Market Insights: Monday, August 26th, 2024.

SPY opened up over $1 and again was within striking distance of the all-time highs, having drifted higher overnight. Another brief rally at the open to today’s highs at $563.91 and like Friday, the market decided that was enough and fell, reaching the low of the day at $559.05. SPY bounced off this level and ended the day down .24%. The Nasdaq suffered worse, falling .83% as money moved out of tech. The DOW was the beneficiary, reaching a new all-time high, gaining .16% with IWM up slightly, gaining .04%. Most "Magnificent 7" stocks fell including NVDA. The exceptions were APPL, NFLX and GOOGL which registered small gains. Trading volume for SPY was light at 34.99 million shares. 10-year Treasury yields gained .32% to 3.82%, with Crude continuing to rally, up 2.94% closing just above $77. We stated for several days we were Bullish Crude and took our profits all day today. We are no longer adding to our Crude position. Gold rose .31% while Bitcoin took a breather, falling 1.49%, holding above $63K. We continue to remain Bullish Gold and Silver, and Bitcoin above $60K.

In Friday’s newsletter, we stated the market today would take a day to digest the information from last week and that SPY would simply drift higher. We forecast ranging price action and two-way trading favoring the long side. We stated the market would attempt to rally overnight toward the all-time high reaching $563 or slightly beyond, but would run into heavy resistance and fail. We stated at that level we favored a mean reversion short to $560. Again, our model could not have been more accurate. SPY did rally overnight to $563.91 and fell hard reaching $560 by noon. Another perfect trade, predicted down to the penny over 48 hours ago. This isn’t luck or coincidence—it's the precision and power of our advanced models at work. The Market State Indicator (MSI) too was once again extremely useful identifying the strength of the trend as well as levels to trade to and from. More below.

In the premarket analysis at 8:00 am ET, we stated the market looked tentatively Bullish with a max high for the day of $564.75. We stated should $561.50 fail, prices would reach $559.50 where the market would likely rally. We stated we would not short at this level. And again to the penny, SPY lost $561.50 at 10:30 am and fell to $559.50 where it bounced to $561.50. Two-way, range bound trading exactly as predicted and exactly at the levels provided. The premarket added additional opportunity for profit on an otherwise uneventful day.

Tuesday has not much in the way of economic news and therefore once again, the market is likely to trade sideways to slightly higher. The Bulls remain in control and even on a day like today, were able to make a higher high and a higher low, keeping a firm hand on the wheel. Volume has evaporated and will likely remain quite low until the Jobs report next month. But Wednesday has NVDA earnings and we do expect some fireworks afterhours on Wednesday. But without additional macro catalysts to push the markets higher, SPY will continue to drift to and likely beyond the all-time high.

Our model suggests Tuesday the market will rally to the all-time high but will once again run into heavy resistance at $565. A break of $565 and the market will move toward $570. A failure of $560 and the market will trade to $557. The $550 to $555 zone is still the battleground between the Bulls and the Bears so should price slip back into this area, the battle for control will pick up once again. The Bulls however currently rule the markets and will seek higher prices. And we continue to warn of the potential geopolitical risks from the Middle East.

SPY continues to trade in a steep Bull trend channel from the August lows. The channel will continue to flatten as price moves sideways to slightly higher. Price is trading along the lower tend line of the Bull channel with room to the upside. The Bull trend is strong as long as price remains above $555. September will be upon us soon, which should provide the Bears an opening to retest lower levels. Until then prepare for more two-way trading with perhaps exacerbated moves either way due to the low August volume. We recommend reviewing the premarket analysis to receive the latest market updates prior to Tuesday’s open.

Looking at a 2-minute chart of SPY with our Market State Indicator (MSI), the indicator is currently in Ranging market state with price closing mid-range. The MSI rescaled lower mid-morning to a Ranging state, then to a Bearish Trending market state. The MSI bounced between Bearish and Ranging states all day, implying nothing but chop and two-way trading. Very narrow trending states are a good indication that the trend will not be overly aggressive. This tight range, in concert with the absence of extended targets, is a good indicator of the strength of the trend. At the open there were extended targets above price but they quickly stopped printing at 9:34. A failed breakout right after the open set up the perfect mean reversion short from $563.31. As the market fell and the MSI rescaled to a ranging state, most took profits @ $560.50, given the Ranging state did not turn into a Bearish state after reaching this level. And once the Bearish state did emerge, as we warned in the premarket report, we were no longer interested shorts from the $560 level. While price did reach the MSI lower targets and extended targets below, because our premarket report stated to look for longs from this level, we waited for the extended targets to stop printing at 12:16 pm for a nice trade back to $561.50 where we once again shorted the high of the Ranging state for a second, large, short trade to the day’s lows. And that was enough for us. Three great trades with more meat on them than any other potential set up on the day. Level to level, identified by the MSI and in the post and premarket reports. This is why we recommend you incorporate these tools into your daily trading.

In the MSI’s current state we favor two-way trading with longs from $560 and shorts from $561.50. That said, we continue to favor the long side with price above $560. A break above $561.50 will likely rescale the MSI to a Bullish state where we would enter long to the all-time highs. This scenario shows the highest probability for Tuesday. A break on volume below $560 and price will likely visit $557, where once again, if there are no extended targets printing below, we favor a mean reversion long. For Tuesday our model projects a range of $556.25 to $565 (white box on chart), continuing to contract, implying more choppy and ranging price action for Tuesday. VIX is hovering at 16 so we expect trading on Tuesday to be similar to today, although it’s likely Tuesday reverses today’s losses.

Dealer positioning for Tuesday to the upside has Dealers selling $564 to $570 and higher strike Calls while also buying $562 and $563 Calls. This implies Dealers believe the market will rally on Tuesday from its present level and will reach as high as $565 before finding resistance. Dealers believe there is a ceiling for Tuesday at $570. Dealers do not typically buy Calls unless they have confidence prices will move higher. To the downside, Dealers are buying $560 to $554 and lower strike Puts in a 1:1 ratio to the Calls they are buying/selling. This implies a Bullish view of the market for Tuesday, with little downside risk.

Looking ahead to Friday, Dealers are selling $561 to $575 and higher strike Calls while also selling $556 and $557 Puts. This implies Dealers believe SPY will rally beyond the all-time high this week and will stay above $556 in the process. To the downside, Dealers are buying $555 to $550 and lower strike Puts in a 1:1 ratio to the Calls/Puts they are selling. This implies a Bullish view of the market as they are positioned for little weakness into Friday. By selling OTM Puts, Dealers are less concerned about weakness than they were coming into today.

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.