Market Insights: Monday, August 19th, 2024.

SPY opened up $.42 after treading water overnight at the $555 resistance level. A brief pullback after the open to $553.86 and the low was in for the day. SPY then resumed where it left off on Friday and pushed virtually straight up to close up .96% at $559.61 for its eighth straight day of gains, the best since November of 2023. The Nasdaq too gained 1.4%, while the DOW was up .6%, with IWM up 1.22%. "Magnificent 7" stocks were all higher except AAPL which was down 7 basis points. NVDA popped over 4% as well. Trading volume for SPY was lower than average at 37.46 million shares, typical of the last two weeks of August. 10-year Treasury yields fell .44% hovering @ 3.9%, with Crude dropping another 2.26%. Gold gained .17% while Bitcoin fell 1.19% moving under $59K. We continue to believe Crude is failing to account for 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 Friday's newsletter, we stated SPY may attempt to break out of the $555 resistance level and move toward $560. This is exactly what the market delivered today. We stated we continued to favor longs and would not short unless the market fell to $550. The market instead found support at the lows and simply charged higher to $560. We advised traders not to seek a mean reversion trade from $555 as this level has been tested several times and was no longer a reliable resistance level. When resistance fails, it becomes support and sure enough, after a failed breakdown trade (one of our favorite patterns discussed in these newsletters) at 10:18 am ET, the perfect long set up at 10:26 am from $555.26 which moved virtually straight up to our target at $560. We also anticipated low volume with exaggerated moves and while the strength of today’s trend surprised even us, it didn’t surprise our MSI indicator which not only saw the move coming but also confirmed the strength of the trend. More on that below.

In the premarket analysis at 7:44 am ET, we stated the market looked primed to grind higher. We stated above $553.50 the market would move to $556 and potentially reach $560. We stated we favored longs at reasonable support levels and would not short without a break of $553.50. Once again, the premarket analysis tied perfectly to the post market recap and experience readers know, this alignment significantly increases the probability of success. Traders should trade in bigger size and be more decisive in their trades when these two reports concur. Once again, the premarket analysis, along with the post market recap presented clear opportunities providing traders a material edge with increased odds of executing successful trades.

Tuesday again is set to be a quiet day with no significant economic news, although two FOMC members are scheduled to speak during the afternoon session. Central Bankers are at the Fed’s annual Jackson Hold symposium discussing their outlook of the economy. On Friday it’s widely expected Chair Powell will outline the Federal Reserve’s plans for a less restrictive monetary policy, i.e. rate cuts. As such the market may continue to rise in anticipation of this news. With the market today breaking out of the $550 to $555 zone, the Bulls have clearly taken control and the Bears have capitulated. Momentum will continue to favor the Bulls in the near term unless economic realities dictate price. Below $555, the market will likely close the gap at $545, while above $555, the market will seek new all-time highs. After eight straight up days for SPY and nine for the Nasdaq, the market is due for a pullback. Statistically, this is once again rare territory and algorithmic models, including our, will have a difficult time determining the markets’ next move. Our model is still showing no signs of an immediate retracement and therefore we remain Bullish. That said, we favor a mean reversion short from $560 given there is little evidence to suggest the market will move much beyond this level on Tuesday. We do not recommend a long from this level without price defending a prior level of support such as $555. If the market pulls back to the $555 level and it holds or puts in a failed breakdown or other bottoming pattern, we favor longs to $560. Should the market stall at $560, we would also love to see a failed breakout to short to $557 with $555 as a final target. Remember the market loves to trap traders and its certainly possible the last two weeks of August remain strong to attract late to the party Bulls, only to punish them in the seasonally Bearish September. And we remind readers any expanded conflict in the Middle East will quickly put the market under stress, especially oil prices which could jump significantly.      

SPY continues to trade in a steep and uncorrected Bull trend channel from the August lows. This channel is unstainable and the market will surely deliver at least a few days of sideways price action which will allow the channel to be redrawn. The lower boundary of the channel has support at $554 and resistance at the upper channel at $571 which would mark a new all-time high. While certainly possible, it is highly improbable the market reaches $571 without at least a minor pullback. We recommend incorporating our premarket analysis into your daily trading plan to receive the latest market updates prior to the 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 with price above the indicator’s extended targets. Extended targets continue to print into the close. The MSI has not rescaled since 12:54 pm ET after rescaling higher six times in the morning session. While the MSI rescaled higher, it printed extended targets above intermittently while it pulled back twice to a Ranging state. Experienced users understand when the MSI rescales multiple times and quickly while also printing extended targets, the trend is strong and the herd is participating in the move. In this state it is recommended to get with the trend from an MSI support level as probabilities favor price will at least reach upper resistance levels. The MSI provided entries after the failed breakdown after 10 am and again at 11:54 am which took prices to today’s highs into the close. With price now sitting above extended targets, probabilities favor a mean reversion short to the extended target at $558.37 with likely follow through to $557.44 where we would seek long entries. It is also possible the MSI rescales either higher or lower overnight. Therefore we highly recommend those who do not use this tool to secure it from your representative given the MSI provides real-time, actionable information to guide your day’s trading. Simply trading level to level with the MSI will deliver a better than 65%-win rate. No other tool can claim or prove this statistic.  

For Tuesday, our model projects a range of $554.25 to $562.50 (white box on chart), which is continuing to shrink in size. VIX continues to fall and as such, it’s likely Tuesday finally delivers a choppy range bound trading day without significant trending price action.

Dealer positioning for Tuesday to the upside has Dealers selling $560 to $565 and higher strike Calls. There is little Dealer exposure beyond these levels for Tuesday as once again, most options for today ended ITM. As such positioning for tomorrow at the close was extremely light. But based on what we can see, this implies Dealers believe the market likely stalls at $560 and certainly will not exceed $565 on Tuesday. The ceiling of $560 held perfectly today. To the downside, Dealers are not showing their hand buying Puts for tomorrow. This implies they have moved to Futures to protect the downside, at least overnight. We are able to look out a few days and see Dealers are buying $557 to $545 and lower strike Puts while also selling $558 Puts. This positioning implies Dealers continue to be Bullish on Tuesday although a break of $557 and Dealers believe prices will potentially reach $550. Dealers have added to their positioning with later expiries so coupled with their likely Futures positioning, Dealers are prepared for any pullback that may develop on Tuesday.   

Looking ahead to Friday, Dealers are selling $562 to $568 and higher strike Calls, while also selling in small size, $555 to $559 Puts. This positioning suggests that Dealers do not expect the market to drop below $555 by Friday, although their positioning is fairly light. When Dealers sell Puts, they are confident price will continue to move higher to as high as $565 by week’s end. To the downside, Dealers are buying $554 to $545 and lower strike Puts in a 10:1 ratio to the Calls/Puts they are selling. This implies should $555 fail, prices are likely to move to $545 quickly. Dealer downside protection for Friday has more than doubled from today which indicates Dealers are protecting profits. We highly recommend any long book do the same, especially going into September.

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.