Market Insights: Friday, August 30th, 2024.

SPY gapped up over $2 again and once again in the morning session, worked its way toward the all-time high without getting above $562.25. SPY then sold off to $557.14 where it reversed, and after chopping around for two hours, SPY made a late afternoon push to close near the highs of the day at $563.56, up .93%. The Nasdaq rallied 1.1% with the DOW gaining .55% and IWM moving .54% higher. All "Magnificent 7" stocks and NVDA closed higher with the exception of AAPL. Trading volume for SPY was average at 50.55 million shares. 10-year Treasury yields rose 1.23% closing at 3.9% while Crude fell 3%. Gold moved lower as well by .98% while Bitcoin too fell .67%, remaining below $59K. We are Bullish Gold, Silver, and Bitcoin above $62K.

In Thursday’s newsletter, we stated the market would move mostly sideways today, trading in a range between $555 and $563. We stated a break of $560 and the Bulls would test the all-time highs. We favored long trades from support at $557.55 to resistance at $560.79 and stated if $557.55 failed, prices might retest $555. And today SPY delivered on just about all front except the lack of conviction (although we have stated for several days the Bulls control the market). At the open SPY moved to $562.15, forming a double top, setting up a favorable mean reversion short to support at $557.55. And virtually to the penny, SPY did find support at $557.14, putting in a failed breakdown pattern, setting up a mean reversion long which moved back to our $560 level. Once again, the levels discussed are where the market reacted, setting up our recommended trades, from mean reversion trades at major levels, to failed breakout/breakdown trades, which readers understand work quite well in a choppy environment. The Market State Indicator (MSI) also once again updated these levels in real-time making it even simpler to execute the trades outlined.

In the premarket analysis at 8:39 am ET, we stated the market looked a bit more eager to move up with support at $559.75 where we favored longs to our target above at $563.50. And in the morning sell off, the market breached $559.75 and moved to the post market level of $557.55, once again adding a nice short trade to the post market recap. Then SPY moved back to $559.75 and broke out of this level in the afternoon session, climbing all the way to our $563.50 target by the close. Multiple trades from levels provided in both the pre and post market reports, which all worked out profitably. We reiterate readers of these newsletters need to learn to incorporate these levels into their daily trading, creating a plan of action at each level. If you plan your day in advance, you effectively remove the guesswork from trading.

Today Core PCE came in as forecast, which is more good news for the economy. Monday the markets are closed and the only real news due on Tuesday is ISM Manufacturing PMI at 10 am ET. Unless this number is far off forecast, we do not expect this to be a market mover. The big news next week starts on Thursday and concludes on Friday with the Jobs report. We expect positioning before these reports are released will create more volatility next week, as the Bulls try to break above the all-time high at $565.16. Volume today was respectable for a day before a long weekend. The Bulls also defended major levels all week which bodes well for the Bulls in the near term. It’s probable Tuesday SPY follows through on today’s move and attempts to break the all-time high, reaching as high as $570. The DOW has been making new highs all week and the equal weighted S&P is also making new highs. SPY has been in a range for ten days between $555 and $563.50 so its likely next week we see a breakout of this range. Trading ranges allow institutions to build positions slowly without moving the market materially. This builds energy which eventually causes the market to move one way or the other. Some refer to this as a squeeze that eventually breaks out. If price can move out of this range, it would not be a stretch to suggest $575 is in play. But again, a failure of $555 and price likely creates a lower trading range in the $550 to $555 zone, before falling further. But the Bulls currently rule so we favor the long side and look for the market to move higher next week, making new all-time highs. While we are now entering the seasonally weak September, seasonality is not tradeable. It’s simply a backdrop so should the market begin to falter, in a seasonally weak month, expect more exaggerated moves to the downside. But until the market starts to fall, it is positioned to move higher. Yet the Middle East still poses risks to the markets.

The Bull channel from the August lows held today and SPY closed above the lower trend channel. Price is precariously moving along this trendline. As long as it continues, SPY can and will move higher and do so fairly quickly given the steepness of the trend channel. SPY has been building energy to break above $565 with multiple attempts this week failing. So while our model projects a new high next week, it’s also possible SPY continues to move sideways for a few more days to build more energy, or to see an external catalyst to move prices higher. We suspect interest rate policy will not be that catalyst and instead believe favorable economic readings will move the market higher. Of course unfavorable macroeconomic indicators will do the opposite. It’s too early to make a prediction for September, as our model currently favors buying dips at support until something material changes. There is plenty of room to the upside for higher prices and SPY surely looks positioned to seek new highs. 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 Bullish Trending Market State with price closing in the upper half of the range. The range is quite narrow after rescaling higher three times in the last hour of the day. The MSI opened the day in a narrow Bullish Trending Market State without extended targets above and price bounced between these MSI levels several times. While the MSI did print a few extended targets above, they were sporadic and inconsistent at best. A narrow range with extended targets that keep disappearing, at a level of resistance identified in our newsletters, is a warning that the trend may not be as strong as it appears. And once the extended targets stopped printing, price made a double top at 10:44 am ET, setting up a profitable mean reversion short to MSI support at $558.62. MSI attempted to rescale lower a couple of times to a Bearish Trending Market State but failed, until 12:26 pm when the MSI did enter a Bearish Trending Market State. But again, there were no extended targets below and the range was quite narrow. So as price approached our major support level of $557.55, once again, while two extended targets printed, which gave us pause to enter a mean reversion long, as soon as these stopped printing, SPY printed a perfect failed breakdown so we were long back to overhead resistance. The MSI then entered a Ranging Market State and price chopped around for several hours before breaking out of this range. In a Ranging Market State probabilities actually favor no trade. This is a transition state where our model is trying to quantify with a high degree of probability what will come next. In trending states, the probability that price will move from one side of the MSI to the other is just shy of 70%. But in a Ranging State, statistics show only a 50% chance price will move from one end to the mid-point of a range. Therefore in a Ranging State we always defer to the broader trend. And if we do trade in this state, we make sure entries are from one of the levels plotting, taking first profits quickly, halfway to mid-range, which has a 65% probability of success. We lock in profits quickly and move stops to breakeven given the lower probability of a Ranging Market State. Today once the MSI broke out of the Ranging Market State and rescaled to a Bullish Trending Market State, longs from support were appropriate, especially with the quick rescaling higher into the close. Learning to properly interpret the MSI is important to utilize this sophisticated tool properly. We recommend you speak with your advisor for more information or to sign up for additional training on this incredibly valuable tool.

In the MSI’s current state we favor long trades from support at $562.41 to resistance at $564.03. Should $562.41 fail, price will likely retest $560. For Monday our model projects a range of $559.50 to $568.25 (white box on chart), contracting from today, indicating more ranging, two-way behavior on Tuesday. VIX is back to 15 so we expect Tuesday to be a quieter day filled with sideways price action. That said, Tuesday is the first day of a new month after a long weekend, AND our model’s forecast high is above the all-time high. It’s probable the market delivers some early session volatility as price attempts to break the all-time high. While we favor a mean reversion short from these levels, we suggest waiting for a break of the all-time highs while looking for a failed breakout pattern, AND ensure the MSI is not printing extended targets above. If these three conditions are true, a mean reversion short will be favorable. We also favor a short on any break below $562. That said, the higher probability for Tuesday is to look for longs at support to as high as $568 where surely, we will be more cautious until the market provides more information.

Dealer positioning for Tuesday to the upside has Dealers selling $564 to $570 and higher strike Calls while buying $562 and $563 Calls. This implies Dealers believe the market will move higher on Tuesday to as high as $570, likely stalling at $568. To the downside, Dealers are buying $563 to $558 and lower strike in a 1:2 ratio to the Calls they are buying implying a very Bullish view of the market for Tuesday. This positioning continues to confirm Dealers are less concerned about downside risk in the short term, believing prices will move higher.

Looking ahead to next Friday, Dealers are selling $564 to $571 and higher strike Calls. This implies Dealers believe prices may rally next week to as high as $571, but not beyond…more probable is $570. To the downside, Dealers are buying $563 to $550 and lower strike Puts in a 4:1 ratio to the Calls they are selling. This implies some concern prices could move lower by next Friday. This positioning makes sense in the context of the economic news due toward the end of next week. This positioning has changed from yesterday to a more risk off view. While not Bearish by any means, Dealers have added lots of protection at these levels and we suggest any long book do the same as well.

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