Market Insights: Wednesday, September 11th, 2024

Market Overview

U.S. stocks staged a head turning rally today as the markets reacted to the latest Consumer Price Index (CPI) report, which came in largely in line with expectations but slightly hotter on the month-over-month metric. This news removed a major catalyst from the week, leaving the market without a clear direction and highlighting some Bearish undertones for the near future. SPY initially sold off on the news, before staging a very strong recovery to close the day just over 1% positive.

SPY Performance: SPY opened at $548.70 and quickly tested resistance around the $549 to $550.30 area as identified in our premarket analysis. Just as rapidly, SPY retreated and fell straight to our initial target, and then as intraday volume continued to pile on, we drifted lower still. As expected though, a massive sell-off was not to be had and we rebounded even more strongly right back to our starting point before breaking through the pressure level from the premarket and hitting our predicted upside target, finally closing at $554.42, up 1.03%. Trading volume whipsawed strongly higher with just over 75M shares traded.

Major Indices Performance: The Dow followed suit upward by .31% while the Nasdaq posted a powerful gain of 2.15%. The Russell 2000 also edged upward less dramatically, rising .29%.

Notable Stock Movements: The "Magnificent 7" stocks broadly swept upward in the day’s rally with all rising while NVIDIA, which has been struggling as of late, staged a wild rally, gaining a full 8.15% to close at $116.91.

Commodity and Cryptocurrency Updates: Crude oil rose by 2.42% to close at $67.31 as energy markets fluctuated. Gold remained relatively stable, ending flat at $2542.4, while Bitcoin dipped marginally by 0.3% to $57,498.

Treasury Yield Information: The 10-year Treasury yield held steady, inching up by 0.16% to close at 3.661%, as markets digested the implications of the CPI report on future interest rate movements.

Final Thoughts on Market Positions: We continue to favor a cautious approach in equities, with defensive positions in Gold, Silver and Bitcoin above $62K. For Crude, we added to our long positions yesterday and will look to sell as Crude approaches $70.

Previous Day’s Forecast Analysis

Recap of Previous Forecast: Yesterday’s newsletter highlighted the expectation of a largely consolidative session prior to the CPI release with the advantage going to the Bulls. We stated the temporary “rest stop” for the Bulls and the Bears was $543 to $548 which today would be resolved one way or the other. We stated if price moved above $548 it would move as high as $553 and a break below $543 would bring in $540 or lower. We made a point to state that the initial move after a major economic report should be faded, as probabilities favored taking the other side of initial move. We favored longs above $548 and shorts on a break of $543 to $540.

Market Performance vs. Forecast: Today's market behavior aligned perfectly with our forecast in direction and major pressure points to cross. The enhanced volatility swings of the day provided large opportunities to capitalize on these transitions. In the premarket with SPY initially selling off on the CPI report, it immediately reversed and moved higher from $545 to $549. We were clear, fading the first move has a high probability of success. At the open SPY sold off to the day’s lows to the $540 level we also forecast where it found support and reversed course, running virtually straight up through $548 to $554. Again we stated, long on breaks above $548 to $553 worked to perfection. We advised yesterday to plot these levels on charts before CPI and trade around them as price approaches these major turning points, with every level and strategy proving once again to be deadly accurate.

Importance of Forecasting Both Directions: Today's price action once again emphasized the value of preparing for both Bullish and Bearish scenarios. By setting clear levels for possible reversals, we navigated the sizable swings today to capture both sides of the market.

Final Thoughts: The forecast accurately captured the day’s uncertain directional bias, reinforcing the importance of adjusting strategies to align with market conditions.

Premarket Analysis Summary

Summary of Key Levels Identified: In today's premarket analysis we highlighted critical levels: resistance at $549 to $550.30 and likely support at $543.60.

Market Bias and Strategy: Our bias remained neutral, anticipating consolidation within the identified range. We favored trading from the edges, with long positions above $549 and shorts below $546, avoiding the middle of the range where price was likely to chop.

Potential Movements and Scenarios: We expected the initial upside progress to be a struggle, and suggested that any break outside its boundaries could lead to an expansive move downward - with a rejection of a major upper target being a potential catalyst for the drop.

Validation of the Analysis: Market performance validated our premarket analysis, with SPY swinging between the key levels and not picking one singular, strong direction until it first tested $540 where the Bulls stepped in and moved prices back into Bull territory.

Looking Ahead: Economic News Releases

Summary of Upcoming Economic Data: The next major report is the Producer Price Index (PPI) set for release on Thursday. Given the current sensitivity to inflation trends, this report has the potential to impact market direction, though less strongly than CPI.

Anticipated Market Impact: The PPI report could lead to increased volatility, especially if it shows unexpected inflationary pressure. Traders should prepare for sharp moves in either direction.

Guidance for Traders: Remain cautious and manage risk carefully ahead of the PPI data. Consider adjusting positions in anticipation of potential volatility. We anticipate the upward momentum and today’s decisive rally to be a factor in tomorrow’s price behavior. While we remain neutral to the outcome of the news, we see others’ bets swinging more to the upside.

Thursday’s Forecast

Market Sentiment and Key Levels: With price now above our DMZ level of $553, Bulls have the advantage. You may recall the DMZ was $550 to $555 before adjusting lower last week. Therefore its important to see how price reacts at the $555 level. While we certainly give the edge to the Bulls, they do not have complete control until $555 is successfully reclaimed. Should the Bulls be able to accomplish this task, new all-time highs are back in the discussion.

Expected Price Action: We expect price to take a breather overnight and wait for PPI before moving higher. Again, without the benefit of this report, our model suggests prices will continue to climb to as high as $555 before finding any resistance. $550 certainly appears to be major support as well and our model suggests price will remain above $550 on Thursday.  

Trading Strategy: Should price break above $555 on volume, there is nothing to keep it from moving to $560. But our model suggests the DMZ may simply reset to $550 to $555. Therefore we favor mean reversion shorts from $554 and higher and longs from $550. A break of $550 on volume and the market may return to $543 so be wary. We see this as a low probability for Thursday.

Risk Management and Warnings: VIX is back below 18 but the size of the moves in the markets has been extreme. SPY moved close to 3% today from high to low. These are large moves which would be viewed with caution. Again larger stops add risk and as such, we recommend trading in smaller size until the market quiets a bit.

Model’s Projected Range: SPY is firmly outside of the Bear Trend Channel from the August highs. Its highly probably either a new channel forms OR the Bull Channel from the August lows is redraw. We will probably see tomorrow our model’s forecasted path for SPY. Our model projects a range for Thursday of $545 to $559, still quite large with the model anticipating volatility and price movement on Thursday in line with today’s price action.

Market State Indicator (MSI) Forecast

Current Market State Overview: The MSI is currently in a Bullish Trending Market State with price well above the upper range and above extended targets. Into the close extended targets continued to print indicating a strong trend. Support is $550.65 and $548.40. The indicator rescaled at the open to a Bearish Trending Market State and as price broke below $543, rescaled lower three more times while printing extended targets below. After finding support at $540, with price breaking above $545, the MSI rescaled higher several times, also printing extended targets above. 

Key Levels and Market Movements: The rescaling both lower and higher with extended targets indicates strong trends that should be respected and entered given the probability of price moving from one side of the MSI to the other is 70%. Shorting MSI overhead resistance after the open easily reached the lower level and continuing to short while extended targets printed also was fairly easy and straight forward. We suggested selling on a break of $543 which the MSI identified perfectly. At the lows, once extended targets stopped printing at 11:06 am ET, a mean reversion long was the perfect trade taking first profits at $545, another MSI level and one we identified in the premarket analysis. Breaking above $548 with MSI in a Bullish Trending Market state with extended targets above once again provided another perfect set up to go long, riding it into the close. Multiple easy trades, all at levels identified with the MSI confirming our model’s outlook for the day.

Trading Strategy Based on MSI: We favor longs from support as long as the meaningful uptrend persists with a break below $550 on volume as a valid short to at least $548.

Dealer Positioning Analysis

Summary of Current Dealer Positioning: Dealer positioning for Thursday suggests that Dealers are selling $555 to $560 and higher strike Calls while selling Puts from $554 to $550. When Dealers sell Puts, this implies little to no fear of lower prices. Positioning suggests a floor at $550 for Thursday with a ceiling at $560. To the downside, Dealers are buying $549 to $546 and lower strike Puts in a 1:1 ratio to the Calls they are selling/buying suggesting a Bullish market stance for the Thursday. Dealers have clearly adjusted their positioning for Thursday from slightly Bearish to solidly Bullish.

Looking Ahead to Future Days: Dealers selling $560 to $563 and higher strike Calls while buying $555 to $559 Calls. This implies Dealers desire to participate in any upside with a likely ceiling for the week of $563. To the downside Dealers are buying $554 to $540 and lower strike Puts in a 3:1 ratio to the Calls they are selling/buying protecting themselves from any risk below today close. Given how Dealers are positioned however, it appears clear that prices are likely to move higher going into Friday. This positioning is unchanged from yesterday.  

Recommendation for Traders: Don’t lose sight of the fact that September is seasonally the most Bearish month of the year. We highly recommend monitoring Dealer positioning closely to anticipate potential market shifts and adjust strategies accordingly. Our goal remains to provide actionable insights for navigating daily market conditions so stay alert. Good luck and good trading!