Market Insights: Tuesday, August 20th, 2024.

SPY opened down @ $.50 and quickly moved to the high of the day at $560.84 by 10 am ET where it quickly found resistance and sold off to $557.33, the low of the day. SPY then spent the afternoon in a $2 range, closing down 16 basis points at $558.70. The Nasdaq fell slightly down .35%, while the DOW dropped .15% with IWM giving way 1.17%. "Magnificent 7" stocks were mixed with META and TSLA losing as well as NVDA, with all others higher. Trading volume for SPY was very light at 32.68 million shares. 10-year Treasury yields continue to fall, dropping 1.5% to @ 3.813%, with Crude shedding another 1.66%. Gold gained .53% while Bitcoin also gained .68% hovering @ $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, Bitcoin above $60K as well as Gold and Silver.

In Monday's newsletter, we stated today would be a quiet day with choppy price action as the market took a day to rest and consolidate. We stated we favored a mean reversion short from $560, particularly on a failed breakout, and recommended longs from $557.44. And to the penny, per the model’s forecast, SPY popped after the open to the high, put in a failed breakout and provided the perfect mean reversion short to where…$557.33 where we initiated a long back to the afternoon highs at $559.72. Two easy and highly profitable trades set up perfectly in the post market recap. Need I say more? And once again the MSI indicator showed us the way as well. More on that below.

In the premarket analysis at 8:34 am ET, we stated the market would find it difficult moving beyond $560. We stated the market would likely find support at $558.25 which is exactly what it did several times today, hovering around this level for much of the day. We stated we favored longs but would be careful and quick to take profits. Certainly there were several opportunities to long from $558.25 for quick scalp trades. The most profitable trades came from a failed breakout and a failed breakdown, both from levels identified in the post market recap. The premarket provided several additional trading opportunities to complement the post-market forecast. Learning to use these two reports in concert with our Market State Indicator (MSI) makes trading straightforward with clear opportunities for profit. We offer several programs to teach you how to incorporate these tools into your daily trading. Contact your representative for additional information.

Wednesday sets the tone for what is to follow this week with FOMC Meeting Minutes being released at 2 pm ET. While unlikely to contain any major revelation, the tone and language may provide insight into Chair Powell’s Friday statement. We recommend trading what you see once this report becomes public. Until then, the Bulls have resumed control of the market and momentum will continue to the upside. Like today, below $555 the market will likely close the gap to $545. Above $555, the market will seek new all-time highs. Today’s sideways price action continues to support this thesis given the best the Bears could do today was produce a sideways, consolidation day. With $560 now being tested a few times, like $555 before it, it is less reliable for mean reversion trades. As such we do not recommend another mean reversion short from this level on Wednesday. We would like to see price on Wednesday move toward $565 where we would surely entertain a mean reversion trade. We continue to recommend longs from $555 and $557. A failure of $555 and the market moves significantly lower. We will continue to look for failed breakout/breakdown patterns to trigger trades for tomorrow. In choppy markets this pattern has a higher probability of success and therefore should be part of every trader’s toolbox. The market constantly seeks to trap traders and with the rest of August likely to produce low volume, be forewarned that any rally beyond the levels identified are likely traps heading into September. The Middle East conflict also continues to be a potential geopolitical risk to the market.

SPY continues to trade in a steep and uncorrected Bull trend channel from the August lows. With more sideways trading days, the channel will be redrawn to something more sustainable. The lower boundary of the channel has support at $556 and resistance at the upper channel at $574. It is highly improbable the market reaches $574 without a pullback. But the trend is strong and there is no case to be made for the Bears presently. We recommend reviewing the premarket analysis 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 displaying something which happens rarely. There is only one blue support level printing below price. This occurs on very low volume where the algo simply doesn’t have enough information to generate two levels. Again a rare occurrence but something that can and does happen. In this case we recommend going up or down in scale. A 1-minute chart will display what you are accustomed to seeing as will a 5-minute chart. But we post the 2-minute chart here as a teaching opportunity for our readers. In this state, the MSI is still in a Bullish trending market state with support and resistance at $557.48. There are no extended targets above which indicates the herd is not interested in pushing prices higher. The MSI provided the perfect exit for the mean reversion short from today’s highs at the $557.48 level. The MSI for all practical purposes has not rescaled since 12:54 pm ET yesterday, dropping lower support at 13:04 pm today. In its current state, the MSI is implying very choppy sideways conditions without much movement either way. Again, change the indicator to a different scale for more or less granularity. Probabilities favor price will retrace to $557.48 and remain in a narrow range until volume is reintroduced to the market which is likely to occur tomorrow after FOMC minutes are released. Until then, Wednesday is likely to set up exactly like today, with more chop and sideways price action. We highly recommend readers who do not utilize the MSI speak to their representative given the MSI provides real-time data to guide your day’s trading, providing invaluable and highly actionable information.

For Wednesday, our model projects a range of $554.25 to $564.50 (white box on chart), expanding slightly from today. VIX rallied above 15 today in anticipation of the news due from the Fed this week. It’s likely Wednesday will continue to deliver a choppy range bound trading day without significant trending price action until FOMC Minutes are released.

Dealer positioning for Wednesday to the upside has Dealers selling $559 to $565 and higher strike Calls. This implies Dealers believe the market likely stalls at $565 with little chance it will rally beyond this level on Wednesday. To the downside, Dealers are buying $557 to $547 and lower strike Puts in a 5:1 ratio to the Calls they are selling. This positioning implies Dealers are far less Bullish than they have been previously. While they still see prices potentially reaching $565, they see this as a ceiling and on any break of $557, Dealers believe prices will easily reach $555 and potentially move much lower. Dealers have added to their downside positioning and are prepared for any pullback that may develop on Wednesday.

Looking ahead to Friday, Dealers are selling $559 to $565 and higher strike Calls, while also selling an insignificant number of $556 to $558 Puts. This positioning suggests Dealers do not expect the market to top $565 by week’s end. To the downside, Dealers are buying $555 to $540 and lower strike Puts in a 6:1 ratio to the Calls they are selling. This implies should $555 fail, prices are likely to move to $550 initially and potentially much lower. Dealer downside protection for Friday has dropped slightly from today. A 6:1 ratio however indicates Dealers are concerned about downside risk and are taking measures to protect themselves. Again we highly recommend a long book do the same.

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.