $525 to $550 as the battle between Bulls and Bears continues. While CPI is projected to increase slightly, anything less than a +.35% increase will likely not change the path of rate cuts and therefore, Tuesday is expected to be another range-bound day, with the possibility of some retracing of last Thursday’s gains.

Key levels continue to be $530 as the 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. While there is risk of a broader conflict in the Middle East which will override any of our model’s projections, should this conflict fail to develop, we anticipate a period of stability with generally choppy, upward price action. Traders should however be aware of the geopolitical risks that can throw a monkey wrench into any model. Trade what you see is extremely important this week.

SPY is currently up against the upper trend line 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. The market needs to build momentum to break out of this channel, otherwise price will slide back into this very steep and uncorrected Bear channel. Its highly likely the market is waiting to determine its next major move from either the economic data due out this week, or Iran’s actions against Israel. Any move that does come will be exacerbated due to light August volume. 

The 200 DMA at $501 continues to be a magnet for price, while the 50 DMA at $543 is also a strong influence. For Tuesday, our model suggests two-way, range-bound trading, with short trades recommended below $528 and longs from $530. Within the $530 to $535 range, there should be opportunities to trade both long and short. A break above $535 could see prices reaching $538 where we would recommend a mean reversion short. We recommend reviewing the pre-market report on Tuesday 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 $530.83 and resistance at $534.74. The MSI indicator rescaled higher once today and did not print extended targets above. This implies while the Bull trend continues, materially higher prices were unlikely and price would likely trade in a range. Without extended targets, we favor mean reversion trades from overhead resistance and longs off lower support. As you can see, these trades set up perfectly four times today, producing large gains for users of this indicator. For Tuesday, our model projects a range of $525.75 to $540 (white box on chart). This range remains somewhat extended so traders should expect larger than normal price moves. VIX remains above 20 having increased 1.67% today. Therefore the market is likely to experience periods of large moves between our model’s levels. We suggest traders remain cautious and be prepared for two-way price action on Tuesday with the release of CPI and any news out of the Middle East. We continue to slightly favor the long side and recommend traders utilize the Market State Indicator for real time updates to gain a material edge each day.

Dealer positioning for Tuesday to the upside indicates a slight upward bias, with Dealers selling $536 to $538 Calls while simultaneously buying $535 and $540 Calls. This implies a belief should the market reclaim $538, prices can easily reach $540 or higher. Dealers are positioned for a breakout should it transpire. Dealers expect initial resistance at $536 which is slightly higher than today. To the downside, Dealers are purchasing $532 to $520 and lower strike Puts at a 3:2 ratio to the Calls they are buying/selling. This suggests a balanced outlook with limited market movement in either direction. Dealers are equally protected for both downside risk and upside gain, but without a strong bias either way. That implies sideways trading for Tuesday.

Looking ahead to the end of the week, Dealer positioning is virtually unchanged heading into Friday. Dealers are selling $548 to $555 and higher strike Calls while purchasing $534 to $547 Calls. This positioning suggests that Dealers expect the market to rally into week’s end, potentially reaching $550. To the downside, Dealers are buying $532 to $520 and lower strike Puts at a 4:1 ratio to the Calls they are buying/selling. This indicates concern that should $530 fail to hold, prices will work materially lower. Dealers have increased their downside protection since Friday by close to 2X.

Dealer positioning changes daily, so we recommend reviewing our pre-market analysis on Tuesday 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.