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Market Insights: Friday, August 16th, 2024.

SPY opened down @ $1.75 after rallying overnight to $554.23 where SPY mean reverted to major support at $550. At the open SPY resumed its trek higher, pausing briefly at $553.50, only to continue higher reaching $555.02 by 1 pm ET. Once at this level, SPY traded sideways for the rest of the day, closing at $554.31 up .22%, putting in its best weekly performance of 2024. The Nasdaq too gained .21%, while the DOW was up similarly .24%, with IWM up .26%. "Magnificent 7" stocks were mixed with AMZN, MSFT and META losing ground while the others rallied, including NVDA. Trading volume for SPY was lower than average at 44.43 million shares. 10-year Treasury yields shed .79% sitting just below 3.9%, with Crude dropping 2%, while Gold jumped 2.16 closing firmly above $2500. Bitcoin rallied 2.3% moving back toward $60K. We believe Crude is failing to price in the risk of an expanded conflict in the Middle East and are therefore bullish Crude. We remain bullish Bitcoin above $60K and are bullish Gold and Silver.

In Thursday's newsletter, we forecasted that the market would rise overnight towards $555, encounter resistance, and then retrace. This prediction played out exactly as expected. We also anticipated that volume would begin to taper off, leading to sideways trading between $550 and $555, which is precisely what occurred. We expressed a preference for a mean reversion short from $555 and a long from $550. As the market touched $550 just before the open, the strategy was to go long and hold until $555, where an exit and a mean reversion short were advisable. While the short didn’t yield much as price entered consolidation and only declined to $553.60, it was still a straightforward trade on a day with minimal market action. Once again, our model's levels were spot-on, the directional bias was accurate, and the type of day unfolded as predicted.

In the premarket analysis at 8:14 am ET, we highlighted that the market seemed reluctant to maintain its aggressive upward momentum, identifying $555 as a realistic target. We anticipated consolidation and sideways movement, advising long positions above $550. Once again, the premarket and post-market reports were aligned, signaling that the models were in full agreement. As experienced readers know, when both reports are in sync, it’s a strong indication to follow the guidance closely and trade with confidence. This alignment significantly increases the probability of success, allowing for larger, more decisive trades. With this insight, along with the previous day’s forecasts, the day presented clear opportunities with a material edge, making it easier to execute successful trades.

Monday is set to be a quiet day with no significant economic news, allowing the market time to digest the recent activity. Given this, it's highly likely that the market will continue to range between $550 and $555 before making its next major move. Although momentum currently favors the Bulls, with the near certainty of Fed rate cuts in September, the market may begin to interpret bad economic news as genuinely negative, potentially driving prices lower. As interest rate policy continues to steer market action, we might see a shift where economic realities start to dictate price. We could see a material shift in how this information is perceived and digested by the markets. The market by historic norms is overpriced and if growth does not justify extended valuations, price will suffer. Below $550, the market will likely close the gap at $545, while above $555, the market will seek new all-time highs and the Bulls will be in control. Between $550 and $555 remains no man’s land and will be the zone for control of the broader market. For Monday we expect more of what transpired today with two-way trading and choppy conditions. SPY may attempt to break out of the $555 resistance level and move toward $560. We would fade this move as there is little evidence to suggest $560 is a level of support…at least not for Monday. Watch for our favorite failed breakout pattern for an entry short from this level. As we stated yesterday the last two weeks of August sees volume dry up, which typically sets up the Bearish month of September. We see this as the likely scenario until other information is introduced to the market. Certainly any further conflict in the Middle East will quickly put the market under stress, especially oil prices which could jump significantly.

SPY is trading in a steep and uncorrected Bull trend channel from the August lows. A few days of sideways price action and this channel will be redrawn to something more sustainable. We continue to favor selling resistance at $555 while buying support at $550 with a break of $555 leading prices as high as $560 where we would look for a mean reversion short. Below $550 we favor shorts to $547. We recommend reviewing the pre-market report Monday morning for the latest updates before the market open.

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 resting below resistance. The MSI has not rescaled since 12:58 pm ET after rescaling higher four times between 12:14 pm and 12:48 pm. While it was rescaling higher, it was also printing extended targets above. Experienced users understand this implies a strong trend with herdlike behavior pushing prices in the direction of the trend. You are advised to hop on these trades as there is a better than 70% probability price will reach upper resistance. With price opening above resistance at $550, a level identified in Thursday’s newsletters, with the MSI in hand, the trade was to go long looking for overhead resistance. Surely once the MSI began rescaling, if you were long, you sought the $555 level identified in the pre and post market reports, which is also the level the MSI printed. The MSI picked this level as overhead resistance which confirmed it as a viable target. Once the extended targets stopped printing, the probabilities for a successful mean reversion short greatly increased. The MSI is designed to keep traders from picking tops and bottoms based on their “view” of the market. How many times have you as a trader decided the market has to stop here so you initiate a mean reversion trade, yet the market continues to move against you and you keep piling into the trade only to finally capitulate, losing far more than intended. With the MSI, you know better: Do not even think about a mean reversion trade until the “herd” is no longer pushing price. And only mean revert when price is at or near a predefined support or resistance level. This one change to your trading behavior potentially makes the MSI the most valuable tool in your arsenal. Currently the MSI is not printing extended targets and with price at $555, a mean reversion short may still be a viable trade for Monday. That said, price tested the $555 level several times on Friday and it is vulnerable to a break higher. We favor waiting for a breakout above this level to fail, then taking a mean reversion to $555 and perhaps to $551. Should the market fall on Sunday, we favor longs from $551 to $555.

For Monday, our model projects a range of $549.75 to $558.75 (white box on chart), which has narrowed significantly. VIX is sub 15 and as such, it’s likely Monday is a choppy range bound trading day. We do not expect significant trending price action without an external catalyst.

Dealer positioning for Monday to the upside has Dealers selling $555 and $556 Calls as well as $558 to $565 and higher strike Calls, They are also buying $557 Calls and selling small quantities of $554 Puts. This implies confidence by the Dealers that price will continue to trend higher. That said, they believe price needs to reclaim $557 on volume to reach $560. Dealer positioning certainly implies a ceiling at $560 for Monday. We stated yesterday that Dealers felt $555 would take a Herculean effort to overcome and certainly the Dealers were correct in their positioning for Friday. To the downside, Dealers are buying $553 to $547 and lower strike Puts in a 4:1 ratio to the Calls/Puts they are selling/buying. This positioning shows more concern for lower prices on Monday, should $547 give way, although Dealers are not overly Bearish.  

Looking ahead to next Friday, Dealers are selling $555 to $565 and higher strike Calls, while also selling small quantities of $551 to $554 Puts. This positioning suggests that Dealers continue to expect the market to move higher to as high as $560, by week’s end. To the downside, Dealers are buying $550 to $540 and lower strike Puts in a 5:1 ratio to the Calls/Puts they are selling. This implies should $550 fail to hold, prices are likely to move to $545 quickly and perhaps much lower. Dealer downside protection for Monday is similar to today.

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.