Market Insights: Tuesday, August 27th, 2024.

SPY opened down over $1 as an early morning sell-off put the markets under pressure. But this set up a nice long opportunity @ 10 am and SPY moved higher reaching a high of $562.06 before ending the day up .14% at $561.56. The Nasdaq rallied similarly, rising .17% with the DOW gaining .02% and IWM losing .78%. "Magnificent 7" stocks were mixed with TSLA, AMZN, META and GOOGL dropping while the others rallied, including NVDA. Trading volume for SPY was very light at 32.6 million shares. 10-year Treasury yields rose .1% with Crude dropping 1.81%. Gold rose .27% while Bitcoin had a bad day, dropping 4.69%, back below $60K. We continue to remain Bullish Gold and Silver, and Bitcoin above $60K.

In Monday’s newsletter, we stated the market would continue to trade sideways to slightly higher today on very low volume. And once again the market did precisely that by ranging between major support and resistance on extremely low volume. Moves toward the all-time highs were met with heavy resistance, as was stated yesterday, while support remained strong @ $560. We stated we favored two-way trading with longs from $560 and shorts from $561.50, and that a break of $560 would likely move toward $557, where we favored mean reversion longs. We also favored mean reversion shorts from any move toward the all-time highs. At the open, the market was clearly under pressure with $560 giving way and the market traded to $558.32 before setting up a failed breakdown. Readers know we favor this pattern in a choppy environment, given it provides the highest probability of success for mean reversion trades. And sure enough SPY flipped long at 9:46 am ET and rallied back to $560 where it traded sideways until once again, the market set up another failed breakdown which reversed, pushing SPY straight up to the highs of the day. Once there SPY fell sharply to $560 where once again another long set up. Back and forth between $560 and $561 and so on until finally SPY moved above $561 in the afternoon session and remained there for the rest of the day, trading between $561 and $562. Very narrow ranges and choppy conditions as forecast by our model.

In the premarket analysis at 8:16 am ET, we stated the market once again looked like it would make a timid move higher. We favored longs above $559.70 with a target of $563. A failure of $559.70 and we felt the market would fall to as low as $556.80, but stated this was a low probability. And to the penny $559.70 did fail at the open with SPY dropping to $558.32 before reversing course. SPY then spent the rest of the day above the $559.70 level trying to reach the model’s projected $563 level, only to fail several times at $562. As forecast, the market delivered two-way, timid, range bound trading at the levels provided.

Wednesday once again has little in the way of economic news and therefore the market is likely to trade sideways. But NVDA, as well as CRM and CRWD among others are due out with their earnings after the close on Wednesday. NVDA may be the most important company in the market so as it goes, so goes the market and especially the chip sector. While the Bulls remain in control, we finally got a lower high and lower low, indicating some trepidation at these levels. That said, there was no volume today and none likely until the Jobs report next month. If NVDA earnings far exceed forecast, Thursday the market will resume its march higher. But if NVDA fails to impress, it could get ugly Wednesday night into Thursday. We don’t expect much to change during the day tomorrow, as the markets will wait on NVDA for direction. There may be some jostling for positioning, but without an external catalyst, SPY will likely continue to drift sideways to slightly higher tomorrow. And like today, our model suggests SPY will once again run into heavy resistance on its way to $565 while a failure of $560 will bring the market toward $557. And we continue to warn of the potential geopolitical risks from the Middle East.

SPY has finally moved out of the steep Bull trend channel from the August lows. The channel will be redrawn in a day or two if price continues to move sideways or fall. Price is below bottom tend line of the Bull channel yet the Bull trend remains strong as long as price is above $555. September could provide the Bears an opportunity to retest lower levels but until then, expect more two-way trading with perhaps exacerbated moves either way due to low August volume. We recommend reviewing the premarket analysis to receive the latest market updates prior to Wednesday’s open.

Looking at a 2-minute chart of SPY with our Market State Indicator (MSI), the indicator is currently in Bullish Trending market state with price closing at the top of the range. The MSI opened the day in a Bearish Trending state with extended targets below. But after these extended targets stopped printing, price mean reverted and the MSI rescaled to a Ranging market state and then quickly to a Bullish Trending market state with extended targets above. The change was quick and yet the MSI picked up this change in “herd” behavior quickly and in real time. The extended targets above told the users of this tool to get long and stay long to the highs of the day. Once again, once the extended targets above stopped printing, shorting to MSI support at $559.94 played out perfectly. Back to a Ranging state and back to longs to resistance until finally the MSI flipped to a Bullish Trending market state with price trading between the MSI support and resistance levels into the close. The MSI once again provided at least six opportunities for profit on a day that otherwise was nothing but chop. Again we highly recommend incorporating these tools into your daily trading.

In the MSI’s current state we favor long trades from support at $561.24 to resistance at $562.88. That said, the range is quite narrow so the trend is weak. And there are no extended targets above so we also favor a mean reversion short from $561.88 or higher. A break of $561.24 and it’s likely the MSI rescales to a Ranging state bringing in much lower levels, like $560. We favor shorts should the MSI provide this opportunity. For Wednesday our model projects a range of $554.75 to $568.50 (white box on chart), expanding significantly from today, anticipating volatility from NVDA earnings. But we do not see this range developing intraday, but only after hours tomorrow. But just acknowledging the massive size of this range should be a warning to all traders holding positions Wednesday after the close. Our model projects the move could be huge either way. We recommend extreme caution for any long book. VIX is hovering at 15.4 so we expect trading on Wednesday to be similar to today until after NVDA releases its earnings where the VIX is likely to pop.

Dealer positioning for Wednesday to the upside has Dealers selling $562 to $570 and higher strike Calls. This implies Dealers believe the market will likely fail to move much higher than the all-time high on Wednesday, and certainly will not exceed $570. To the downside, Dealers are buying $561 to $555 and lower strike Puts in a 3:2 ratio to the Calls they are selling. This implies a slight Bullish view of the market for Wednesday with minimal downside risk.

Looking ahead to Friday, Dealers are selling $562 to $570 and higher strike Calls while also selling $556 and $557 Puts. This implies Dealers believe SPY will rally beyond the all-time high by Friday, remaining above $556 the rest of the week. 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 Dealers are positioned for higher prices, anticipating NVDA lifts the market to new highs. Dealer positioning for Friday has not changed materially today.

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.