Market Insights: Monday, September 16th, 2024

Market Overview

Stocks were all over the place on Monday, with tech shares having a rough time as everyone gears up for a big week, mostly focused on the Federal Reserve's first interest rate cut in four years. In general, the market is split, with some betting that the Fed might go for a bigger-than-expected 50 basis point cut when they announce their decision on Wednesday, wrapping up their two-day meeting. Most people are pretty sure the Fed is set to deliver this rate cut, marking a big shift in policy, and officially ending a years-long effort to curb inflation with a 63% chance of 50 basis cut compared to 30% just a week ago.

SPY Performance: SPY opened down at $561.74, spending the morning chopping in a range between $560 and 563. Around 1:30 pm ET, SPY broke higher and its range tightened further with SPY trading between $562.40 and its high of $563.11 before closing at $562.84, up 0.15%. Trading volume was once again low at 36.61M shares traded.

Major Indices Performance: The Dow was higher by 0.55% while the Nasdaq fell 0.51%. The Russell 2000 once again move higher by 0.36%.

Notable Stock Movements: "Magnificent 7" stocks fell with the exception of Microsoft, Google and Meta with NVIDIA also shedding close to 2%.

Commodity and Cryptocurrency Updates: Crude oil gained 1.88% reaching a high of $70.68 while Gold rallied 0.18% with Bitcoin falling 2.6% and moving back below $58K once again.

Treasury Yield Information: The 10-year Treasury yield continued to slide, falling 1.01% to close at 3.618%. 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: SPY continues to drift higher, finding resistance near its all-time highs. We continue to advise caution at these levels, preferring defensive positions in Gold, Silver, and Bitcoin above $62K. We continue to hold a small trailing Crude position which we will look to close this week.  

Previous Day’s Forecast Analysis

Recap of Previous Forecast: In Friday’s newsletter we reiterated the Bulls are in complete control of the market and that $563 would continue to offer major overhead resistance to higher prices for SPY. We stated we did not see price falling below $560 today and forecast two-way trading, favoring longs from $560 and shorts from $563. We forecast a tight trading range, favoring range trades (scalps) vs. trend following trades.    

Market Performance vs. Forecast: After the open, SPY reached $562.92 and by 10:34 am ET fell to a low of $559.40 where it bounced a few times before moving back to $563 into the close. To the penny as forecast, once again, SPY stayed above $560 and below $563. Today's market behavior aligned perfectly with our model in the direction of the trend, major levels to trade and in recommended trades. In an otherwise difficult and challenging environment, our model once again delivered precise timing and trades for our readers to earn on the day.  

Final Thoughts: While we still believe the market will make new all-time highs in SPY and DOW this week, traders now believe the Feds will cut rates 50 basis points on Wednesday, vs the consensus 25 basis points last week. Our view is if the Feds do cut rates 50 basis points, markets will likely sell off as participants may view this as the Feds fear of a recession. Therefore we advise remaining cautious at these levels until the Fed announcement. The Bulls remain in complete control, however prices can quickly cascade lower on any news which implies weakness. For example, look at Apple today dropping close to 3% on fears the new iPhone won’t sell as well as prior models. When price gives way, it does so quickly to inflict as much pain as possible in a liquidity grab by major players. We recommend hedging a long book with Put options, favoring long opportunities in small size until FOMC. Because of this critical announcement and the timing of the last two weeks of September, we advise caution.   

Premarket Analysis Summary

Summary of Key Levels Identified: In today's premarket analysis at 8:16 am ET, we highlighted critical levels: resistance at $563 and support at $559.90. We stated the market continued to be Bullish but hesitant to move higher prior to FOMC. We favored longs to $563 and shorts to $559.90.

Validation of the Analysis: The market low was $559.90, exactly as forecast, which was also a level identified in our post-market analysis. $563 was also forecast in both newsletters as resistance and again, as readers know, when both newsletters state the same information, the model has not changed overnight and to load the boat trading in size as probabilities favor these levels working as designed. And again today, these levels as well as the recommended trades worked to perfection, providing our readers with multiple opportunities for profit. 

Looking Ahead: Economic News Releases

Summary of Upcoming Economic Data: Tuesday brings Core Retail Sales during the premarket. This report may provide some insight into the strength of the consumer.

Anticipated Market Impact: While it’s likely the market on Tuesday will continue to chop around in a fashion similar to today, Tuesday’s Retail Sales numbers could move the market before the open, given the concern about the strength of the US consumer. Absent this report, it’s likely SPY will continue to move as it did today, drifting higher on low volume until FOMC on Wednesday.

Guidance for Traders: Favor long opportunities to the all-time highs until the Fed announces interest rate policy on Wednesday, but take profits quickly and trade small until the market picks a direction. We continue to advise caution given the overhang of the seasonally Bearish last two weeks of September, particularly on light volume.  

Tuesday’s Forecast

Market Sentiment and Key Levels: The market remains in Bull control with $560 continuing to be key support while $563 continues to be resistance. $563 is starting to weaken however, as price continues to absorb liquidity at this level. $565 is the next level of major overhead resistance which poses a challenge for the Bulls. $555 is a level which if breached will attract Bears with prices moving as low as $550. We continue to see a break below $555 as a low probability for Tuesday.   

Expected Price Action: Price will continue to move sideways until FOMC. It’s likely Tuesday the market trades in range between $559 and $563 in a similar fashion to today. Should $563 give way tomorrow, the week, the market will reach $565 but should stall at this level. Its unlikely prices will fall below $559 on Tuesday and instead we forecast price moving in a two-way range until FOMC on Wednesday. A break below $559 on volume will bring in major support at $555. But again, our model suggests price will not approach this level on Tuesday.  

Trading Strategy: For Tuesday we will seek long entries above $559 to $563. At the close our Market State Indicator (MSI) was printing extended targets above therefore we do not favor mean reversion shorts from $563 as long as these continue to print. Should price break above $563, we favor longs to $565 where we favor mean reversion shorts. Should price break below $559 on volume, we will look for shorts to $555 but absent a break of major support, we favor long trades from $559 to $563 and mean reversion shorts from $565 to $560.

Risk Management and Warnings: VIX rose slightly today to 17.15 given the risk of market volatility on Wednesday. Today’s range was extremely tight which is likely to persist on Tuesday and Wednesday prior to FOMC. As such, in a ranging market, sell high and buy low scalping for profits with tight 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 forecast price remaining in this channel for the foreseeable future. Our model projects a range for Tuesday of $557.50 to $567.50, reducing in size from today which implies more two-way, ranging price action for Tuesday.

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. Extended targets are printing above indicating the herd is participating in the Bull’s march to the all-time highs. The MSI rescaled several times today, both higher initially and in the afternoon session and lower mid-morning. The range between support and resistance shrank all day implying a weak market without much impetus either way. And that is what the market delivered. The trend is still strong as if evidenced by the extended targets but the very narrow range indicates a likely trap being set for the Bulls as price reaches the all-time high. Support is $561.95 with resistance at $562.54.     

Key Levels and Market Movements: The MSI only briefly entered a Bearish Trending Market State today with a range so narrow it’s hardly worth mentioning. This extremely narrow range carried through to the now Bullish Market State. These narrow ranges indicate not much conviction either way and a somewhat balanced market. The only difference is the extended targets continue to print above price, therefore we continue to favor long trades. For much of the afternoon extended targets printed sporadically, meaning the herd was not fully committed to higher prices. We see the market continuing in a range with the potential for a short-term break above $563 to $565 where price likely stalls and mean reverts.

Trading Strategy Based on MSI: We continue to advise caution on any short trades as long as extended targets print. As such we do not favor mean reversion shorts from $563 and instead will look for opportunities to get long from support at $561.95. We don’t love this level however as the range is so narrow, we see the entire $560 to $563 zone as nothing but chop with very challenging, messy trading, designed to make one over trade and give back profits. We would much rather sit on our hands until the MSI provides a clearer picture of what is to follow. If you do trade, trade in small size, seeking two-way trading which favors the long side.

Dealer Positioning Analysis

Summary of Current Dealer Positioning: Dealer positioning for Tuesday suggests Dealers are selling $563 to $565 and higher strike Calls. This implies the Dealer’s believe prices will remain below $570 on Tuesday with a high probability price will stay below $565. To the downside, Dealers are buying $562 to $558 and lower strike Puts in a 5:1 ratio to the Calls they are selling continuing to position themselves for lower prices should they appear. Dealers are fully protected from downside risk.  

Looking Ahead to Friday: Dealers are selling $564 to $570 and higher strike Calls while buying $563 Calls in tiny size. This implies the Dealers believe the market will break $565 this week and move toward $570. To the downside Dealers are buying $562 to $550 and lower strike Puts in a 10:1 ratio to the Calls they are selling/buying. Dealers have added significant downside protection going into Friday. This is a decidedly Bearish view and a material change in Dealer positioning since last week. While Dealers are prepared for prices to reach $570, they are spending their money to protect from prices falling to $550 or lower. We highly recommend protection for any long book as well.   

Recommendation for Traders: Keep in mind that September is seasonally the most Bearish month of the year and 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!