Market Insights: Wednesday, August 21st, 2024.

SPY opened up over $1 and after a quick drop to support at $559, popped to the high of the day at $562.11 at 10:42 am ET where it found significant resistance and sold off hard to the low of the day at $554.73. SPY reversed at the $555 level and moved back to $561.70 before once again, finding resistance and closing the day at $560.62, up .34%. The Nasdaq rallied .57% as well while the DOW gained .14% with IWM up over 1.3%. "Magnificent 7" stocks were once again mixed with GOOGL, MSFT, APPL and NFLX falling while the others and NVDA, moved higher. Trading volume for SPY was light at 40.77 million shares. 10-year Treasury yields fell .45% to @ 3.8%, with Crude dropping another 1.83% to below $72. Gold was basically flat, down 7 basis points while Bitcoin gained 3.41% and moved back over $61K. We continue to believe Crude is failing to account for the risk of an expanded conflict in the Middle East and continue to add to our Crude longs. We are also Bullish Bitcoin above $60K and are also Bullish Gold and Silver.

In Tuesday's newsletter, we stated today would be very much like yesterday with low volume, choppy conditions with momentum favoring the Bulls. We recommended waiting for a mean reversion short beyond $560 and to look for a failed breakout pattern for a short entry. We also favored longs from $557, and again recommended looking for a failed breakdown pattern, given choppy conditions provide a higher probability of success for these patterns. And today once again, the market delivered precisely what was forecast. The first trade was the failed breakout mean reversion short at 10:44 am ET from the highs which delivered a solid opportunity for profit. The market then delivered a failed breakdown at 12:08 pm ET from the $557 level we recommended, again for a monster trade. And while our favorite pattern presented six times today, the two trades outlined above were the best of the day and showcased the power and accuracy of these post market reports. And with the Market State Indicator (MSI) on our charts, these trades were made even simpler to execute. See more below.

In the premarket analysis at 8:02 am ET, we stated the market was primed to grind higher but would not do so out of the gate. We stated if $559 held, the market would move upward. We favored long entries from $559 with first profit targets at $561.60. And once again, on cue the market fell after the open to support at $559 only to reverse and scream higher to the high of the day above $562. Another perfect trade, set up from the premarket analysis a full 90 minutes before the open. As a trader, what would you pay to have three successful trades that you could plan well in advance of the start of trading. No need to watch the market every minute or stress about what direction or level to trade. Just following the advice provided in the post and premarket reports and we believe your trading life will be simpler, less stressful and much more profitable.

Today the market initially reacted positively to the FOMC Minutes released at 2 pm ET. The report showed the vast majority of Fed officials favored a rate cut in September. But after an initial pop on the news, the market sold off, although it did manage to end the day with minor gains. On Thursday, Unemployment Claims will be released at 8:30 am, followed by PMI at 9:45 am. With today’s update to the number of jobs created the past year, adjusting the total lower by over 800K, tomorrows’ Unemployment report could be significant and move the market more than it might otherwise. Jobs numbers are routinely updated and as such are unreliable as a single data point. But with such a large downward revision, it’s possible the Federal Reserve is behind the curve reducing rates and the labor market isn’t as strong as they believe. We will be watching for a change in tone on Friday from Chair Powell. If the Feds are more dovish, while this will surely lead to rate cuts, they will be for the wrong reasons, implying a possible recession. If they remain unchanged and state one rate cut in September is appropriate without any further guidance, the market may rally, believing the soft landing scenario is still probable. We expect the market will react more violently come Friday, one way or the other. Bulls still control the market and momentum continues to favor the upside. But with news coming out tomorrow and Friday which could change market participants’ views, we recommend trading extremely light until there is more visibility from these macro events. Absent this information, Thursday will be much like today where below $555 the market will likely close the gap to $545 and above $555, the market will seek new all-time highs. While we continue to favor longs from $557 and $559, we may change our view quickly on any news that moves the markets. As such for Thursday, trade what you see and be nimble…or don’t trade at all. There is nothing wrong with waiting for price discovery before risking capital. We continue to believe price will try to move to $565 where we would entertain a mean reversion trade. There is little evidence to suggest prices will exceed this level on Thursday. A failure of $555 and the market moves significantly lower. We continue to believe the Middle East conflict remains a 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, the channel will be redrawn to something more sustainable. The lower boundary of the channel has support at $557 and resistance at the upper channel at $575. It is highly improbable the market reaches $575 without a pullback. The Bull trend is strong and the Bears have nothing to do but wait for the market to provide an opening. Perhaps they will reemerge in the seasonally weak September. 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 in Bullish Market State with price closing just above support at $560.77 with resistance at $561.71 and lower support at $558.92. There are no extended targets above which indicates the herd is not pushing prices higher. The MSI rescaled in the premarket several times while printing extended targets, implying a strong trend that should be respected after the open. Price fell quickly to MSI support at $559 and put in a failed breakdown which was a signal to go long. MSI then continued to rescale higher twice while printing extended targets. But these targets quickly disappeared at the day’s highs and a perfect failed breakout pattern emerged for a short back to support. The MSI then rescaled first to a Ranging State then to a Bearish State and when price reached mid-range in the Ranging state, experienced users of this product knew to get short and hold for lower levels. With the MSI back to a Bear Market State but without an extended target, the quick flash lower to $559 was once again the perfect failed breakdown pattern. And while the MSI did print one extended target, it quickly disappeared allowing our users of this tool to know it was safe to hop on the long trade after 12:04 pm. The entry didn’t come for another 4 minutes at 12:08 pm so there was plenty of time to take this mean reversion long and hold for higher prices. The rest of the day had much the same action with the MSI flipping from Bullish to Ranging States, ending in a very narrow range. When this happens we look for two way trading between the levels identified by the MSI and our pre and post market reports. In a Ranging State we like to take first profits mid-range given this is a transition state and price may or may not follow through. Historical probabilities suggest using the MSI alone without the benefit of other information will produce better than 65% winners. When coupled with the levels, directional bias and recommendations of the post and premarket reports, you can easily understand why we expect to win many more trades than we lose.

For Thursday, our model projects a range of $555.25 to $566 (white box on chart), expanding a bit from today. VIX is back above 16, expecting volatility from the news due from the Fed this week. Thursday be prepared for more volatile and potentially trending price action once new information is released into the market. Trade what you see.

Dealer positioning for Thursday to the upside has Dealers selling $565 to $570 and higher strike Calls. This implies Dealers believe the market stalls at $565 with a small chance it will move beyond this level on Thursday. To the downside, Dealers are buying $560 to $555 and lower strike Puts in a 4:1 ratio to the Calls they are selling. This positioning implies Dealers are less Bullish than they have been. While they still believe prices may reach $565, they see this as a ceiling for Thursday and on any break of $558, Dealers believe prices will easily reach $555 and potentially lower. Dealers have not materially changed their downside positioning for Thursday.

Looking ahead to Friday, Dealers are selling $561 to $570 and higher strike Calls, while also selling a tiny number of $556 to $560 Puts. This positioning suggests should $565 be breached, the market will stall at $570. To the downside, Dealers are buying $555 to $540 and lower strike Puts in a 3:1 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 by half from today. A 3:1 ratio is balanced which implies Dealers are less concerned about downside risk heading into Friday. While not Bullish, Dealers are not overly concerned about downside risk by Friday.

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.