Market Insights: Thursday, August 22nd, 2024.

SPY opened up just shy of $2, within striking distance of the all-time highs. But the market quickly found today’s high of $563.18 too difficult to move beyond and the market began falling at 10 am ET, continuing all day reaching a low of $554.98, closing at $556.22, down .78%. Perhaps it was a buy the rumor sell the news day as Fed President Harker stated in no uncertain terms that the Fed would start cutting rates in September. The Nasdaq also fell 1.63% while the DOW fell .43% with IWM down .86%. "Magnificent 7" stocks and NVDA all sold off as well. Trading volume for SPY was just below average at 46.38 million shares. 10-year Treasury yields jumped 2.36% to 3.864%, with Crude rallying 1.4% to just shy of $73. Gold fell 1.11% while Bitcoin shed 1.99%, hovering around $60K. 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 Wednesday's newsletter, we stated today was a day to trade light, favoring the long side, as the news due today and tomorrow could change market participants views and change our view very quickly. We stated volatility was likely to return to the market and recommended trading what you see, remaining nimble given the current environment. We felt prices would move toward $565 where we favored a mean reversion short. And today the market delivered on all fronts: First the market pushed toward $565 which topped out at the days’ highs, setting up a double top mean reversion short which delivered massive gains. There was also a strong opportunity for a long from $557, the level we favored for long trades. Given the strength of the move down from today’s highs, experienced traders knew to use the pop to the $560 level as an opportunity to get short once again, riding it to the day’s lows. Once again, our model provided highly accurate levels to trade with specific trades to look for as the market developed. Additionally the Market State Indicator (MSI) was extremely helpful today in identifying the strength of the trend and levels to trade to and from. More on this below.

In the premarket analysis at 7:51 am ET, we stated the market continues to sluggishly climb upward. We stated the market would move toward $565 with limited eagerness and favored longs above $560.65. We felt any break of $559, our anticipated low, would change our view of the market. Certainly there were opportunities to long from $560.65. However after the 10 am hour, the market clearly didn’t like either the economic news or the Fed speak and sold off, closing near the lows of the day. Like the post market recap stated, on days like this trade what you see. Today is a sold example of why we provide two reports each day. There are times these reports are identical. And when they are not, readers should take heed to be more careful navigating the day.

Today in the premarket, SPY initially reacted positively to the Unemployment Claims data but by 10 am, while Flash PMI and Existing Home Sales beat forecasts, the market decided it needed a day to pullback and consolidate before Chair Powell’s speech tomorrow. There is little news due on Friday so we believe the wise course of action is to look for any change in tone from Chair Powell for clues about the market’s next move. We continue to expect more volatility on Friday and while the Bulls remain in control of the market, a larger pullback before the market seeks new highs would not surprise us. We recommend trading light until the market reacts to the Fed at 10 am tomorrow. Without the benefit of this information, our model suggests Friday the market will attempt to rally from today’s lows at $555 to keep the Bull market firmly intact. A break of $555 lower on volume and the market will sell off to $550 where we expect a bounce. But should $550 fail, the market will look to close the gap at $545. The $550 to $555 zone remains the battleground between the Bulls and the Bears. Therefore the Bulls do not want to give the Bears any excuse to sell and will do all they can to defend this level. As such we continue to favor longs from $555 but like today, may quickly change our view on any news that moves the market. For Friday we recommend you trade what you see. Today’s firm rejection of the move toward the all-time high suggests the market will likely retrace more of its recent gains before attempting to make a new high. We continue to believe the Middle East conflict remains a significant geopolitical risk to the market.

SPY continues to trade in a steep and uncorrected Bull trend channel from the August lows with price just below the lower trend channel. A day or two more of sideways trading and the channel will be redrawn to something more sustainable. Price is hovering just below support at $556 with plenty of room to the upside. The Bull trend remains strong and the Bears will not participate in force until price breaks below $550. Perhaps the first two weeks of September will provide more opportunities for the Bears. 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 Bearish Market State with price closing mid-range. There are no extended targets below. MSI rescaled higher several times in the early morning hours while printing extended targets. This was a sign of strength and the ultimate push to today’s highs. But once the extended targets stopped printing at 10:02 am, it was time to take the mean reversion short discussed in yesterday’s post market recap. Once in this trade, the MSI quickly rescaled lower to a Bearish Market State bouncing between Bearish and Ranging. But while in the Bearish Market State, it also printed extended targets below. That should have been a sign of the strength of the trend. And sure enough, price broke support at $560.50 and fell hard, continuing to print extended targets lower. At 11:42 am after another rescale lower, the extended targets stopped printing. Given the $557 support level was a level identified in our newsletters, a long from this level was appropriate and delivered a great move back to $560. But $560 didn’t hold very long before the MSI once again rescaled lower several times printing extended targets below along the way. Again, the herd was with the short trend and the MSI displayed it perfectly. When the extended targets finally stopped printing, another mean reversion was appropriate for another nice pop to resistance at $557. Finally a sell at the end of the day to support and with but one lone extended target below, by 3:54 pm ET, another mean reversion long into the close set up perfectly. There were almost too many opportunities today provided by the MSI. This is why we continue to recommend using the MSI in concert with our newsletters as having access to real-time information, coupled with the information in the newsletters, creates a powerful and valuable trading system.

In the MSI’s current state we favor shorts from $557 to support at $555. That said, as was stated above, $555 will take a formidable effort to breach. And without extended targets printing below, we actually prefer a mean reversion long from $555 to $557. We would like to see price work lower overnight and set up a failed breakdown to trigger a mean reversion long from $555. At $557 we would also look for a failed breakout to initiate a short to $555. The MSI is plotting a very tight range which implies more sideways than trending price action. As such we would be careful trading until price showed us the way. Given Powell speaks at 10 am Friday, the prudent course of action is to wait for the MSI to rescale or print more information after the speech for higher probability trades.

For Friday, our model projects a range of $548.50 to $564 (white box on chart), expanding from today. VIX is above 17 and we expect more volatility as a result of Powell’s speech tomorrow. The range implies trending price action therefore probabilities favor riding any trade with the trend. But because new information will be introduced to the market, TRADE WHAT YOU SEE.