Market Insights: Thursday, August 15th, 2024.

SPY gapped up at the open a whopping $5.75 driven higher by a Retail Sales number which was much stronger than forecast indicating a very strong consumer who is still spending. Unemployment Claims too came in lower than expected and combining these reports with the other economic news this week, the fears of a recession and hard landing have all but been erased. While much of today’s move came premarket, a brief pause at $550 and SPY continued its trek higher, reaching $553.36 before closing at $553.07, up 1.71% for the day. The Nasdaq had an even better day gaining 2.32%, while the DOW was up 1.39%, with IWM, a recent underperformer topping the tape, popping 2.59%. Every "Magnificent 7" stock rallied including NVDA with TSLA leading the way, up 6.34%. SPY's trading volume was higher than average at 60.56 million shares, reinforcing today’s move. 10-year Treasury yields gained 2.43% moving back toward 4% with Crude also gaining 1.47% while Gold too joined the party, up .6%, sitting just below $2500. Bitcoin suffered as money rotated back into technology, falling 3.88% with price just below $57K. We remain bullish Bitcoin above $60K and are bullish Gold and Silver.

In Wednesday’s newsletter, we stated the premarket would once again bring excitement to the market and to trade what you see. We stress this on days with major news releases. We also stated absent today’s economic news, the market was ready to move higher with periods of strong trending behavior expected today. We stated support was $540 and resistance $550. With the market opening at $549.50, there was little to trade until 10 am when the market pulled back to $549 forming a double bottom setting up a long to the highs of the day. One and done but it was a doozy. Our MSI caught this perfectly which you will see below. Knowing key levels with a directional bias surely helped one manage the day. But once again, today was a day to use our model as a guide and TRADE WHAT YOU SEE.

In our premarket analysis at 8:24 am ET, we stated the market was timidly Bullish going into the Retail Sales report. We stated should the market move above $547, it will reach as high as $551. We stated we favored long entries off support as they developed along the way. With the market reaching $553.36, and opening at $549.50, once again traders needed to grasp the power of the rally, understand why it developed and get with the trend to ride it for all it was worth. Again knowing our model favored long trades, knowing to expect periods of strong trending market action, and knowing where our model expected support and resistance should have prepared you for what followed.

But today was not just about a strong Retail Sales number. It was a classic short squeeze that set up in late July and in earnest on August 1^st when the market sold off 1.42%. This is why the market gapped lower on August 2^nd. Funds and institutions piled into the short trade and while many did well, those still holding short positions today had no choice but to exit their shorts given they were now underwater. So today they bought and continued buying to close out short positions with exacerbated the move higher. In fact the last six plus days has been a classic short squeeze with today being the culmination. Understand why and how markets work is critical to being able to capitalize on days like today…or for that matter since the market selloff began. The market has now entered the $550 to $555 no man’s land we spent lots of time discussing in July’s newsletters. The question everyone should be asking is “What happens now?”.

Friday there is no material economic news so the market needs some time to digest the gains of the past seven days before determining its next move. V bottoms and tops are less common than reversals that take time to consolidate. Look at the April sell off which took over two weeks to actually find a bottom and reverse. This sell-off, while violent and perhaps even scary, took one day to bottom. While far less common, it is not unheard of. But models such as ours, are designed for the majority of market conditions and not for the less common occurrences. After such a massive reversal from $510 back to $553, or @ an 8.5% move off the bottom in just a few days, will the market continue to press higher or even make new all-time highs? Our model suggests both are possible. But because of the rarity of the move we just witnessed, our model needs more data and therefore more time to accurately predict what will come next. So we go back to older predictions when price traded in the $550 to $555 range to gain clues of what is likely to transpire in the short term. Our model is no different from other models…we all face the same dilemma. Our conclusion is it’s highly likely, like it was in mid-July, that the market ranges between $550 and $555 for a few days before deciding its next major push. Below $550, the market is likely to close today’s gap at $545. Above $555, the market will seek new all-time highs and put the Bulls firmly in control. Between $550 and $555 the battle for control still rages, although certainly the favorite is now the Bulls. So for Friday we expect to see two-way trading with the market moving higher overnight toward $555 but likely finding resistance and even retracing a bit. It’s still August and in the last two weeks of August volume dries up significantly. As such it’s probable we enter a period of sideways consolidation before entering the seasonally Bearish September and October months. And like today, any geopolitical shock from the Middle East can easily change the narrative very quickly.

SPY is now trading in a very steep and uncorrected Bull trend channel from the August lows. There is little chance this trend channel remains as steep or as narrow as it is over the next several days. As such for Friday, our model favors two-way, range bound trading selling resistance at $555 while buying support at $550. A break above $555 could see prices reach $560, although we see this as a low probability for Friday. We suggest reviewing the pre-market report on Friday 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 with extended targets above, and price is trading above the MSI’s extended targets. The MSI has not rescaled since the open, after rescaling twice in the premarket. At the open the MSI rescaled and provided levels to enter long at $549.07. Given the MSI continued to print extended targets, even at these elevated levels, probabilities favored going long and holding for the extended targets above. This was a fairly easy trade to take in the 10 am hour which delivered a straight shot to the day’s highs. With price then above the extended targets, we did not favor any trade. When this occurs, the prudent course of action is to wait for the MSI to rescale either higher or lower to provide clues of what is to follow. Currently there is no resistance above given where price is resting. Support is at $549.07 and $546.83.75 respectively. The range remains narrow but with extended targets still printing, we are not inclined to take a mean reversion trade. The trend is strong as was evidenced by the MSI rescaling higher before the open while also printing extended targets above. Users of the MSI know to avoid mean reversion trades when the MSI is printing extended targets. We will have to wait to see if the MSI rescales higher overnight or the extended targets stop printing. If they do stop printing, we favor a mean reversion short to $550 where we would lock in profits and reverse long.

For Friday, our model projects a range of $548 to $558 (white box on chart), contracting significantly to a more “normal” range. VIX fell to 15.23 as fear of a market collapse has disappeared. As such the market will begin to trade more sideways, digesting the recent price action to build momentum for its next move. We expect Friday to be a day of rest without much trending price action. But remain cautious, keeping an eye out for news out of the Middle East. Using the Market State Indicator for real-time updates certainly helps to gain a material edge in the markets, each and every day.

Dealer positioning for Friday to the upside implies a continued upward bias, with Dealers selling $554 to $560 and higher strike Calls while also selling $552 and 553 Puts. Dealers sell Puts when they firmly believe prices have nowhere to go but up. That said, virtually all of the Dealer’s overnight positions have moved ITM and as such, there is little to gleam from Dealer positioning for Friday. The options market in general is heavily Call dominated and $555 is a major level which will take a Herculean effort to overcome on Friday. Based on Dealer positioning, $555 appears to be a ceiling for Friday. To the downside, Dealers are buying $552 to $547 and lower strike Puts at a 2:1 ratio to the Calls they are buying/selling. This suggests a balanced outlook for Friday.

Looking ahead to next Friday, Dealer are selling $554 to $565 and higher strike Calls, while also selling $550 Puts. This positioning suggests that Dealers expect the market to continue to rally to as high as $560 by the end of next week. This also implies a floor at $550. To the downside, Dealers are buying $549 to $540 and lower strike Puts in a 6:1 ratio to the Calls/Puts they are selling. This indicates should $550 fail to hold, prices could move lower quickly. Dealer downside protection has increased since today, which makes sense given today’s huge move and the desire to protect profits.

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