Market Insights: Friday, September 13th, 2024

Market Overview

US stocks picked up steam on Friday afternoon, paving the way for some solid weekly gains. This came after Wall Street’s hopes for a big interest rate cut by the Federal Reserve jumped overnight, sending a wave of optimism through the market. Everyone’s betting on a major move from the Fed, and it's fueling a lot of excitement with SPY and the Dow within earshot of their all-time highs. Stocks are climbing as the market starts to embrace the idea of a half-point rate cut from the Fed, despite earlier dismissing the chance of such a big shift due to recent inflation and jobs numbers. Now, traders are seeing a 49% chance of a 50-basis point cut happening next week, a huge jump from the 15% odds that were on the table as recently as Thursday. It looks like sentiment has shifted pretty quickly, and investors are getting hopeful for a bigger Fed move.

SPY Performance: SPY opened up slightly at $559.71 and quickly found support at the low of the day at $559.40 before moving higher the rest of the session. SPY reached a high of $563.03 before closing at $562.01, up 0.52%. Trading volume was low at 34.66M shares.

Major Indices Performance: The Dow too was up 0.72% while the Nasdaq gained 0.64%. The Russell 2000 was the standout winner, moving higher by 2.48%.

Notable Stock Movements: The "Magnificent 7" stocks had a mixed day with Amazon, Meta, Apple as well as NVIDIA showing minor weakness while the others gained.

Commodity and Cryptocurrency Updates: Crude oil gained 0.29% reaching a high of $70.33 as we continued to scale out of our long positions. Gold rallied strongly once again, up 1.15% to over $2600 while Bitcoin too had a big day moving higher by 2.18% just shy of $60K.

Treasury Yield Information: The 10-year Treasury yield fell 0.52% to close at 3.657%. We continue to forecast longer-term bonds moving higher but the market will likely reach 3.3% before finding major support.

Final Thoughts on Market Positions: While SPY continues to move higher, as it approaches the prior high, buyers are become less involved as witnessed by volume drying up today. As such we remain cautious equities, with defensive positions in Gold, Silver, and Bitcoin above $62K. We have only a small position left in Crude as we banked most of our profits the last two days.

Previous Day’s Forecast Analysis

Recap of Previous Forecast: In yesterday’s newsletter we stated Bulls are in complete control of the market and that $563 would keep SPY from making new highs today and in the very near term. We expected price to slow its upward trajectory while still moving materially higher. We favored longs from $559.40 to $563 and stated price would remain above $555. Finally we stated to wait for price to reach $563 before entering any mean reversion shorts as the trend was simply too strong to attempt a counter trend trade.  

Market Performance vs. Forecast: After the open, SPY reached a low of $559.45, virtually to the penny of our $559.40 support level and reversed, moving to today’s highs, precisely in line with our prior day forecast. After reaching $563, we waited patiently for our Market State Indicator (MSI) to stop printing extended targets and entered a mean reversion short at 2:12 pm ET for great trade back to $561. Once again as predicted, today's market behavior aligned perfectly with our forecast in trend direction, major levels to trade and with our recommended trades, showcasing the power and accuracy of these newsletters.

Final Thoughts: The Bulls will not easily give up control of this market and it should be abundantly clear to all market participants the all-time highs for both SPY and the DOW will break soon, and most likely next week. We continue to favor long opportunities in these markets and suggest our readers do the same. We are not euphoric by any means and will remain vigilant the last two weeks of September. FOMC next week will be a major market mover but until then, we forecast prices moving higher, albeit at a slower rate.   

Premarket Analysis Summary

Summary of Key Levels Identified: In today's premarket analysis at 8:02 am ET, we highlighted critical levels: resistance at $563 and support at $557.50. We stated the market looked primed to move higher and suggested buying support and riding it to resistance at $563. We also stated profit taking at $563 was likely and suggested our readers too take profits at this level.

Validation of the Analysis: The market found support at $559.40, a level identified in our post market analysis and moved straight up from there with only brief pullbacks along the way. Once the market reached $563 as forecast, profits were taken and the market sold off allowing traders another opportunity to enter long from $561.50. A second attempt to break $563 and once again, another bout of profit taking. The $563 level was mentioned in both the pre and post market newsletters and as such, as our readers know, hop on these trades in size given the probability of success is quite high. In fact rarely do we see a level fail when both the pre and post market reports align. Again today was no exception as these levels, recommended trades and targets worked extremely well, providing our readers with multiple opportunities for profits. 

Looking Ahead: Economic News Releases

Summary of Upcoming Economic Data: There is no economic data scheduled to be released on Monday.

Anticipated Market Impact: The market will likely continue to move as it did today, drifting higher on low volume until the Fed decision on Wednesday.

Guidance for Traders: Continue to seek long opportunities until the Fed announces interest rate policy on Wednesday. At the all-time high, we advise caution given the overhang of the seasonally Bearish last two weeks of September. Volume is light for a reason so tread carefully the next few days until a clear picture emerges, but continue to favor long trades.  

Monday’s Forecast

Market Sentiment and Key Levels: The market is firmly in the hands of the Bulls. $560 is a key level of support while $563 will continue to be resistance, but only in the near term. $565 is the next level of resistance which will be a challenge to break above, especially on any first or second attempt. $555 continues to be a level which if broken will attract Bears with prices moving as low as $550. We see a break below $555 as a very low probability for Monday.   

Expected Price Action: Price will likely begin to move sideways as we get closer to FOMC. It’s likely Monday the market trades in range between $560 and $563 in a similar fashion to today. We expect $563 to give way early in the week with the market moving to $565 prior to FOMC. We may find ourselves in a buy the rumor sell the news market which will keep prices elevated as we get closer to Fed decision day, however we see $565 holding until FOMC. We do not see prices falling below $560 on Monday and instead see price moving both ways until FOMC on Wednesday. A break below $560 on volume will bring in major support at $555, but again, our model suggests price will not approach this level on Monday.  

Trading Strategy: For Monday we will seek long entries above $560 to $563. We currently favor mean reversion shorts from $563 and higher as we expect two-way trading Monday. Should price break below $560 on volume, we will seek shorts to $555 but absent a major break of support, we will look to enter long trades from $560 to $563 and mean reversion shorts from $563 to $560.

Risk Management and Warnings: VIX has fallen to 16.5 as the Bulls cheer and the Bears fear. Today’s range was more typical and we expect VIX to continue to fall while the market moves toward its all-time highs. In a ranging market, sell high and buy low taking smaller profits utilizing tighter stops.  

Model’s Projected Range: SPY is currently in the middle of the Bull Channel from the August lows with plenty of room higher and lower. We suspect price remains in this channel for the foreseeable future. Our model projects a range for Monday of $557.50 to $568.25, further reducing in size from today. The current range implies more two-way price action for Monday.

Market State Indicator (MSI) Forecast

Current Market State Overview: The MSI is currently in a Bullish Trending Market State with price closing well above the upper channel. There are no extended targets above and the MSI did not rescale at all today, indicating a strong trend but one that is starting to weaken. Support is $554.96 with resistance at $559.40. For much of the day, extended targets above price printed which indicated the “herd” was participating in this Bullish Trending Market State which supported higher prices.    

Key Levels and Market Movements: The MSI has remained in a Bullish Trending Market State since yesterday, clearly indicating the Bull trend is strong and should be respected. The herd participated most of the day today and when they stepped back or took profits, the market fell but only slightly. In this type of Bull trend we advise caution on any short trades. If price does not change materially on Monday or if volume continues to fall, its very likely the MSI will maintain its current posture. Therefore, we advise seeking two-way trading which favors the long side.   

Trading Strategy Based on MSI: We favor longs from support at $559.40 to resistance at $563. Without extended targets above, we favor mean reversion shorts from $563 to as low as $560. That said, given the strength of the market, a reasonable first target may be $561.50. As we stated above, short trades will have difficulty reaching their targets so take profits more quickly and if short, trade in smaller size.

Dealer Positioning Analysis

Summary of Current Dealer Positioning: Dealer positioning for Monday suggests Dealers are selling $563 to $565 and higher strike Calls while also buying $561 and $562 Calls. This implies the Dealer’s desire to participate in this Bull trend as prices continue to drift higher. Dealer positioning implies a likely ceiling for Monday of $565. To the downside, Dealers are buying $560 to $557 and lower strike Puts in a 5:1 ratio to the Calls they are selling/buying moving from a balanced view of the market to a more Bearish view. Clearly Dealers are looking to lock in profits at these levels and protect from downside risk.

Looking Ahead to Next Friday: Dealers are selling $567 to $570 and higher strike Calls while buying $563 to $567 Calls. This clearly implies the Dealers belief the market will break $565 next week and move to at least $567 and much more likely $570. To the downside Dealers are buying $562 to $540 and lower strike Puts in a 5:1 ratio to the Calls they are selling/buying, further protecting themselves from any risk below today’s close. Dealers positioning has not changed materially for next Friday as Dealers continue to be positioned for higher prices.

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!