Market Insights: Thursday, September 12th, 2024
Market Overview
US stocks surged on Thursday as investors took in the latest inflation and labor data, while also keeping an eye on the growing anticipation of a potential quarter-point interest rate cut next week. Everyone's trying to figure out how the numbers will impact the Fed’s next move. This news removed yet another major catalyst from the week leading to a 4th straight day higher for the markets as tech once again leads the way. Like yesterday, SPY initially sold off on the news, before staging a recovery where it tread water for much of the morning session before exploding higher in the afternoon to close the day up 0.84%.
SPY Performance: SPY opened up $.59 at $555.01 and quickly tested resistance at $552.74, the low of the day, before returning to unchanged by 10 am. SPY then did nothing for three hours before taking off to the highs of the day at $559.40 and after a brief bout of profit taking at 3 pm ET which pushed prices lower, SPY returned to the highs of the day to close at $559.09. Trading volume was average at 51.82M shares.
Major Indices Performance: The Dow was flat today, down 0.03% while the Nasdaq gained 1.02%. The Russell 2000 also moved higher by 1.29%.
Notable Stock Movements: The "Magnificent 7" stocks swept broadly higher with all rising, including NVIDIA which closed at $119.14.
Commodity and Cryptocurrency Updates: Crude oil gained 2.67% to close at $69.27 as fears of a recession have dried up. We are scaling out of our long Crude positions with the market trading between $69 and $70. We see Crude moving still higher in the near term. Gold rallied strongly up 1.89% while Bitcoin moved higher by 1.23% to $58K.
Treasury Yield Information: The 10-year Treasury yield held steady, inching up by 0.63% to close at 3.68%, as longer duration bonds revert to a more typical yield curve. We still see longer term bonds moving higher.
Final Thoughts on Market Positions: We remain cautious equities, with defensive positions in Gold, Silver, and Bitcoin above $62K. As mentioned above, our model suggests it is prudent to begin to lock in profits on 80% of our Crude position and trail the remaining 20% as Crude continues to moves higher.
Previous Day’s Forecast Analysis
Recap of Previous Forecast: In yesterday’s newsletter we stated Bulls had the advantage and to watch how the market reacted at the $555 level. We stated should the Bulls reclaim this level, new all-time highs are back in the discussion. We stated $550 appeared to be major support and that price would stay above this level today with any break below $550 being a low probability. We favored mean reversion shorts from $554 and higher, with longs above $555 to $560.
Market Performance vs. Forecast: During the morning session, the $554 to $555 level held and a mean reversion short at the open worked well to $552.74. This trade set up several more times in the morning hours before price broke above $555, which had represented major resistance in the overnight and morning hours. But as a level gets tested repeatedly it weakens and today was no exception. The $555 level eventually did give way with a breakout at 12:42 pm ET where price moved directly to the highs of the day at $559.40. Once again, today's market behavior aligned perfectly with our forecast in both direction and major levels, delivering on our recommended trades, allowing our readers to capitalize on these market movements.
Final Thoughts: The Bulls now control the narrative so our model has shifted from looking for short opportunities to favoring long opportunities. We suggest our readers do the same. While the market is not out of the woods completely, it is on its way to new all-time highs, perhaps as early as next week.
Premarket Analysis Summary
Summary of Key Levels Identified: In today's premarket analysis at 8:06 am ET, we highlighted critical levels: resistance at $560 and support at $551.05. We stated the market was broadly Bullish and favored long entries above $555.15 toward $558.50 and higher. We stated a loss of $555 and the market would dip to $551.05 where we expected rallies back toward the highs.
Validation of the Analysis: As the market failed to break above $555.15 in the morning session, short trades as stated worked perfectly toward our low target of $551.05. Once there, remaining Bullish, we recommended longs back to $558.50 and higher, adding above $555.15. This $555 level was mentioned as an important level in the post-market analysis and was validated in the premarket analysis as well. As readers of this newsletter know, when this happens, odds favor larger position sizes with a higher probability of reaching our model’s targets. And today again was not the exception as these levels, recommended trades and targets worked well, providing our readers with the opportunity for material gains.
Looking Ahead: Economic News Releases
Summary of Upcoming Economic Data: There is no material economic data being released on Friday with the next major report coming on the 18th with the FOMC meeting.
Anticipated Market Impact: Given there is no economic news until next Wednesday, the market will likely continue to drift higher in anticipation of a favorable interest rate cut from the Fed.
Guidance for Traders: For the near term, look for long opportunities and don’t fight the Fed. As the market gets closer to the all-time high, we would advise caution given the last two weeks of September are historically the most Bearish of the year, and previous attempts to break this level have failed.
Friday’s Forecast
Market Sentiment and Key Levels: Price is solidly above the DMZ zone and at $560, is within striking distance of all-time highs. There is little to keep the market from moving to $565 and higher. Bulls are in complete control and will fight to keep it, holding price above $555. This remains a key level for the Bulls to stay in charge. $565 is also a key level given each prior attempt to break this level has been met with sellers. $563 short term, also appears to be a level which will hold SPY from breaking to new highs.
Expected Price Action: We expect price to slow its upward trajectory, while still making material gains to the upside. On Friday we expect SPY to fight to get above $560 with two-way price action centered around this level, before breaking through and moving higher, to as high as $563. We anticipate resistance at this level. $555 certainly appears to be major support and our model suggests price will remain above this level on Friday.
Trading Strategy: We will seek long entries above $560 to $563 on Friday. We don’t currently favor a mean reversion short from the $560 level. Should price approach $563, we are open once again to a mean reversion short. Should price fall to $555, we will seek long trades from this level, initially back to $560 and beyond. A break below $555 and the market will reenter the DMZ where it will trade between $550 and $555. We see this as a low probability for Friday.
Risk Management and Warnings: VIX has fallen to 17 with fear coming out of the market. Today’s range was much more palatable and as such, the market is returning to more typical behavior. Average size stops and risk is once again appropriate.
Model’s Projected Range: As anticipated, our model has redrawn the prior Bull Channel, flattening it substantially to a much more orderly and typical price channel. SPY is mid channel with all kinds of room both higher and lower. The Bear Channel from the August highs should be viewed more as a Bull flag than an actual channel. We suspect price remains in this updated channel for the foreseeable future. Our model projects a range for Friday of $552.50 to $564.50, which has reduced in size from today. This range should continue to reduce in size leading up to next Wednesday’s FOMC meeting. The current size still implies trending price action for Friday.
Market State Indicator (MSI) Forecast
Current Market State Overview: The MSI is currently in a Bullish Trending Market State with price closing at the upper channel. Ther are no extended targets above and the size is respectable implying a continuation of the Bull trend. Support is $554.96 with resistance at $559.40. The indicator rescaled higher several times as price broke out at 12:42 pm ET. With each rescale extended targets printed above price implying a very strong trend with higher prices likely.
Key Levels and Market Movements: With the MSI remaining in a Bullish Trending Market State since yesterday, and with extended targets printing above, the MSI was clearly indicating a mean reversion short at the open would not move significantly to the downside. While our target was $551.05, this proved to be true as price only reached a low of $552.74 before reversing. Price also put in a perfect failed breakdown pattern and began printing extended targets. Early in the session, this implied the herd was participating in the Bull trend and to be careful with any shorts, instead favoring long trades. Once price did breakout, price moved through each MSI level, reaching targets along the way. A strong trend was clearly identified by the MSI all day today.
Trading Strategy Based on MSI: We continue to favor longs from support at $554.96 to resistance at $559.40. While there are currently no extended targets printing above, we do not favor a mean reversion short due to the size of the range of the MSI Bull Trend Market State. The size is actually expanding implying sellers moving away from the market, leaving only buyers to push prices higher. Should the MSI rescale higher tomorrow, at that time we would favor a mean reversion short from upper MSI levels as long as the MSI is not printing extended targets above.
Dealer Positioning Analysis
Summary of Current Dealer Positioning: Dealer positioning for Friday suggests Dealers are selling $560 to $563 and higher strike Calls implying a likely ceiling at $563. To the downside, Dealers are buying $559 to $555 and lower strike Puts in a 2:1 ratio to the Calls they are selling suggesting a balanced view of the market for the Friday. Dealers were perfectly positioned coming into today and have only slightly adjusted their positioning for Friday from slightly Bullish to neutral.
Looking Ahead to Next Friday: Dealers are selling $565 to $570 and higher strike Calls while buying $560 to $564 Calls. This implies the Dealers desire to participate in further upside with a likely ceiling for next week of $570. To the downside Dealers are buying $559 to $540 and lower strike Puts in a 4:1 ratio to the Calls they are selling/buying, further protecting themselves from any risk below today’s close. Dealers continue, however, to be positioned for higher prices next week and most likely believe the market will make new all-time highs at some point next week. This positioning is similar to yesterday.
Recommendation for Traders: We reiterate keep in mind 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!
