Market Insights: Tuesday, September 10th, 2024

Market Overview

U.S. stocks had a mixed close on Tuesday as investors braced for an upcoming consumer inflation report that could be key in shaping the size of the first U.S. interest rate cut in years. After a rebound on Monday, where the S&P 500 tried to recover from its worst week since early 2023, today's session was marked by more subdued price action as investors weighed inflation concerns and potential interest rate cuts with SPY ranging between $543 and $548 all day.

SPY Performance: SPY opened up @ $2 but soon faced resistance at the key level of $548, identified in our newsletters. After testing this level at the open, SPY failed to break through and drifted lower, reaching an intraday low of $543.38. The index closed at $548.79, up slightly by 0.44%. Trading volume remained quite low at 36.23 million shares, reflecting the market's hesitancy to commit ahead of Wednesday’s CPI release.

Major Indices Performance: The Dow ended the day down slightly, shedding 0.23% while the tech-heavy Nasdaq showed marginal strength, up 0.72%, with the Russell 2000 basically unchanged, closing down 0.08% at 208.31.

Notable Stock Movements: The "Magnificent 7" stocks showed mixed results with Apple, Netflix and Google losing ground while the others were flat to higher. NVIDIA was up 1.53% displaying resilience amid market uncertainty.

Commodity and Cryptocurrency Updates: Crude oil dropped by 3.49% to close at $66.31 as demand concerns weighed on prices. Gold was up slightly by 0.52%, while Bitcoin rallied 1.03% to $57,500, looking poised to reclaim $60K.

Treasury Yield Information: The 10-year Treasury yield continued to fall, down 1.43% to close at 3.646%, as bond market contemplates larger than previous forecast rate cuts from the Fed.
Final Thoughts on Market Positions: We maintain a cautious outlook on equities, favoring defensive plays in Gold and Bitcoin above $62K. With Crude closing in on $65 we are increasing our long position looking for Crude to reclaim $70. While demand for Crude is weakening, there are external global macro drivers of Crude which should allow it to rally in the near term.

Previous Day’s Forecast Analysis

Recap of Previous Forecast: In Monday's newsletter, we noted a high probability of limited market movement today given the proximity of major news events. We forecasted that SPY would trade in a range between $543 and $548 with sloppy, two-way price action. We stated the market would likely face resistance at $548 and suggested that only a sustained break above this level would favor a more substantial upside, targeting $550 as a ceiling for the day. We favored mean reversion shorts from $548 to $545 initially, with $543 as an additional lower target. We stated downside moves could be fast and furious, yet stated we favored longs from $543 on a failed breakdown or other bottoming pattern given our model forecast price trading as low as $543.

Market Performance vs. Forecast: Today's performance was consistent with our forecast, as SPY struggled to break above $548 and as anticipated, the market remained range-bound, trading within the stated range. An opening short from $548 to $543 with a long at that level marked the two best trades of the day. The market’s behavior aligned perfectly with our expectation of sideways two-way price action as highlighted in both our post and premarket analyses.

Final Thoughts: Overall, the forecast accurately captured the day’s sideways movement and the market's hesitancy to commit to a direction. This reinforces the importance of staying vigilant and planning for multiple scenarios.

Premarket Analysis Summary

Summary of Key Levels Identified: In today’s premarket analysis, posted at 8:01 AM ET, we identified key levels to watch, including resistance at $547.05 and support at $543.40.

Market Bias and Strategy: We maintained a neutral to slightly bullish bias, favoring the long side only if SPY could break and hold above $547.05. Otherwise we felt SPY would be stuck in chop and move sideways for much of the day, providing an opportunity for shorts from $547.05 and longs from $543.40.

Potential Movements and Scenarios: We expected a relatively tight trading range, forecasting a failure to hold $547.05 would likely lead to a downside move toward $543.40.

Validation of the Analysis: The market performance today aligned with our analysis once again with SPY testing the $547.05 level but failing to hold, confirming our view of a range-bound session with limited directional bias. SPY fell to support at $543.40 virtually to the penny, providing an opportunity for a long from this level. Once again, the post and premarket newsletters were in complete agreement and readers of this newsletter understand this means a higher probability of success trading these levels. On these days we recommend trading heavier and with more confidence in reaching our model’s targets. Three or four days like this every month and the earnings potential is greater than the rest of the month combined. Institutional and professional traders are quite skilled at knowing when to move “all in”. We recommend understanding when the odds favor trading in size and when they do not and adjust your strategy accordingly.

Looking Ahead: Economic News Releases

Summary of Upcoming Economic Data: This week brings pivotal economic data, including the Consumer Price Index (CPI) on Wednesday and the Producer Price Index (PPI) on Thursday. Both reports are expected to be market-moving, given the current sensitivity to inflationary trends.

Anticipated Market Impact: These reports could trigger significant volatility, especially if inflationary pressures exceed expectations. Investors should be prepared for sharp moves in either direction. We recommend caution making certain to trade what you see after these reports are released.

Guidance for Traders: Remain prepared for potential volatility around the data releases and consider adjusting positions to manage risk accordingly. This means sizing down to adjust for increased volatility and risk.

Wednesday’s Forecast

Market Sentiment and Key Levels: The edge continues to slightly favor the Bulls, as long as the $543 to $548 zone remains intact. We view this as a temporary rest stop before price either moves into the Bull/Bear battleground between $548 and $553, or moves below $543 toward $535. Volume the last two days has been quite low and as such our model does not trust the last two-day recovery from the September lows as it could be nothing more than a Bull trap.

Expected Price Action: Overnight we expect price to stay within this rest stop zone until CPI is released at 8:30 am ET. Depending on the news, SPY could move right up into the DMZ zone of $548 to $553 or fall and drop to new September lows. There is no way to know what will transpire until the report is released.

Trading Strategy: On major report releases the market tends to initially pick a direction. Probabilities actually favor fading this initial reaction and taking the other side of the trade. Please note this is not always the case. These types of trades require skill and an understanding of the market to be effective. But we mention it here so you have another tool in your arsenal. Options data for tomorrow suggests good economic news has the potential to push SPY to as high as $553 but no higher. Again that would put SPY in our DMZ zone and would be a level we would look for mean reversion shorts. We favor longs above $548 to this $553 level in this case. Bad news and the options market tells us the market could fall to $543 or perhaps much further. There is no floor to how far the market may fall on very bad news. We favor shorting on a break below $543 on volume to $540 initially and perhaps much lower. Like all major economic news release days, trade what you see and what the market gives you. Plot our major levels on your chart and look for rejection or acceptance at these levels for clues about what will come next.

Risk Management and Warnings: Volatility is likely to increased further tomorrow. Higher volatility warrants wider stops so should you be uncomfortable with additional risk, consider reducing position sizes.

Model’s Projected Range: SPY has moved just outside the Bear Trend Channel from the August highs. The steepness of this channel is unsustainable and therefore it’s likely the channel is adjusted to incorporate today and perhaps tomorrow’s price action. Our model projects a range for Wednesday of $541 and $556.50 (white box on chart), expanding from today with the model anticipating more volatility and trending price action on Wednesday.

Market State Indicator (MSI) Forecast

Current Market State Overview: The MSI is currently in a Ranging Market State with price closing mid-range with support at $546.53 and resistance at $551.33. The indicator rescaled prior to the open to a Ranging Market State from a Bearish Trending Market State which had been in place since last Friday. A Ranging State is a “transitionary state” and the probabilities of price moving from support or resistance to midrange are only 50%. Therefore in this state, its favorable to look for levels where price may fail to trade back to the prior MSI state.

Key Levels and Market Movements:  In today’s case the prior state was a Bearish Trending Market State and once price reached $548.50, a level we stated as major overhead resistance, the proper trade was to fade the move higher after the open, trading SPY to the $545 level and then the $543 level stated as major support in both the post and premarket newsletters. MSI rescaled lower to a Bearish Trending Market State several times as price fell below $548 and printed extended targets below. This implies the “herd” was participating in the move lower and to jump on the trend and ride it to the next MSI level. The probabilities of price moving from one level to the next in an MSI trending state is 70%. Therefore get into these trades as often as possible given the odds heavily favor a successful outcome. After reaching $543, the MSI quickly stopped printing extended targets and printed a very narrow range Bearish Trending Market State. This implied a weakening trend. Once extended targets stopped printing, the double bottom at the MSI level of $543.43 set up a perfect mean reversion long all the way back to the highs of the day.

Trading Strategy Based on MSI: We believe MSI will rescale after CPI is released premarket and will trade what MSI provides. In the current state and absent this economic information, we favor shorts from $550 and longs from $545 but again, plan to update these levels prior to the open.

Dealer Positioning Analysis

Summary of Current Dealer Positioning: Dealer positioning for Wednesday suggests Dealers are selling $549 to $553 and higher strike Calls implying Dealers do not believe prices on Wednesday will exceed $553. To the downside, Dealers are buying $548 to $540 and lower strike Puts in a 3:1 ratio to Calls they are selling, indicating a slightly Bearish stance for the upcoming session. This positioning has adjusted slightly to a more Bearish view for tomorrow with Dealers exhibiting caution ahead of key data releases.

Looking Ahead to Future Days: Looking to Friday Dealers are selling $557 to $560 and higher strike Calls while also buying $549 to $556 Calls in very small size. This positioning suggests Dealers want to be in a position to participate in any potential upside by Friday, but do not see prices exceeding $557. To the downside, Dealers are buying $547 to $540 and lower strike Puts in a 2:1 ratio to the Calls they are selling, implying a balanced view of the markets going into Friday. That said, Dealers are loaded with protection below $540 should the market deliver any surprises. This positioning has become more neutral since yesterday.

Recommendation for Traders: Review our pre-market analysis posted daily before 9:15 am ET to stay ahead of potential market movements and adjust strategies accordingly. Our goal is to provide actionable insights to navigate daily market conditions effectively. Stay prepared and good luck and good trading!