Market Insights: Wednesday, August 14th, 2024.

SPY opened up over $1.80 once again driven higher by a CPI print that showed inflation below 3% for the first time since April 2021. Lower inflation and weaker PPI cements the rate cuts starting in September, which market participants believe supports higher stock prices. After an initial sell-off to support at $540 at the open, the market reversed course and moved to the day’s highs at $544.96. It then spent much of the afternoon chopping around sideways until a final push higher to close the day at $543.75, up .32%. The Nasdaq rose .12%, while the DOW was unchanged up .05%, with IWM shedding .63%. "Magnificent 7" stocks had a mixed day with GOOGL, TSLA, META AND AMZN falling while MSFT, NFLX AND APPL rose. NVDA too moved higher. SPY's trading volume was below average at 39.78 million shares as traders seem tired by the huge swings the last two weeks. 10-year Treasury yields fell .21% with Crude also dropping 1.98%. Gold fell .76% settling just below $2500, while Bitcoin gave up yesterday’s gains falling 2.5% with price just below $60K once again. We remain bullish Bitcoin above $60K and are bullish Gold and Silver.

In Tuesday’s newsletter, we predicted CPI would be a market mover and to trade what you see. Absent CPI, we anticipated some follow through from yesterday’s rally, favoring the long side but with less volatility with periods of trending behavior. We stated support was $541 where we would initiate longs and also favored mean reversion shorts from $543 to $541. And once again, even with the model not having the benefit of CPI data, the market did precisely what was projected, selling off from $543 at the open to $541, then reversing for a great long to $544.96, a target established in the premarket ($545). Another mean reversion short from this level to $541 and the model was three for three on the day with ease. Knowing in advance key levels to enter and exit trades, a directional bias, whether to hold or take profits quickly makes trading fun and easy. Today could not have been a more perfect example of the power, accuracy and actionable nature of the information provided by our model.

In our premarket analysis at 8:06 am ET, we stated CPI would bring sizable volatility to the market. We stated our view of the market was softly bullish with an initial target of $545 as long as the market stayed above $542.10. This $542.10 level held several times after the initial drop, pop and fall described above which for some presented more opportunities to trade to the long side. Once again, the pre and post market reports contained similar, actionable information. With this confluence our readers know to trade in size and follow the information closely to maximize gains. Another win for the pre-market analysis, especially when combined with yesterday’s post market recap.

Thursday premarket could once again bring some excitement to the market with the release of Retail Sales and Unemployment data. A weakening consumer, while bad for the economy, is further proof the Federal Reserve should be aggressive cutting rates. While a .25 or .5% rate cut doesn’t truly matter to the economy, the information the Fed may provide about future rate cuts and how many cuts will follow does. The advice from today continues to stand for tomorrow…trade what you see once these reports are released. But absent this information, the market has followed through on yesterday’s breakout and appears ready to move higher. Support remains $540, while $550 represents major overhead resistance. Below $540 the market will likely retest $535, which must hold for the Bulls to maintain control of this breakout. Without Retail Sales information, we expect Thursday to be a day similar to today, but with less follow-through to the upside and more sideways, low volume price action. Seven days straight up and the market needs a day or two to rest and consolidate before a push higher. Like today, any geopolitical shock from the Middle East could derail this extremely strong move toward Bull territory, so be cognizant of this external market risk.

Key resistance continues to be $550 as the dividing line between the Bulls and the Bears. A break below $540 will see prices revisiting $535. And while a broader conflict in the Middle East will override our model’s projections, absent this conflict, we anticipate a period of sluggishly higher prices with SPY moving toward $550, pausing in the $543 to $545 range to build momentum to push higher.

Today is day two with SPY outside of the Bear trend channel that has been in place since the market highs. A third day and a new Bull channel will be formed which will be quite steep, narrow, and too strong to be sustainable. There is still a better than even chance this breakout will be tested with prices dropping to at least $535. For Thursday, our model favors two-way, range bound trading selling resistance at $545 while buying support at $541. A break above $545 could see prices reach $550. We suggest reviewing the pre-market report on Thursday 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 and is quite narrow with resistance at $544.75 and support at $543.62. This narrow range without extended targets above implies the trend is tired and there is little impetus to push prices significantly higher. As such, the MSI is telling users to prepare for two-way price action and chop until the MSI rescales or moves to a different state. The MSI indicator rescaled multiple times today. Overnight price was above the upper channel which held during the market open selloff, providing a great long opportunity. The indicator then rescaled higher several times while printing extended targets above. As users of this product know, this means get with the trend and stay with it as the herd is supporting this move. As soon as the extended targets stopped printing at 12:08 pm ET, a classic failed breakout presented and provided the perfect opportunity for a mean reversion short of this major level of resistance to $542.10, the level identified in the premarket. The MSI then entered a Ranging Market state confirming the likely Bull move was overdone. Reaching mid-range and at our level of support, users of the MSI could have easily taken two long trades to resistance at $543.62 for even more successful trades on the day. But in a Ranging state, we expect sideways prices and that is what the market delivered for the bulk of the day, with a brief switch to a Bullish trending market state at 2:44 pm ET without any extended targets. This was simply a pop without any “herd” momentum to push price higher. One final rescaling to a Bullish state at 3:48 pm ET which did reach upper resistance and the market called it a day. But it was a good day for the MSI with several solid opportunities, particularly when used in concert with the levels provided in these newsletters.

For Thursday, our model projects a range of $537.25 to $550 (white box on chart), still remaining quite large but shrinking a bit from today as the VIX continues to fall, closing just above 16. As volatility continues to drop, the market will trade more sideways while it builds momentum for its next move. Certainly with such a large projected range for tomorrow, there will continue to be periods of trending price action. We continue to recommend traders remain cautious with the release of the economic data due tomorrow and watch for any news out of the Middle East. Using the Market State Indicator for real-time updates is recommended to gain a material edge every day.

Dealer positioning for Thursday to the upside implies a continued upward bias, with Dealers selling $546 to $549 and higher strike Calls while also buying $545 and $550 Calls. This implies a belief should the market break above $547, price will likely reach $550. Dealers once again nailed today’s price action with yesterday’s positioning. To the downside, Dealers are buying $543 to $530 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 $549 to $555 and higher strike Calls, while purchasing $543 to $548 Calls. This positioning suggests that Dealers expect the market to continue to rally to $550 where it will 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 $540 fail to hold, prices will move lower. Dealers downside protection has not changed materially for the last few days.

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