Market Insights: Friday, September 20th, 2024
Market Overview
The Dow managed to notch another record at the end of a winning week for stocks, even though Friday's action was more subdued. US stocks ended mixed as the initial excitement over the Fed's rate cut started to wear off. Still, the Dow Jones Industrial Average (^DJI) stayed above 42,000, closing at a new high. Even with Friday’s calmer mood, the major indexes finished the week with solid gains, thanks mostly to Thursday’s rally. Investors were feeling good after Fed Chair Jerome Powell reassured them that the big interest rate cut was a proactive move to support the economy, not an emergency measure — a sentiment backed by strong jobless claims data. However, Friday's rally lost steam as concerns resurfaced about potential risks to growth. Wall Street is still debating whether the Fed might be a step behind in steering the economy toward a "soft landing." Traders are now betting on deeper rate cuts this year than the Fed’s own projections suggest.
SPY Performance: SPY opened down @ $3 at $567.84, selling off overnight. SPY continued its overnight weakness into the noon hour, falling to a low of $565.17 where SPY set up a perfect failed breakdown trade for a long back to $568. Another push back toward the lows in the afternoon session and yet another failed breakdown pattern at 2:38 pm ET from $566.50 back to $568. SPY finally closed the day in the green at $568.25, up 0.48%. Trading volume was higher than average due to quad witching at 76.53M shares traded.
Major Indices Performance: The Dow moved a bit higher, up 0.09% while the Nasdaq saw profit taking, down 0.35% with the Russell 2000 shedding 1.07%.
Notable Stock Movements: The "Magnificent Seven" stocks had a mixed day with Google (GOOGL), Meta (META) and Apple (AAPL) rising while the others, including NVIDIA fell.
Commodity and Cryptocurrency Updates: Crude oil inched higher by 0.08% while Gold rose to new highs, up 1.17% with Bitcoin falling by 0.38% but remaining above $62K.
Treasury Yield Information: The 10-year Treasury yield rose 0.98% to close at 3.745%. 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% long term. The bond market is actually forecasting a recession with long duration bond yields now higher than short duration bonds in a resteepening of the yield curve.
Final Thoughts on Market Positions: After new highs for SPY and the DOW and nine straight up days, the markets needed to take a breather to consolidate. This may continue for some time until an external catalyst pushes the market higher. Bulls continue to write the narrative yet the question remains how much is left in this very expensive (by historical standards) market. As such we continue to favor defensive positions in Gold, Silver, and Bitcoin above $62K.
Previous Day’s Forecast Analysis
Recap of Previous Forecast: In Thursday’s newsletter we stated the Bulls continue to control the market with $570 and $566 as key support. We stated a failure of $570 and price would move to as low as $560. However we cautioned shorting the market until price pulls back at least $10 or consolidates for several days as the Bulls are simply too strong. We stated SPY would not fall below $565 on Friday and would buy any pullback at our major levels. We favored longs from support at $568 to $570 on failed breakdown patterns ONLY and to wait for price to approach $566 before initiating any longs absent this pattern. We stated the market was likely to trade in a range on Friday with two-way price action.
Market Performance vs. Forecast: SPY opened at $568 in between our support levels of $570 and $566. Selling off after the open and below $570, we waited for SPY to approach $566 per our newsletter, looking for a failed breakdown pattern. This set up perfectly at 11:16 am ET at $565.80 where we went long to $568. This same pattern emerged once again at 2:38 pm ET for another long to the day’s highs into the close. In an otherwise choppy and rangebound market, our model laid out precisely what to look for and where, as well as how to trade it. The instructions could not have been more accurate or clearer and once again the post market recap provide two excellent opportunities for big profits, capping the week off with large gains.
Final Thoughts: Today’s price action was to be expected with SPY testing lower levels of support before moving higher on the day. Its likely SPY remains rangebound for a few days. It’s also possible SPY retests the lows from FOMC day at $560 to trap Bears. This would not be unusual or unexpected. As such our model sees SPY still seeking a $10 sell off day, blowing through multiple support levels to attract unsuspecting Bears, only to reverse course and move back to the all-time highs. Markets do not move in straight line so expect to see this type of price action next week while the market sets up for the Jobs report on October 4th. Ultimately however our models sees higher prices next week with the possibility of another new, all-time high.
Premarket Analysis Summary
Summary of Key Levels Identified: In today's premarket analysis at 8:11 am ET, we stated the market looked ready for some profit taking and consolidation. We stated as long as price remained above $567.55 prices would move higher to $570. We stated a failure of this level and we favored shorts to $566.15. Critical levels: Resistance at $570, support at $566.15, dividing line, $567.55.
Validation of the Analysis: The premarket analysis once again was spot on as after the open, $567.55 held for less than thirty minutes before giving way for a nice short to $566.15. An easy trade, adding a short to the post market’s long trades. But the premarket also confirmed the long with its $566.15 level which again, tells our readers to load the boat and move all in. This was a great trade back to $568 and by taking it in size, most of our readers were done for the day. But again, $566.15 failed once more for another short to the long entry suggested in the post market report. Two more trades, doubling the day’s bounty. Another perfect day thanks to our premarket model and analysis, coupled with the post-market report.
Looking Ahead: Economic News Releases
Summary of Upcoming Economic Data: Monday has Manufacturing PMI at 9:45 am ET, as well as several Fed speakers throughout the day.
Anticipated Market Impact: It’s likely the market will start to react a bit more violently to every little news event given interest rate policy no longer dictates intraday moves.
Guidance for Traders: We recommend staying vigilant during these events to ensure you are not caught in a trade that spikes against you due to one of these economic releases. VIX remains elevated above 16 and we recommend observing how the market reacts at our major levels of $560, $566, $570, and $575.
Monday’s Forecast
Market Sentiment and Key Levels: Control resides with the Bulls with $570 as a dividing line. Support is $566 while $575 is major overhead resistance. Options data has started to shift to a more Put dominated market which implies price likely retest lower levels. Should $566 be breached to the downside, the market will likely trade to $564 fairly easily and perhaps as low as $560. Above $570 the market will find resistance at $572 initially, but certainly remain contained below $575…at least early in the week. We continue to favor long trades over shorts as long as the Bulls maintain control. That said, in a two-way market, we are certainly open to short trades from major resistance levels. Below $560 on volume will bring in significantly lower prices, but as we stated yesterday, Bears will not fully engage until price breaks $550. Until then its mostly chop with the Bulls driving the action.
Expected Price Action: Today was another Doji day which is a sign of confusion. Big up followed by big down equals big confusion. And confusion translates into a trading range. Therefore we expect price to continue to consolidate on Monday, trading in a range between major levels. We still forecast a better than 60% probability price rolls over within the next two weeks for at least a few days of falling prices. The market needs to retest at least $560 before reaching new highs. Therefore on Monday expect more of the same as today.
Trading Strategy: We favor mean reversion shorts from $572 and higher and longs from $566 and lower. We do not recommend trading around $570 as this is simply no man’s land without the energy to make a trade worthwhile. We do not anticipate prices falling on Monday below $565 or rising above $573, and continue to favor longs on any pullback to major support levels. Like today, for Monday we forecast two-way trading in a tight range.
Risk Management and Warnings: Our model’s projected range continues to shrink, implying tighter and narrower trading on Monday. Probabilities favor a sideways market for a few days with two-way trading, level to level.
Model’s Projected Range: SPY is back to 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 Monday of $562.50 to $573 implying sideways price action for Monday.
Market State Indicator (MSI) Forecast
Current Market State Overview: The MSI is currently in a Bearish Trending Market State with price closing at lower support. There are no extended targets printing currently. The range is extremely narrow and, as such, likely to change on Monday. The MSI rescaled several times overnight, entering the day in a Bearish Trending Market State with extended targets below. Extended targets below printed for much of the morning session but ceased printing at 11:18 am ET. Current support is $568.11 and resistance is $568.33 which are so close together they are somewhat irrelevant. We expect the MSI to rescale before Monday’s open. Should that not occur, we advise clients using the MSI to scale down to a 1-minute chart for more granularity.
Key Levels and Market Movements: By rescaling lower overnight and at the open, and printing extended targets below, our MSI users had a free hand shorting the break of our levels indicated above. Our users stayed in this trade until the MSI stopped printing extended targets, opening the way to a mean reversion long from the failed breakdown pattern at 11:20 am ET, trading back to MSI resistance at $568. And once again, this same trade set up in the afternoon session but without extended targets printing, our MSI users knew the move lower would not be as strong as the morning session so they captured profits more quickly, reversing long once again to the day’s highs.
Trading Strategy Based on MSI: With the MSI in a Bearish Trending Market State but in such a narrow range, we favor waiting for the MSI to rescale, or moving to a 1-minute chart for more information. We would rely on the levels above as areas of support and resistance and use the MSI for confirmation of the trend and the strength of the trend until the MSI rescales with a wider range. Without extended targets, the trend is not strong and therefore the market is more likely to trade in a range. We suggest continuing to look for failed breakout/failed breakdown patterns, given in a ranging market, these have a higher probability of success than in a trending market. If this pattern does not develop, we suggest waiting for price to reach our major upper and lower support levels before entering trades. On Monday 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 Monday suggests Dealers are selling $572 to $575 and higher strike Calls while also buying $569 to $561 Calls. This implies Dealers believe the market has the potential to rally on Monday to as high $575. To the downside, Dealers are buying $568 to $560 and lower strike Puts in a 1:3 ratio to the Calls they are selling/buying, implying a Bullish view of the market for Monday with no concern over lower prices. Dealers continue to remain Bullish heading into Monday in a similar fashion to their positioning today.
Looking Ahead to next Friday: Dealers are selling $573 to $580 and higher strike Calls while buying $568 to $572 Calls. This implies Dealers believe the market may rally next week to as high as $580, although $575 looks far more probable based on their positioning. To the downside Dealers are buying $567 to $555 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!