Market Insights: Friday, September 27, 2024

Market Overview
The market sentiment remained bullish, supported by strong economic data and moderate reactions to inflation numbers. Today’s PCE inflation report, while anticipated to cause more volatility, showed minimal surprises, and allowed the market to retain stability. Investors appeared cautiously optimistic, holding positions as the week closed. The broader indices closed slightly mixed as traders digested the PCE inflation data. The report suggested inflation continues to cool, which strengthened the sentiment that the Fed may continue to cut interest rates over the coming months. The Dow pushed higher, finishing up 0.33%, while the Nasdaq and SPY remained slightly down due to profit-taking in the tech sector. Tech stocks, after strong performances earlier in the week, pulled back slightly.

SPY Performance
SPY opened at $573.50 near its recent highs and briefly touched an intraday high of $574.22. A brief sell-off brought SPY down to a low of $570.42 before closing at $571.41, down 0.16% for the day. Volume was lighter than usual, with 34.78 million shares traded, as many traders appeared to take profits and wait for the coming week’s economic data releases.

Major Indices Performance
The Dow performed the best among the major indices, closing up 0.33%. The Nasdaq dropped 0.40%, weighed down by losses in large-cap tech names, while the Russell 2000, representing small caps, showed strength, gaining 0.68%.

Notable Stock Movements
The "Magnificent Seven" stocks had a mixed day, with Apple (AAPL), Google (GOOGL), and Tesla (TSLA) rising. Meanwhile, NVIDIA (NVDA) fell by 2.17%, as traders took profits following a strong week for the chipmaker. Overall, tech stocks saw some profit-taking after their recent rally.

Commodity and Cryptocurrency Updates
Crude oil rallied by 1.30% due to supply concerns, while Gold fell by 0.78%, taking a breather after its recent climb. Bitcoin continued its upward momentum, rising 1.37% to close just above $65,500.

Treasury Yield Information
The 10-year Treasury yield fell by 0.88%, closing at 3.762%. The bond market’s reaction to the PCE data showed a slight cooling in inflation expectations, which could hint at fewer aggressive rate hikes in the future.

Final Thoughts on Market Positions
As the market heads into the final week of September, traditionally one of the weakest months, we advise maintaining a defensive posture. Gold, Silver, and Bitcoin continue to perform well, and SPY seems poised to test resistance at $573 again in the coming days. However, caution is advised as volatility remains elevated, especially with key economic data releases on the horizon.

Recap of Previous Forecast

In Thursday's newsletter, we predicted that SPY would struggle to break through the $575 level and would likely trade in a tight range. We also anticipated buying opportunities near $570, where we expected strong support. Additionally, the market’s reaction to the PCE inflation report was a key focus, with expectations that it could trigger increased volatility, especially if the data showed any signs of unexpected inflationary pressure. We mentioned that a breakout above $575 would likely be followed by a rapid move toward $578, but that failure to hold above $575 would likely keep SPY trading within a narrow range, with support at $570 serving as a potential buying zone for long trades.

Our forecast also highlighted that despite the bullish sentiment, caution was necessary due to elevated volatility and the potential for profit-taking in tech stocks, which had experienced strong gains earlier in the week. We warned traders to be vigilant around key economic data releases, as any surprises could lead to sharp market moves.

Market Performance vs. Forecast

Today's market performance largely validated our predictions. As anticipated, SPY struggled to break through the $575 resistance level, failing to sustain any breakout attempts. This confirmed our forecast that SPY would likely trade in a range, with resistance at $575 and support around $570. The PCE inflation report had a relatively muted impact on the market, as the data came in line with expectations, limiting the potential for increased volatility. Traders who followed the forecast saw opportunities to short SPY near the $574-$575 resistance zone, capitalizing on the failure to break higher with a perfect failed breakout pattern at 10:30 am ET. We stated to look for these patterns today in yesterday’s newsletter as they have a high probability of success in a rangebound market.

Meanwhile, the strong support we predicted near $570 provided a solid base for long trades, with SPY bouncing off these levels intraday. Although SPY dipped briefly below $571, buyers stepped in to defend the support zone, validating our outlook for a range-bound market day. The lack of significant movement beyond the forecasted range confirms the importance of identifying and trading around key technical levels, particularly in a market where volatility remains elevated.

Our forecast that tech stocks might see some profit-taking was also validated. The Nasdaq dropped by 0.40%, driven by declines in key tech names such as NVIDIA, which fell over 2%, in line with our expectation of pullbacks in high-performing stocks.

Final Thoughts

The accuracy of today’s market performance relative to our forecast underscores the importance of identifying critical support and resistance levels, especially in a market characterized by heightened volatility and mixed economic signals. The inability of SPY to break above $575 reinforces the strength of that resistance level, and the support around $570 proved to be a valuable entry point for long trades, as expected.

The tech sector’s profit-taking, particularly in stocks like NVIDIA, confirms that while the broader market sentiment remains bullish, individual stocks may experience corrections, especially after strong rallies. Going forward, traders should continue to monitor key technical levels and remain cautious of any surprises in economic data releases.

In summary, today’s price action provided a textbook example of how traders can benefit from carefully tracking key levels and trading within defined ranges when the broader market lacks a clear directional bias.

Premarket Analysis Summary

Summary of Key Levels Identified
In today’s premarket analysis at 8:11 AM ET, we identified $573.50 as a key level of resistance, with $570 acting as support. These levels aligned closely with recent price action, making them critical for traders looking to position themselves intraday. We noted that a break above $574.75 could lead to an extended move higher, potentially reaching $578, while failure to hold support at $570 could result in a pullback toward $567.

Validation of the Analysis
The price action played out in line with the premarket analysis. SPY struggled to hold above $573.50, failing to trigger a breakout. Support at $570 held firm, with buyers stepping in around this level, allowing traders to capitalize on long positions as expected. The market respected the identified levels, offering profitable opportunities for traders who followed the analysis. The day’s movements reinforced the importance of identifying these key levels in premarket planning, as they serve as effective guideposts for intraday trading decisions.

Looking Ahead: Economic News Releases

Summary of Upcoming Economic Data
Monday features the release of Manufacturing PMI data at 9:45 AM ET, followed by a series of speeches from Federal Reserve officials throughout the day. These reports will provide further insight into the health of the U.S. economy and could lead to increased market volatility depending on the numbers.

Anticipated Market Impact
Given the market's sensitivity to economic indicators, particularly around inflation and economic growth, the PMI report could have a significant impact on market sentiment. A stronger-than-expected reading could lead to speculation about future rate hikes, potentially pressuring equities, while a weaker reading may provide further support for a more accommodative Fed policy.

Guidance for Traders
Traders should be prepared for potential volatility surrounding the economic data releases on Monday. Keep a close watch on key support and resistance levels, as unexpected results could trigger sharp movements. Adjust positions accordingly and be cautious about entering new trades ahead of the reports.

Next Day’s Forecast

Market Sentiment and Key Levels
Heading into Monday, we expect the Bulls to maintain control, especially if support at $570 holds. The key resistance remains at $575, and any successful break above this level could see SPY quickly move toward $578. However, a failure to hold $570, which is major support at this point, could trigger a deeper pullback to $566 or lower, particularly if Monday’s economic data surprises to the downside.

Expected Price Action
We expect SPY to continue trading in the range of $570 to $575.50, with potential for a breakout above $575 if buying pressure increases. A failure to break above $575 could see SPY consolidating within this range, while a breach of $570 would likely lead to further downside toward the $566 level. Traders should watch for failed breakout or breakdown patterns, as these could provide strong opportunities for intraday trades. We mentioned all week that the market may rollover within two weeks, printing lower prices. Should $570 break on volume, it’s very possible this starts next week.

Trading Strategy
We favor long trades from support at $570, particularly if this level holds in the early part of the session. Shorts from resistance at $575 remain a viable strategy, especially if there is a failure to break higher after an initial test of resistance. Traders should be ready to adjust positions based on the outcome of Monday’s PMI report, as unexpected results could lead to sharp market moves in either direction.

Risk Management and Warnings
The market remains range-bound, so manage risk accordingly. Be cautious of potential spikes in volatility following key economic data releases, especially as we approach month-end.

Model’s Projected Range

Model’s Projected Range
Our model projects a range of $567.75 to $576.50 for Monday, with an increased probability of sideways price action. The range is relatively tight, suggesting that Monday may see continued consolidation, with potential for a breakout or breakdown depending on market drivers such as the PMI report.

Market State Indicator (MSI) Forecast

Current Market State Overview
The MSI is currently in a Bearish Trending Market State, with price closing just above mid-range. In this state we expect price to move from resistance to support. The probabilities of this occurring are better than 68%. The range is tight therefore the trend is weak. There are no extended targets printing below MSI support therefore the herd is not participating in the move lower. MSI support is $570.42 and resistance is $571.47.

Key Levels and Market Movements
At the open, the MSI flip flopped twice between a Bullish Trending Market State and a Ranging Market State indicating a somewhat weak Bull trend. The range of the Bullish Trending Market State was rather narrow as well, reaffirming a weak trend. By 10:30 am ET when price created a perfect failed breakout pattern, conditions were perfect for a mean reversion short from major overhead resistance at $574. This level was identified in the premarket report as was the statement in the post market report to look specifically for this pattern today at these major levels. This trade should have been easy to see and take given all of the information provided in these daily newsletters. As the session progressed, the MSI rescaled to a Bearish Trending Market State and printed the occasional extended target below support which indicated the trend was strong, although not unstoppable. Finally at 2:30 pm the MSI stopped printing extended targets and price once again set up another perfect failed pattern, this time a failed breakdown and price reversed from another of our model’s levels of $570.70, returning to $572.50. Two easy trades for today in an otherwise choppy and low volume, Friday session.  

Trading Strategy Based on MSI
With the MSI in a Bearish Market State but with Bulls in control and price above $570, we favor mean reversion long trades from support, with price moving back to $572 and higher. But we must also respect the MSI’s current state and therefore also favor shorts from overhead resistance at $571.50. We suspect by Monday’s open the MSI will have rescaled and recommend all users update these levels at that time. The $570 support level remains a key level even more so for Monday as options volume builds at this dividing line between the Bulls and the Bears.

Dealer Positioning Analysis

Summary of Current Dealer Positioning
Dealers are selling $575 to $580 and higher strike Calls, while buying $572 to $574 Calls. This implies that Dealers want to be positioned for any market rally to as high as $580. Dealers however have moved all in supporting $570 and should price rally beyond $573, it could go well beyond $580. We see a move on Monday above $575 as a low probability but one which must be stated as we remain in a strong Bull market. To the downside, Dealers are buying $571 to $565 and lower strike Puts in massive size in a 10:1 ratio to the Calls they are buying/selling, indicating a very Bearish view for Monday. Dealers have shifted from a Bullish to Bearish stance heading into Monday and should $570 fail to hold, price could accelerate to the downside.

Looking Ahead to Next Friday
Dealers are selling $578 to $585 and higher strike Calls while buying $572 to $577 Calls, indicating a desire to participate in any move higher by next Friday. To the downside Dealers are buying $571 to $560 and lower strike Puts in a 4:1 ratio, increasing their downside protection significantly. While not overly Bearish, certainly Dealer positioning is in place to capitalize on any weakness heading into next Friday.

Recommendation for Traders
Review Monday’s premarket analysis for additional insights and trade according to updated MSI and Dealer positioning levels as its highly likely these change on Monday. Good luck and good trading!