Market Insights: Tuesday, September 17th, 2024
Market Overview
Stocks ended Tuesday pretty much where they started, as investors were left unsure about the size of the Federal Reserve's expected rate cut. With just one day left before the Fed wraps up its policy meeting, Wall Street is still debating the chances of a 0.5% cut. The two-day meeting, which began Tuesday, is widely expected to bring the first rate cut since early 2020, but the exact size remains a big question mark. Investors and market watchers are divided on how the first cut will play out in the market. Retail sales data for August, which came in stronger than expected, has added another layer of uncertainty. While the numbers beat Wall Street’s estimates, they also hinted at a possible slowdown in consumer spending—something the Fed may consider as it decides whether to go for a more substantial rate cut instead of the smaller quarter-point option. As for the Fed’s outlook for 2024, opinions are still split on whether further rate cuts are in the cards.
SPY Performance: SPY opened up over $2.50 at $565.10 after a strong overnight. SPY spent the morning exploring the peak of its new all-time highs, finding resistance at the high of the day at $566.58 before selling off in a straight line, to the lows of the day at $560.79. SPY closed virtually unchanged at $563.07, down 0.04%. Trading volume was average at 49.06M shares traded.
Major Indices Performance: The Dow too fell 0.04% while the Nasdaq rallied 0.20%. The Russell 2000 once again move higher by 0.83%.
Notable Stock Movements: "Magnificent 7" stocks all had a good day rising in unison. NVDIA on the other hand fell over 1%.
Commodity and Cryptocurrency Updates: Crude oil gained 1.31% while Gold fell 0.48% with Bitcoin blasting higher by over 4% and moving back above $60K.
Treasury Yield Information: The 10-year Treasury yields firmed, rising .73% to close at 3.648%. 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 and the DOW’s new highs today were inevitable as was the selloff from these new highs. We continue to advise caution as we await policymakers’ remarks tomorrow and favor defensive positions in Gold, Silver, and Bitcoin above $62K. We exited our long Crude position completely with nice gains.
Previous Day’s Forecast Analysis
Recap of Previous Forecast: In Monday’s newsletter we continued to press the fact that Bulls are in complete control of the market and that while $563 continued to be resistance, this level was weakening and that price would move to $565 as early as today, with SPY making new all-time highs. We stated the market would continue to trade sideways between $559 and $565, until FOMC. We stated it was unlikely prices would fall below $559 and favored long entries above $559 and above $563 to $565 where we favored mean reversion shorts to $560.
Market Performance vs. Forecast: With SPY opening just shy of $565, there was little to do but watch for signs of weakness for an opportunity to enter a mean reversion short to $560. This trade set up nicely between 11 am and noon ET with SPY creating a failed breakout pattern and an entry at the $565 level. The market quickly fell straight to $561 where it bounced before falling once again to the lows of the day. At the lows SPY set up another failed breakdown trade with a perfect opportunity to long from this level back to $563.50. Those with our Market State Indicator (MSI) were provided all kinds of information which helped determine when it was safe to enter both trades. More on this below. Needless to say, SPY traded in a range as forecast and set up two perfect trades, both long and short for two-way trading, again as predicted in yesterday’s newsletter. Our model forecast new highs before FOMC and recommended fading any new high, with longs from $560 and once again, today's market behavior aligned perfectly with our model.
Final Thoughts: With new highs for SPY and DOW in the record books, tomorrow is set to be a wild day. The options market is forecasting a 100 point move in the S&P ($10 in SPY) tomorrow. Be forewarned: Tomorrow will be a day to trade what you see. On average the S&P is up 24% one year after the Fed starts cutting rates conservatively. If the Fed aggressively cuts rates (50 basis points), this return drops to just 5.2%. Typically there are reasons for large rates cuts and they do not bode particularly well for the market. But with either scenario the market is due to rise over the course of the next 12 months, so don’t fight the Fed long term. For tomorrow, be sure to trade what you see after the release. We continue to recommend hedging a long book with Put options and would stay out of the market tomorrow until the Fed statement is released.
Premarket Analysis Summary
Summary of Key Levels Identified: In today's premarket analysis at 8:32 am ET, we highlighted the overnight move to the critical levels: resistance at $565 and support at $561.35. We stated the market had already moved significantly overnight and should the market be able to hold $565, $568 would be in play. Below $563 we favored longs from support at $561.35. We also stated shorts should look to take profits at $561.35 as moving below this level would be difficult.
Validation of the Analysis: The market low today was $560.79, just below our $561.35 level as forecast. As the market broke above $565, it did move higher, stalling at $566.58. The takeaway from the information provided, when coupled with the post market recap, traders should adjust the $565 post market update level higher before looking for mean reversion shorts, and adjust the $560 support level to $561.35 when looking to take profits on shorts or go long. By making these minor adjustments from the overnight newsletter to the morning session analysis, trading today was simple and clearcut without the need to guess about what may come next. This is the goal of these analyses…to make our readers trading lives simpler and to make trades easier to execute. And once again today, these levels worked to perfection, providing our readers with multiple opportunities for profit.
Looking Ahead: Economic News Releases
Summary of Upcoming Economic Data: Wednesday at 2 pm ET, Fed policymakers announce interest rate policy, likely reducing rates for the first time in four years. This report may also provide insight into future interest rate policy as well and is a very important, milestone report from the FOMC.
Anticipated Market Impact: We expect the market to react quite violently to this report. With a projected $10 move in SPY either way, the market may move in the opposite direction initially, before picking a direction and pushing price to as high as $570, or pushing price below major support at $560 to as low as $550. Either can happen once the FOMC statement is released. Prior to FOMC we expect the market to trade within a range between $561 and $565.
Guidance for Traders: We recommend sitting on the sidelines until the FOMC statement is released as its likely by late morning the broader markets will consolidate and move sideways without much conviction either way. After the release, trade what you see. It is impossible to predict market behavior prior to such an important and pivotal economic release. Our major levels are $550 and $570 so be prepared for this range. After a trend is established, we recommend hoping on the trend and riding it for gains which typically only come from these types of events.
Wednesday’s Forecast
Market Sentiment and Key Levels: The market is controlled by the Bulls with $560 continuing to be key support while $566 to $568 is resistance. $560 if breached will tease the Bears into action. We would be very careful assuming a break of $560 will deliver significantly lower prices. The Bears will not fully participate in any sell off until prices break $550.
Expected Price Action: With new all-time highs in the record books, the Bulls would like nothing more than to push price to $570 and beyond, setting up a very strong Fall. We do not see prices rising above $568 tomorrow however, but also acknowledge every major level is subject to fail after tomorrows FOMC statement. With the market closing at $563.07, SPY is in the middle of the range between $560 and $565 and tomorrow its likely to test both sides of this range before picking a final direction.
Trading Strategy: When the FOMC statement is released, price may initially move one way but quickly reverse and move the other way. “Fading the first move” is a strategy with a better than 60% success rate. But the risk of taking a large stop is present in this trade and as such, if you are uncomfortable with larger than average risk, either pass this trade or trade in very small size. Expect slippage in fast moving markets like the Nasdaq. Its also likely Futures exchanges will increase margin requirements for the day.
Our goal will be to fade the first entry for quick profits on Wednesday, and look for failed breakout and failed breakdown patterns to enter thereafter for a trend trade. We favor getting on the trend to our major levels, scaling in and out along the way.
Risk Management and Warnings: VIX continues to rise and closed at 17.61 given the risk of volatility on Wednesday. Today’s range was double Monday’s range due to the market making new highs and selling off. Tomorrow the range could potentially reach $20. Trading this kind of market takes skill and market knowledge, therefore we advise inexperienced traders trade very small or just watch the market to learn how these types of days develop. Stops need to be wide and decisions need to be made quickly.
Model’s Projected Range: SPY remains 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 Wednesday of $553.50 to $572 which is a massive, almost $20 range. Our model implies large moves and trending price action for Wednesday.
Market State Indicator (MSI) Forecast
Current Market State Overview: The MSI is currently in a Ranging Market State with price closing mid-range. The MSI rescaled several times higher before the open and printed extended targets indicating a strong trend which delivered new all-time highs. The MSI stopped printing extended targets and the market fell to the lows of day, with the MSI rescaling to a Bearish Trending Market State. There were several rescales lower in rapid succession, which also implied a strong trend. But without extended targets below, this Bearish Trending Market State quickly reverted to a Ranging Market State and price remained contained within this state for most of the afternoon. The current range is quite large with support at $561.81 with resistance at $563.94. Readers of this newsletter know that in a Ranging Market State there is no edge with price moving from one side to mid-range only 50% of the time. Therefore in a Ranging Market State we favor observing the market to determine if the prior market state will remerge. A Ranging Market State is a transitionary state and should be traded accordingly.
Key Levels and Market Movements: Once SPY broke above overhead resistance in the morning session at $564.94, it was clear to us new highs we in store for SPY. But we knew to look for mean reversion shorts from new highs and waited for the extended targets above to stop printing. This happened after a failed breakout @ 11 am ET which set up the perfect short for a massive trade. As the MSI rescaled to a Bearish Trending Market State at 12:30 pm ET, we looked to add to our shorts as the MSI continued to rescale lower in rapid succession. Readers know when this happens, the odds of price moving from one side to the other side of the MSI is @ 70%. But again, after making the day’s lows at our major support level of $560, without extended targets below we were free to seek mean reversion longs. And once long, with the MSI rescaling to a Ranging State, it was clear to us that we needed to bank profits at the MSI mid-range given the odds of price moving further were less than 50%.
Trading Strategy Based on MSI: With MSI is a Ranging State we do not favor any trade. If overnight SPY retests $560, we may seek a long back to overhead resistance at $561.84, however with so much potential likely after 2 pm tomorrow, we are much more likely to wait for the opportunity to trade FOMC as described above.
Dealer Positioning Analysis
Summary of Current Dealer Positioning: Dealer positioning for Wednesday suggests Dealers are selling $564 to $568 and higher strike Calls. This implies the Dealer’s believe should prices rally tomorrow, they will remain below $568. To the downside, Dealers are buying $563 to $555 and lower strike Puts in a 2:1 ratio to the Calls they are selling, implying little concern for lower prices unless price moves below $555. Dealers have reduced their close to the money protection going into Wednesday, however, remain fully protected from downside risk should price move below $555.
Looking Ahead to Friday: Dealers are selling $564 to $570 and higher strike Calls. This implies Dealers believe that any rally by Friday will find fierce resistance at $570, the strike with the most options of any on the table. To the downside Dealers are buying $562 to $550 and lower strike Puts in a 2:1 ratio to the Calls they are selling. Dealers have sold a material quantity of Calls at $570 and higher which lowered the ratio between Puts and Calls significantly. This should not be misinterpreted as Bullish. On the contrary the number of Puts owned by Dealers has increased while the quantity of Calls sold has also increased substantially, implying little concern by the Dealers that prices will break $570 this week. Dealers sold large quantities of Calls to finance additional Put protection displaying their concern about the potential unknowns for the rest of the week. This is Bearish positioning which on the surface appears Bullish. It’s important to understand how to interpret this information properly. Dealers are clearly telling us while they are ready for price to reach as high as $570 this week, they are also ready for price to fall to $550 and potentially much lower, to as low as $540. This Bearish view has not changed since yesterday. Again we highly recommend protection for any long book.
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!
