Market Insights: Monday, September 23rd, 2024
Market Overview
Stocks continued their September rally on Monday, with the Dow Jones and S&P 500 barely squeezing out record highs. Investors are keeping an eye on comments from Federal Reserve officials and upcoming inflation data to gauge the chances of another big rate cut. There are still concerns about the US economy’s health, especially after the Fed made a bold move last week by cutting interest rates.
The big focus this week is whether the data will back up Fed Chair Jerome Powell's claim that the economy is still strong. Friday's PCE index — the Fed's favorite inflation measure — and Thursday's second quarter GDP report are key. Experts are betting that cooling inflation, rather than fears of a recession, will encourage the Fed to make another 0.5% rate cut this year. On Monday, Fed officials Raphael Bostic and Neel Kashkari shared their views, explaining why they supported a larger 50-basis-point cut, citing progress on inflation and a slowing job market. With some disagreement in the Fed’s last decision, people are eagerly awaiting remarks from Powell and Fed Governor Michelle Bowman later this week for more clarity.
SPY Performance: SPY opened up just over $1 at $569.34 as the overseas markets pushed prices higher today, with SPY reaching a high of $570.33 and a low of $568.10. SPY spent all day in this very tight range in a low volume, chop filled session without significant opportunities for profit. SPY closed the day slightly in the green at $569.67, up 0.25%. Trading volume was low at 34.26M shares traded.
Major Indices Performance: The Dow continued to move higher by 0.18% while the Nasdaq moved up 0.14% with the Russell 2000 losing 0.35%.
Notable Stock Movements: The "Magnificent Seven" stocks were once again mixed with Google (GOOGL), Microsoft (MSFT) and Apple (AAPL) losing ground while the others, including NVIDIA rose.
Commodity and Cryptocurrency Updates: Crude oil fell 0.63% while Gold again made new highs, up 0.19% with Bitcoin rising 0.32% above $63K.
Treasury Yield Information: The 10-year Treasury yield rose 0.6% to close at 3.75%. 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 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: The markets are taking a break after a strong rally the last couple of weeks, which was to be expected. As stated on Friday, this may continue for some time until an external catalyst pushes the market higher. Bulls continue to drive the market as even the risk of a much larger global conflict in the Middle East has had no effect on price. By historical standards the market is overvalued but without said catalyst, prices are likely to continue to grind higher, albeit at a much slower pace than the last 6 weeks. We continue to favor defensive positions in Gold, Silver, and Bitcoin above $62K as we expect SPY to reach $573 in the near term making a new all-time high before finding material resistance.
Previous Day’s Forecast Analysis
Recap of Previous Forecast: In Friday’s newsletter we stated the Bulls control the market with $570 as the dividing line between higher and lower prices. We stated key support is $566 while $575 is major resistance. We stated we favored longs trades over shorts but were open to short trades from major resistance. We expected price to continue to consolidate on Monday in a tight range and that today’s market behavior would be similar to Friday, but tightening even further.
Market Performance vs. Forecast: SPY opened at $569.34, right at the $570 level and did nothing all day that caught our attention. A very tight range as forecast provided few opportunities for profit. While $569 set up twice with a failed breakdown pattern, the range was so tight we favored taking the day off rather than risking capital. Price never got close enough to either of our major levels and as such, was a day to simply observe. Once again, the post market recap kept our readers out of a difficult chop-filled session by suggesting where to trade to and from and what to expect in terms of the day’s price action. Not trading is an important part of a trading strategy so knowing when this is advisable certainly has value.
Final Thoughts: Today’s price action was extremely narrow, setting up a squeeze for the market to breakout. As price trades sideways, energy builds like a rubber band coiling and when it is released, price will pop one way or the other. Probabilities favor a break higher. We believe the market is waiting on an external catalyst to move the market one way or the other and it’s likely one of the major economic news releases due out this week or next. Until then, we expect SPY to bounce between major support and resistance levels, remaining rangebound. It’s very possible when SPY does break out, it retests the lows from FOMC day at $560 to trap Bears. Our model still forecasts a $10 sell off day coming within the next two weeks with price moving through multiple support levels to attract unsuspecting Bears, only to reverse course and move back to the all-time high. Until this occurs however, our model sees higher prices this week with SPY reaching $573 making yet another new, all-time high.
Premarket Analysis Summary
Summary of Key Levels Identified: In today's premarket analysis at 8:31 am ET, we stated the market this week looked like it would rise across the board but without sufficient momentum for a large move. We expected dips to be bought with chop between $567 and $570. We stated should $567 hold, we favored longs to $570.50 but did not believe there was much motivation to move prices significantly higher. Critical levels: Resistance at $570, support at $567, dividing line, $567.
Validation of the Analysis: The premarket analysis tightened the range of the post market recap and similarly favored buying dips. The low of the day was bought today and longs surely had a better day than shorts. Price remained above the $567 level and to trade today’s price action required skill and an understanding of the failed breakdown pattern to create a successful opportunity. We saw this at 1 pm ET with a long that moved to $569.70. But other than this one trade, today was not a very productive day, but one that was forecast to be so in both the post and premarket analysis.
Looking Ahead: Economic News Releases
Summary of Upcoming Economic Data: Tuesday Consumer Confidence will be released at 10 am ET.
Anticipated Market Impact: We do not expect a major reaction to Tuesday’s economic news. Today August Manufacturing PMI was released which came in slightly below forecast while Services PMI was a bit higher than forecast. A nonevent given both reports were quite close to forecast. The market is waiting for a major report such as Friday's PCE index — the Fed's favorite inflation measure — or Thursday's second quarter GDP after which we expect volatility to increase.
Guidance for Traders: VIX has dropped below 16 as market participants become more complacent. We continue to advise observing how the market reacts at our major levels of $560, $566, $570, and $575 and while the situation in the Middle East has not had a material effect on price yet, the potential exists for this to be a market mover so we advise caution.
Tuesday’s Forecast
Market Sentiment and Key Levels: Control resides with the Bulls with $570 as a dividing line. For Tuesday, support continues to be $566 while $573 is major overhead resistance. Options data is back to Call dominated yet not overly so. Therefore should $566 be breached to the downside, the market will likely trade to $564 and perhaps as low as $560. Above $570 the market will find resistance at $573 and any break above $573 will stall at $575. Below $560 on volume will bring in significantly lower prices, but as we stated yesterday, Bears will not fully engage until price breaks $550.
Expected Price Action: Today was yet again another Doji day which continues to imply a state of confusion. Until the market breaks from the current tight range of $566 to $570, we expect mostly chop with the Bulls driving the action. Price will continue to consolidate on Tuesday, trading in a range between major levels and while we still forecast a better than 60% probability price rolls over within the next two weeks with the market possibly retesting the $560 level, until something pushes price one way or the other, expect more of the same chop tomorrow.
Trading Strategy: We favor long trades over shorts as long as the Bulls remain in control. In a trading range, look for two-way trading from major levels. We favor mean reversion shorts from $573 and higher and longs from $566 and lower. We continue to advise caution trading around $570. We do not anticipate prices falling on Tuesday below $565 or rising above $573, and continue to favor longs on any pullbacks to major support levels.
Risk Management and Warnings: Our model’s projected range for Tuesday is about the same as today, implying a tight and narrow trading range for Tuesday. Probabilities favor a sideways market for a few days with two-way, level to level trading.
Model’s Projected Range: SPY is 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 Tuesday of $564.75 to $573.25 inching up slightly, but remaining tight still implying sideways 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 above upper resistance. There are no extended targets printing and were none all day today. The MSI range is extremely narrow. MSI rescaled overnight, entering the day in its current state but the range provided was so narrow the most valuable information provided by the MSI was to expect an extremely tight trading range that slightly favored the Bulls.
Key Levels and Market Movements: With price printing above upper resistance and without any extended targets, mean reversion shorts from $570 could have been entertained several times today. We do not favor trading in a Ranging Market State which developed twice today as the odds of a successful trade in a Ranging State are only @ 50%. There was an opportunity for a long from the lows a 1 pm ET when the MSI briefly moved to a Bearish Trending Market State without printing any extended targets. This was a good long entry and one that was acceptable, given our long bias and willingness to take mean reversion trades when there are no extended targets printing.
Trading Strategy Based on MSI: With the MSI in a Bullish Trending Market State but with such a narrow range, we continue to favor to wait for the MSI to rescale, or move to a 1-minute chart for more information. With price above the MSI upper channel, we favor a mean reversion short but prefer entries once price approaches $573. The $569 - $570 zone is chop filled and again, we suggest using the MSI in its current state as a broad indicator of the trend direction and the strength of the trend. Should the MSI change materially on Tuesday, we would be inclined to trade the levels provided by the MSI at that time.
Dealer Positioning Analysis
Summary of Current Dealer Positioning: Dealer positioning for Tuesday suggests Dealers are selling $572 to $575 and higher strike Calls while also buying $570 and $571 Calls. This implies Dealers believe the market may rally on Tuesday to as high $575, but with major resistance at $573. To the downside, Dealers are buying $569 to $563 and lower strike Puts in a 3:1 ratio to the Calls they are selling/buying, implying a neutral view of the market for Tuesday with some concern over lower prices. Dealers have shifted their positioning to more neutral from Bullish heading into Tuesday.
Looking Ahead to Friday: Dealers are selling $574 to $580 and higher strike Calls while buying $570 to $573 Calls. This implies Dealers believe the market may rally this week to as high as $580, although $575 looks more probable based on their positioning. To the downside Dealers are buying $569 to $555 and lower strike Puts in a 5:1 ratio to the Calls they are selling, implying a Bearish view of the market this week. This view has shifted materially from Friday with Dealers adding significantly more downside protection.
Recommendation for Traders: We remind you that the last two weeks of September are seasonally the most Bearish of the year, therefore we advise 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!
