Market Insights: Thursday, August 29th, 2024.

SPY opened up over $2 after moving lower overnight, finding support at $553.50 and reversing to open higher on the day. The market continued to rally as GDP came in better than forecast and Unemployment Claims were slightly below forecast. All good news for the economy so SPY once again attempted to reach the all-time high, but failed once again at $563.68, the high of the day. After spending an hour or so trapping longs, the market reversed course and in the afternoon session dropped to the lows of the day at $557.18. SPY closed the day flat at $558.33, down .01%. The Nasdaq fell .21% with the DOW gaining .59% and IWM rallying .7%. "Magnificent 7" stocks moved higher with the exception of GOOGL. NVDA too lost over 6.3% on underwhelming earnings. Trading volume for SPY was below average at 35.72 million shares. 10-year Treasury yields rose .7% moving back toward 4% while Crude jumped 1.92%. Gold moved higher .68% while Bitcoin too gained .83% but remained below $60K. We continue to remain Bullish Gold and Silver and Bitcoin above $62K.

In Wednesday’s newsletter, we stated GDP and Unemployment Claims could impact the market in addition to NDVA’s earnings release. We forecast increased volatility for today with $555 as a key level to watch. We stated a break of $555 and a battle would ensue between the Bulls and the Bears, potentially moving prices to as low as $550. We also stated a break of $560 would trigger a push toward the all-time high. And overnight price did break the $555 level but found support at $553 where it reversed and moved higher. At the open price hovered at $560 before breaking higher as forecast, reaching $563.68 before failing and once again, moving toward $555. We stated we favored mean reversion longs from the $555 zone which set up overnight, and like yesterday, stated the all-time high would not be breached again today and that a mean reversion short from the highs was also a high probability trade. We suggested marking important levels on your charts to trade around these levels…to the downside $557, $555, and $550 and to the upside $560 and $565. And as you can see from today’s price action, these are the levels where the market reacted decisively. And once again the Market State Indicator (MSI) updated these levels in real-time and was dead on.

In the premarket analysis at 8:56 am ET, we stated positioning was upward but not aggressively so. We felt the market would initially reach $561 and drift higher, calling for long entries above $557.60 moving toward $564.75. And in the morning session the market did in fact rally from the open to Monday’s highs where once again, there was simply no conviction to move the market any higher. After the sell-off the market found support at the $557.60 level stated, and reversed for three long opportunities. The $557 level once again showed up in our model and when price fell to this level as forecast, it was a good place to seek long trades. We continue to reiterate readers should study these levels and learn to incorporate them into their daily plan.

Friday PCE Core Price Data will be released premarket and while this is the Fed’s preferred inflation gauge, there has been lots of inflation data already released so PCE is unlikely to change the path of rate cuts. Instead the market will wait for the Jobs report before making its next major move. Tomorrow is also the day before a long weekend and its highly likely volume evaporates even further and the market does nothing but move sideways all day. We warned that the market would awaken today, which is what happened with large swings in both directions. In a low volume environment price moves can be easily exaggerated. For tomorrow its probable SPY trades between $555 and $563 without much conviction either way. The Bulls once again defended the $555 level last overnight and remain in control the market. But we are close to the $550 to $555 zone where the Bears will once again step in and try to move price lower. Like yesterday, a break below $550 gives the Bears an edge while a break above $560 and Bulls will attempt to test the all-time high. Everything in between is just noise. Next week we enter the seasonally weak September and we expect to see more volatility and larger moves, probably to the downside. And of course the Middle East continues to pose a risk to the markets.

The Bull channel from the August lows has been redrawn and SPY closed on the lower trend line. It’s quite possible that price rolls over into September and we set up a pullback. There is plenty of room to the upside and we continue to believe this steep channel will flatten if not fail altogether. We recommend reviewing the premarket analysis to receive the latest market updates prior to Friday’s open.

Looking at a 2-minute chart of SPY with our Market State Indicator (MSI), the indicator is currently in Bearish Trending Market State with price closing at overhead resistance. The range is quite narrow and therefore the Bear trend is not very strong. The MSI opened the day in a Bullish Trending Market State without extended targets above and after spending an hour flipping between a Bullish Trending Market State and a Ranging State, picked the Bullish Trending Market State and started printing extended targets above. This was sign of a strong long trend which told our users to get long and ride them toward the highs. Once at the highs, price moved sideways and extended targets stopped printing which was the MSI signal to take a mean reversion short back to major support at $560. When we discuss profit targets in these newsletters, the levels we state represent our initial targets where we typically take 70 to 75% of our profits. We then leave a runner to see if we can reach targets further away. While $560 was a good first target for the mean reversion short, $557, another of our levels, was a spot where we took off an additional 15 – 20% of our trade, leaving a very small runner in the event the market pushed even further in our favor. The MSI does a great job printing these levels in real time so you always know which is likely to be the next level hit. As the mean reversion short moved solidly in our favor, the MSI rescaled to a Bearish Trending Market State but without extended targets below. At that point we knew the trend was likely over and took off our short trade at the $557 level. Without a strong trend, users of the MSI knew a mean reversion long from $557 was a trade with a respectable probability of success. But we wouldn’t have blamed anyone for calling it a day after the mean reversion short from the highs given the size of this move. Once again, the MSI provided multiple trading opportunities centered around the levels provided in these newsletters. If you are not using the MSI, you are making your trading life much more difficult than it needs to be.

In the MSI’s current state we favor long trades from support at $557.55 to resistance at $560.79. Should $557.55 fail, price will likely retest $555 or below. But we see that as a lower probability for Friday. More likely MSI reverts to a Ranging State and price simply bounces between the levels indicated on the MSI. For Friday our model projects a range of $552.50 to $564.25 (white box on chart), contracting significantly from today, indicating more ranging, two-way trading on Friday. VIX is back below 16 so we expect Friday to be a quieter day filled with chop and two-way trading.

Dealer positioning for Friday to the upside has Dealers selling $562 to $565 and higher strike Calls while buying $559 to $561 Calls. This implies Dealers believe the market will move higher on Friday, but not beyond $565. To the downside, Dealers are buying $558 to $550 and lower strike Puts in a 3:2 ratio to the Calls they are buying/selling implying a Bullish view of the market for Friday. This positioning has changed from yesterday with Dealers less concerned about downside risk.

Looking ahead to next Friday, Dealers are selling in size $559 to $571 and higher strike Calls. This implies Dealers believe prices could rally next week to as high as $571 but not beyond. To the downside, Dealers are buying $558 to $550 and lower strike Puts in a 1:2 ratio to the Calls they are selling. This implies little concern prices will trend much higher or much lower as Dealers are selling far more Calls than buying Puts. While $571 is the max high Dealers project for next week, the max low is $550. Dealers are positioned for higher prices given their ratio of Puts to Calls but are protected to the downside as well. This positioning for next Friday has changed from yesterday to a more sideways to Bullish view, likely due to may ITM options clearing today. We suspect this changes significantly on Tuesday given Monday is a holiday.

Dealer positioning changes daily, so we recommend reviewing our pre-market analysis on Friday 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.