Market Insights: Thursday, September 19th, 2024
Market Overview
US stocks skyrocketed, with the Dow Jones Industrial Average (^DJI) closing above 42,000 for the first time ever, as optimism surged that the Fed's big rate cut could lead to a "soft landing" for the economy. Investors rallied after the Fed kicked off its new rate cycle with a 50-basis point cut. Though stocks wobbled after Wednesday's policy announcement, they ultimately bounced back. Wall Street seems to have embraced Fed Chair Jerome Powell's message that a deep rate cut, even with a relatively strong economy, is a proactive move to ward off recession risks. It's being seen more as a sign of confidence rather than panic. Now that the Fed has made its move, attention is shifting back to data releases, with investors bracing for potential market swings. The latest report from the Labor Department on Thursday showed jobless claims fell to their lowest level in four months, adding more fuel to the market's optimism.
SPY Performance: SPY gapped up @ $10, opening at $571.01 after a strong move overnight. After testing $568.08 in the first hour, the low of the day, SPY spent the bulk of the session moving higher, reaching a high of $572.88 before closing at $570.98, up 1.71%. Trading volume was heavy 75.14M shares traded, reinforcing today’s move to new all-time highs.
Major Indices Performance: The Dow too made another new all-time high, climbing 1.34% while the Nasdaq ripped up by 2.46% with the Russell 2000 up 2.06%.
Notable Stock Movements: The "Magnificent Seven" stocks saw solid gains, with Nvidia (NVDA) surging nearly 4%, Tesla (TSLA) climbing over 7%, and Apple (AAPL) rising more than 3%.
Commodity and Cryptocurrency Updates: Crude oil too moved 1.77% higher while Gold rose .50% with Bitcoin higher by over 4.6%, closing above $62K.
Treasury Yield Information: The 10-year Treasury yield rose 0.86% to close at 3.719%. We continue to forecast longer-term bonds moving higher with the market likely testing 3.4% before finding major support on its way back toward 4%.
Final Thoughts on Market Positions: SPY and the DOW made new, closing all-time highs, surely a sign of strength. But after a massive 6% move since September 6th, how much higher can the market go before a sell-off. Yesterday’s closing price action was a trap set by the Bulls in their hunt for liquidity. The S&P and by association, SPY/SPX/ES, due to their sheer size, trap traders to find liquidity. You can either be the liquidity, or you can trade after the traps are set by the institutions. Trap filled markets are full of violent swings in both directions, as institutions hunt the liquidity required to absorb their massive orders. Yesterday was a perfect example as the weak close made it appear the rally was over, only to reverse overnight and push the markets over 2% higher today. Will this rally continue unabated or will the jobs market derail the Bull market? Time will tell, but in the meantime, we continue to favor defensive positions in Gold, Silver, and Bitcoin above $62K, and suggest learning to trade with the trend, using the levels provided in these newsletters.
Previous Day’s Forecast Analysis
Recap of Previous Forecast: In Wednesday’s newsletter we stated the Bulls controlled the market with $560 being key support while $568 was resistance. We advised caution shorting the market as the Bulls were likely to retest Wednesday’s highs at $568.69 and push price as high as $570 before any sell off. We stated the market would move higher before it would move lower and favored mean reversion shorts from $570 with long trades from $560 and $565. We stated today would have two-way trading with periods of strong trending price action and that Dealers were Bullish believing prices would rally to $570 by Friday.
Market Performance vs. Forecast: SPY opened at our upper $570 target and fell to prior resistance which became support at $568 as forecast. After forming a failed breakdown, SYP reversed and moved back to $571.89 before once again giving way, back to $570. Finally moving to the highs of the day at $572.88, above our upper target, SPY sold off into the close back to $570.98. While the levels shifted beyond our forecasted levels, how the market reacted and where, was perfectly in line with our model’s projections. Our recommended mean reversion short from $570 worked at least twice in the morning session with a nice long from $568. And fading the highs after 1:30 pm ET worked as well. Those with our Market State Indicator (MSI) knew when it was safe to enter the mean reversion trades given extended targets ceased printing, providing a clear indication the herd had stepped away from the Bull trend. But the herd reappeared during the noon hour and once again, MSI users knew to wait until later in the day to short $572 into the close. As forecast, SPY moved in the manner predicted, moving to the prior day’s high before finding any weakness. While we won’t state today our models was perfect, it was close enough for our readers to make a solid plan of action for the day.
Final Thoughts: Today’s close as a Doji potentially sets up a pullback or period of consolidation. The market has moved straight up for virtually 9 days which is highly unusual and unsustainable. A $10 pull back in SPY would be normal and welcome. This may happen quickly, OR SPY will chop sideways to let enough time pass for institutions to consolidate positions for a move higher. The battleground for the Bulls and Bears remains $550 to $555 and at some point, it’s likely the market will give the Bears another shot at this level, if for no other reason, than to hunt liquidity. Once again, the next few days will provide clues whether the market can simply move higher, or simply move sideways until the Jobs report on October 4th.
Premarket Analysis Summary
Summary of Key Levels Identified: In today's premarket analysis at 8:20 am ET, we stated we saw strong momentum in the market and as long as the Bulls kept price above $570, we favored longs to $573.35. Below $570 we stated the market could potentially reach $566 where we would favor long entries once again. Critical levels: Resistance at $573.35 and support at $570.
Validation of the Analysis: The premarket analysis did an excellent job adjusting the post market levels, suggesting $570 resistance was closer to $573.35 while also moving support higher to $570. This is why we provide two reports, post and premarket. By understanding how to adjust the day’s plan by combining the information in both reports, our readers can better develop their plan for the day. Our levels are designed to provide entry and exit “zones” where our models see liquidity which will trap traders. Our models understand this concept and have determined with a high probability of success where the market will react. Anyone reading these newsletters for any amount of time has realized these levels are incredibly accurate and once again, understanding when it was safe to sell $570 and $573 today made for a day that consisted of a fairly narrow trading range, quite profitable for our readers.
Looking Ahead: Economic News Releases
Summary of Upcoming Economic Data: Friday does not have any economic news.
Anticipated Market Impact: As stated above, the market will likely spend time treading water until the Jobs report the first Friday in October.
Guidance for Traders: We recommend keeping an eye on volatility with VIX above 16 to see how the market reacts at our major levels of $560, $566, $570 and $575.
Friday’s Forecast
Market Sentiment and Key Levels: The market is in complete control of the Bulls with $570 now forming the base of key support. $566 is lower support while $575 is major overhead resistance. Should $570 be breached to the downside, the market will likely trade to as low as $560 where we see prices reversing and resuming their march higher. We advise caution shorting the market until price pulls back at least $10 or consolidates for several days. Below $560 on volume will deliver significantly lower prices yet the Bears will not fully engage in any sell-off until prices break $550.
Expected Price Action: Today’s closing all-time high further solidifies Bull control. The market closing as a Doji however continues to show its exhaustion at these levels. There remains a better than 60% probability that price will roll over within the next two weeks and we will enter a period of falling prices. We believe the Bulls on Friday will retest the highs at $573 but will find difficulty moving much higher. We would entertain mean reversion shorts to $570. We do not anticipate prices falling tomorrow below $565 and would buy on any pullback at our major support levels. For Friday we forecast two-way trading in a tighter range than today of $568 to $573.
Trading Strategy: We favor long trades from support at $568 to $570 and from $570 to $573 on a failed breakdown pattern. We also favor mean reversion shorts from the all-time highs. Should price break below $568 on volume, we favor shorts to $565, although we see this is a low probability for Friday.
Risk Management and Warnings: Our model’s projected range has shrunk considerably for Friday implying much tighter and narrower trading on Friday. Probabilities favor a sideways market for a few days with two-way trading, level to level.
Model’s Projected Range: SPY has moved toward the upper side 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 Friday of $565 to $577.50 implying sideways 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 well above the upper channel. There are no extended targets printing currently. The MSI rescaled several times in the premarket as price moved higher, but has not rescaled since 4 am ET. The range is narrow and while extended targets above printed for much of the day, when they ceased printing the market gave way and closed midway between the high and low of the day. Current support is $568.74 and $566.76. As we stated yesterday, we suspected the MSI would rescale from a Ranging State to a Bullish Trending Market State and its likely to continue to remain in this state on Friday.
Key Levels and Market Movements: Entering the day in a Bullish Trending Market State it was clear the day would favor long entries from support. Just after the open, price bounced off MSI support of $568.74 virtually to the penny and moved to extended targets above. Breaking far above extended targets without the MSI rescaling higher indicated to us the trend, while strong, was not as strong as it appeared. As soon as the MSI stopped printing extended targets, MSI users were open to short at will to capture significant profits. But the MSI also kept our users out of shorts during periods of strength.
Trading Strategy Based on MSI: With the MSI in a Bullish Trending Market State and with price above support, we favor mean reversion shorts to $568.74 as long as there are no extended targets above. At $568.74 we suggest looking for long entries but only on failed breakdown patterns. If this pattern does not develop, we will wait for price to reach the lower support level of $566.76 before attempting a “knife catch” long. The market on Friday can easily sell off $10 or more from the highs, which would be perfectly normal, only to move back to the all-time highs. Therefore to protect from this possibility, we will look for failed breakout/breakdown patterns only on Friday. This pattern allows institutional traders to push price through a level to absorb liquidity only to reverse and move price higher. By waiting to enter with this pattern, we significantly reduce the risk associated with a level failing completely. For Friday we favor two-way, level to level trading, using the MSI as confirmation, seeking failed breakdown/breakout patterns.
Dealer Positioning Analysis
Summary of Current Dealer Positioning: Dealer positioning for Friday suggests Dealers are selling $571 to $576 and higher strike Calls while also selling $570 Puts. Dealers typically only sell Puts when they are convinced prices will move higher. This implies Dealer’s believe prices will continue to move higher on Friday, to as high as $575. To the downside, Dealers are buying $569 to $554 and lower strike Puts in a 1:6 ratio to the Calls/Puts they are selling, implying a very Bullish view of the market for Friday with no concern over lower prices. Due to most Call options ending ITM today, Dealers are no longer holding large Call positions and instead have sold Puts to finance the purchase of lower strike Puts should $570 give way. This is a material change from positioning heading into today.
Looking Ahead to next Friday: Dealers are selling $571 to $577 and higher strike Calls. This implies Dealers believe a rally next week will move the market as high as $577 but not beyond. To the downside Dealers are buying $570 to $562 and lower strike Puts in a 2:1 ratio to the Calls they are selling, implying a balanced view of the market for next week. This view has not shifted materially from yesterday.
Recommendation for Traders: We remind you 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!
