Market Insights: Wednesday, September 18th, 2024
Market Overview
The Federal Reserve cut interest rates by half a percentage point on Wednesday and laid out plans for two more cuts this year, with four additional cuts set for 2025. This marks the Fed's first rate cut since 2020, officially ending its most aggressive inflation-fighting strategy since the 1980s. Not everyone was on the same page, though—Fed governor Michelle Bowman disagreed, pushing for a smaller 25 basis point cut instead of 50. The general agreement at the meeting was that the Fed will implement two more 25 basis point cuts by the end of the year, followed by four more in 2025, and two more in 2026. Along with that, they expect the unemployment rate to rise slightly to 4.4%, up from the previous forecast of 4% while they predict the economy to grow 2% this year, down slightly from the previous 2.1%, and expect it to hold steady at 2% for the next two years. Inflation, on the other hand, is forecasted to end the year at 2.6% and drop to 2.2% in 2025.
SPY Performance: SPY opened up slightly at $563.74 ranging between $561.40 and $564.28 all session prior to the Fed statement at 2 pm ET. SPY reacted to the release initially moving much higher, making a new all-time high at $568.69. This initial move did not hold long however as market participants worried the Fed’s aggressive rate cut is being done for reasons unknown to the market. After a drop and bounce back to $567, SPY sold off into the close reaching a low of $560.83 before closing the day at $561.40, down 0.30%. Trading volume was higher than average at 58.84M shares traded.
Major Indices Performance: The Dow too fell 0.25% while the Nasdaq fell 0.30% as well. The Russell 2000 was virtually unchanged, up 0.02%.
Notable Stock Movements: "Magnificent 7" stocks as well as NVDA fell, with the exception of META, Google, and Apple.
Commodity and Cryptocurrency Updates: Crude oil fell 1.37% while Gold fell 0.40% with Bitcoin higher by over 3.61%, closing above $60K.
Treasury Yield Information: The 10-year Treasury yield rose 0.60% to close at 3.715%. We continue to forecast longer-term bonds moving higher with the market likely testing 3.3% before finding major support on its way back toward 4%.
Final Thoughts on Market Positions: SPY and the DOW once again made new intraday, all-time highs. But the market continues to question these elevated levels, selling off with every new high. The market is moving two steps up and one step back. At some point, the market will roll over and the reverse will happen. While policymakers are not stating any fear of a recession, their actions speak volumes about the state of the economy, and more specifically the jobs market. Without jobs, companies can’t sell products so the focus now shifts to the employment picture as a prelude of what is to come. We continue to favor defensive positions in Gold, Silver, and Bitcoin above $62K.
Previous Day’s Forecast Analysis
Recap of Previous Forecast: In Tuesday’s newsletter we stated the Bulls remained in control of the market and would like nothing more than to push prices to $570, stating we did not see prices rising above $568 today. We stated the market was likely to test both sides of the prior range from $560 to $565 before picking a final direction. We stated after the FOMC statement, price had a better than 60% probability of moving in one direction initially but quickly reversing and moving the other way. We stated prior to FOMC if the market tested $560, we favored a long back to overhead resistance but after FOMC as volatility increased would trade only with the trend.
Market Performance vs. Forecast: SPY opened at resistance at $564 and fell to $560 by noon ET setting up a perfect long as forecast, back to $564 before FOMC. Once the Feds released their statement, the market jumped up to $568.69, just above our projected ceiling of $568, where it set up a failed breakout and fell straight down to $563. Our recommended fade of the initial move worked to perfection four times in rapid succession. We watched as our traders sold $565 and $566 riding price to $561 for two monster trades. Those with our Market State Indicator (MSI) were provided valuable information about targets and the strength of the trend. In fact the MSI told us the pop higher after FOMC did not have the herd participating which made it that much easier for us to short the market. More on this below. Exactly as forecast, SPY did precisely what was laid out in the post market recap, providing multiple, highly profitable trades for those who follow these newsletters.
Final Thoughts: While today’s wild day is behind us, the options market continues to forecast increased volatility. We stated yesterday that when the Fed starts cutting rates aggressively (50 basis points), market returns are just 5.2% one year from the first rate cut. While 5% is still a respectable return, the 20+% annual returns are likely in the past for at least 2025. That sets up more two-way trading which for day traders can be quite profitable. Our favorite pattern, the failed breakout/breakdown has a very high probability of success in a ranging market and while we never recommend fighting the Fed, it’s likely the market retests the all-time highs to trap Bulls before selling off, back into the battle zone between the Bulls and the Bears of $550 to $555. The next few days will provide some clues about what is to follow with the next major market moving event being the Jobs report on October 4th. Until then the market is likely to trade more sideways than materially higher or lower.
Premarket Analysis Summary
Summary of Key Levels Identified: In today's premarket analysis at 8:17 am ET, we stated the Bullish market bias was somewhat uncertain but that the market would likely move to $565 initially and a positive reaction to FOMC would move SPY as high as $568. A drop below $563.10 and we stated the market would fall to $561.30. Critical levels: Resistance at $568 and support at $561.30.
Validation of the Analysis: Once again the premarket analysis and levels aligned perfectly with the post market recap. Long term readers understand when this happens, the probability of success at the levels indicated is higher than average. As such we trade larger with more conviction. The pop to $568 once again provided perfect opportunities for shorts to support at $561.30…virtually to the penny in our premarket analysis. By understanding when the odds increase in your favor, professional traders increase their bets given just one or two trades in size can make an entire month. Think of it like Blackjack…you only split Aces and 8’s which doubles your risk yet you do it because the odds favor a positive outcome. Trading is similar in that knowing when the odds are in your favor is key to earning profits. While most “gurus” will tell you to risk the exact same amount on every trade, our experience running a large fund that this is not what professionals do. They size up and down depending on the probability of success. Armed with the two daily newsletters, you are provided with an edge otherwise unavailable to other traders. These levels worked to perfection today, providing a perfect plan with multiple opportunities for profits once again.
Looking Ahead: Economic News Releases
Summary of Upcoming Economic Data: Thursday premarket is Unemployment Claims which has the potential to move the market given the focus shifts from interest rate policy to US employment.
Anticipated Market Impact: With the market selling off into the close, any bad news will likely send the market lower. Certainly we see the market testing $560 on any bad news, while good news will likely move the market to at least $566.
Guidance for Traders: As with all news releases, trade what you see after Unemployment Claims are released. While volatility is back with VIX above 18, we recommend watching for market reactions at our major levels of $555, $560, $566, and $568.
Thursday’s Forecast
Market Sentiment and Key Levels: The market remains controlled by the Bulls with $560 continuing to be key support while $566 and $568 are resistance. $560 if breached will attract Bears and its likely prices fall to $555. We still advise caution shorting this market before the Bulls retest the current highs. Dropping below $560 on volume will deliver significantly lower prices yet the Bears will not fully engage in any sell-off until prices break $550 and it’s likely the market moves higher before it moves lower.
Expected Price Action: Today provided another new all-time high for the Bulls to cheer over. Yet the market is tired and there is a better than 60% probability that it will roll over in the next two weeks and we will enter a period of falling prices. We believe the Bulls will retest the highs at $568.69 and perhaps a bit higher toward $570 where we would look for mean reversion shorts to $560. This may or may not develop on Thursday given the market’s reaction to FOMC into today’s close. We do not anticipate prices falling tomorrow below $560 given control still resides with the Bulls. Therefore we forecast two-way trading in an expanded range on Thursday of $560 to $568 or slightly higher.
Trading Strategy: We favor long trades from support at $560 to $565 initially. We also favor mean reversion shorts from the all-time highs. Should price break below $560 on volume, we favor shorts to $555, although we see this is a low probability for Thursday.
Risk Management and Warnings: VIX is above 18 and our model’s projected range continues to be quite large. Therefore we advise giving the market a day to decide if today’s news is good or bad for the market before committing heavily either way. Probabilities favor a sideways market for a few days with periods of trending price action given current volatility.
Model’s Projected Range: SPY remains in the middle of the Bull Channel from the August lows with room both higher and lower. We forecast price remaining in this channel for the foreseeable future. Our model projects a range for Thursday of $558 to $573, which is still quite large, albeit a tad smaller than today. This implies more sideways price action with large, trending moves occasionally. We suspect we will see these larger moves initiated from our major levels.
Market State Indicator (MSI) Forecast
Current Market State Overview: The MSI is currently in a Ranging Market State with price closing at the bottom of the range. The MSI rescaled several times today, both higher and lower due to the FOMC report. The MSI only briefly printed extended targets below price at 3:48 pm ET, indicating the herd was not participating in either the move up or down after FOMC. The MSI rescaled to a Bullish Trending Market State after FOMC which quickly gave way to a Ranging Market State. This indicated market uncertainty and confusion regarding today’s 50 basis point rate cut. Ending the day as it started, the MSI reaffirmed the belief that market participants have yet to make up their minds about the market’s direction going forward. When the MSI and price displays this level of confusion, the market is likely to produce two-way, choppy price action. The current range is quite large with support at $562.14 and resistance at $564.75. Readers of this newsletter know that in a Ranging Market State there is no significant edge for price moving from one side of the MSI to mid-range, as probabilities suggest this happens only 50% of the time. Therefore in a Ranging Market State we favor observing the market to determine which trending market state will reemerge. Given the Bulls control the market, its likely the MSI rescales to a Bullish Trending State sometime tomorrow.
Key Levels and Market Movements: Entering the day the MSI was in a Ranging Market State and stayed there until FOMC, finishing there as well. Again this represents more confusion than anything else and without extended targets, the herd are sitting on their hands deciding what do to next. The MSI provided several key levels today to trade off of, from the highs at $566.71 to the lows at $560.82. With the MSI initially rescaling higher, it quickly rescaled lower and made lower highs indicating a weak long trend, particularly without extended targets printing above. The MSI’s Bearish Trending Market State was also proven to be weak but showed a bit more conviction to the downside with its one extended target below.
Trading Strategy Based on MSI: With the MSI back to a Ranging Market State, as a transitionary state, we favor two-way, level to level trading from our recommended levels, using MSI as confirmation while we await a new trending state to materialize.
Dealer Positioning Analysis
Summary of Current Dealer Positioning: Dealer positioning for Thursday suggests Dealers are selling $563 to $570 and higher strike Calls. This implies the Dealer’s believe should prices rally on Thursday, they will remain below $570. To the downside, Dealers are buying $561 to $554 and lower strike Puts in a 1:1 ratio to the Calls they are selling, implying a slightly Bullish view of the market for Thursday with little concern for lower prices. Dealers continue to lighten up on close to the money protection, however they remain fully protected from downside risk should price move below $554.
Looking Ahead to Friday: Dealers are selling $562 to $570 and higher strike Calls in very large size. This implies Dealers believe that any rally by Friday will find resistance at $570. To the downside Dealers are buying $561 to $550 and lower strike Puts in a 1:1 ratio to the Calls they are selling. They have lightened up slightly on their downside protection going into Friday implying less concern about downside risk. That said, the number of Calls sold by Dealers increased substantially the last two days, implying very little to no concern that prices will break $570 this week. Put protection remains similar to yesterday implying any rally to $570 is likely to be sold, yet prices are also likely stay above $560 heading into Friday. A break below $560 and Dealers will clean up on their downside protection. But the adjustment today implies Dealers are a bit less Bearish, moving to a more neutral stance.
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!
