Market Insights: Tuesday, August 13th, 2024.
SPY gapped up over $3 and after a brief pause at $538 and a slight pullback, pushed through major resistance, once again pausing at $540, before closing near the highs of the day at $541.98, up 1.64% on the day. Lower than forecast PPI gave market participants confidence the Fed would move to aggressively reduce rates at its next meeting, given inflation seems to be firmly headed toward the Feds 2% target. The Nasdaq outperformed the S&P, gaining 2.4%, while the DOW rallied 1.04%, with IWM jumping 1.6%. Every "Magnificent 7" stocks rose, including NVDA, up over 6%. SPY's trading volume was average at 51.91 million shares. To be expected, 10-year Treasury yields fell 1.52% with Crude also dropping 1.29%, disregarding the potential geopolitical risks in the Middle East. Gold was basically flat up .03% while Bitcoin jumped 2.98% with price once again over $60K. We remain bullish Bitcoin above $60K and are bullish Gold and Silver.
In Monday’s newsletter, we predicted PPI numbers would surely be market movers and to trade what you see. Absent PPI, we anticipated another rangebound trading session. But PPI was significantly lower than forecast and the market ran with it, changing the market narrative completely. This is why we state on days when new information is introduced to the market, to trade what you see. Today is the reason we state this often and why we emphasized this in yesterday’s newsletter stating “trading what you see this week is extremely important”. While our key levels worked quite well with $535 being initial resistance and $538 being the next level the Bulls needed to overcome, the market only paused at these levels before closing the gap from August 1st and moving toward the 50 DMA.
We also stated any move today would be exacerbated due to light August volume. And with 2% moves in multiple markets, exacerbated was an understatement. We suggested a mean reversion short from $538 which did develop and work out well, however our Market State Indicator kept us out of this trade as it was printing extended targets above price. Finally we stated we favored long trades from support and once $535 was overtaken, this became a viable level of support from which to initiate a long trade. This turned out to be quite profitable, but let us be clear; today was a day where your training and knowledge was put to test to identify the strength of the trend and the power of a favorable economic report. This was a day to trade what you see. Models, including ours, do not have the benefit of economic data prior to release so while today was a great day to trade with the trend, and one in which we hope our readers took full advantage of, our model’s predictions for the day were moot once PPI was released and changed everything. This should be a good lesson to all traders. Today PPI made the markets rip higher. Tomorrow an attack on Israel by Iran could have the opposite effect. Every trader needs to be cognizant when new information is introduced to adjust and react to the new information in real time. Fortunately, for those with the Market State Indicator, this is made much simpler, as you will see below.
In our premarket analysis at 8:13 am ET, we stated the market was waiting on PPI before rising. We anticipated a sluggish market overall. We stated above $534 the market would move to $539 and stated we favored longs if $534 held. The market never dipped below $536.28 and traders needed to be nimble to hop on the long trend to $539 to capitalize on this morning’s move. Again the premarket and post market contained similar information which condensed to favor long trades, trading what developed after PPI. This was the best advice we could provide on a day like today.
Wednesday premarket sees CPI reports released which once again are potential market movers. The advice for today stands for tomorrow…trade what you see once these reports are released. Absent this information, the market has broken out of its Bear trend channel and has closed the gap from August 1st. Support levels have shifted once again to $540, while $550 remains major overhead resistance. Below $540 the market will likely retest $535, which must hold for the Bulls to take control from the Bears. Without CPI we expect Wednesday to be a day with some muted follow through to the upside with the market potentially reaching $546, but pausing at $543. Given CPI, we caution using the model’s directional bias or potential range without also considering CPI. The market has moved up five straight sessions and it will not take much to derail this extremely strong push back toward Bull territory. One more straight up day and its highly probably the market at least pauses or retraces a bit of the last few days move to the upside.
Key resistance continues to be $550, representing the dividing line between the Bulls and the Bears. Just five days ago even discussing these levels seemed to be out of the question. Yet price is virtually right back to the zone where participants need to decide who wins the battle. A break below $535 will see prices revisiting $528. And while a broader conflict in the Middle East will override all of our model’s projections, as long as this conflict fails to develop, we anticipate a period generally higher prices with SPY moving toward $550.
SPY has broken the upper trend line of the Bear trend channel that has been in place since market highs. A test of this breakout is likely at some point in the next several days. A one-day breakout from a channel does not cause our model to start a new trend channel. We need several days outside of the Bear channel to start a new Bull trend channel. It would not surprise us in the least to see sideways price action while the market digests both the economic information being released this week, while also assessing the continued risks in the Middle East. Price is now within striking distance of the 50 DMA at $543, which has a realistic probability of being reached on Wednesday. For Wednesday, our model favors long trades from support at $541 to $543, with the potential for a mean reversion short from $543 toward $538. Within the $535 to $541 range, there will be opportunities to trade both long and short, favoring the long side. A break above $542 could see prices reach $543 where we recommend a mean reversion short. We suggest reviewing the pre-market report on Wednesday 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 above the upper range. Support is now $541.15 and $535.61. The MSI indicator rescaled higher twice today, once in the premarket and once at 12:46 pm ET while it continued to print extended targets above. This implies a very strong Bull trend which should be respected and traded only from the long side. With extended targets, we do not favor mean reversion trades. Currently extended targets have ceased printing therefore the odds of a successful mean reversion short have increased to 40% with the potential to generate twice the profit as risk. But because of CPI tomorrow, this information may materially change. As such, having the MSI as part of your trading arsenal is important for tomorrow. Today $535 became support once this level was broken at the open and set up a nice long to our $538/539 target. The indicator did not provide any short signals today give the extended targets above.
For Wednesday, our model projects a range of $532.25 to $549 (white box on chart), expanding from today. VIX has dropped to 18 as fear comes out of the market. Therefore the market is likely to experience a bit less volatility once it digests both the macro and geopolitical risks but this range is quite large so prepare for more trending price action. We suggest traders remain cautious with the release of CPI and any news out of the Middle East, while we continue to favor the long side. Using the Market State Indicator for real-time updates is recommended to gain a material edge every day.
Dealer positioning for Wednesday to the upside indicates a continued upward bias, with Dealers selling $545, $546, and higher strike Calls while simultaneously buying $543 and $544 Calls. This implies a belief should the market reach the 50 DMA at $543, price will move to $545 before finding any material resistance. Dealers did well today as they were positioned for the breakout that followed PPI. To the downside, Dealers are purchasing $541 to $525 and lower strike Puts at a 1:1 ratio to the Calls they are buying/selling. This suggests a slightly bullish outlook for tomorrow.
Looking ahead to Friday, Dealer are selling $550 to $555 and higher strike Calls, while purchasing $543 to $549 Calls. This positioning suggests that Dealers expect the market to continue to rally to $550 where it will likely pause. To the downside, Dealers are buying $542 to $520 and lower strike Puts at a 4:1 ratio to the Calls they are buying/selling. This indicates should $535 fail to hold, prices will work their way lower. Dealers have kept their downside protection stable since yesterday.
Dealer positioning changes daily, so we recommend reviewing our pre-market analysis on Wednesday 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.
