Market Insights: Tuesday, September 3rd, 2024.
SPY gapped down over $3 today after reaching a high in the premarket of $564.22, just shy of the all-time high of $565.16. But the real party started once ISM Manufacturing PMI was released at 10 am ET. While the topline number was slightly below forecast, the drop in new orders, down 2.8 reached the lowest level since May 2023 while inventories registered the largest jump since 2014, both indicating a slowdown in the economy. To boot prices paid for materials climbed 1.1 points which is bad news for inflation. This double whammy raised the specter of an economic slowdown, i.e. recession, which spooked the market and caused SPY to fall virtually straight down all session, dropping 2.06% while the Nasdaq fell a whopping 3.25% with the DOW falling 1.51% and IWM losing 3.03%. Every "Magnificent 7" stock lost including NVDA, which shed 9.54% today. Trading volume for SPY was slightly above average at 60.26 million shares. 10-year Treasury yields dropped 2.07% closing at 3.83% while Crude got crushed, dropping 4.38%. Gold too moved slightly lower by .16% while Bitcoin fell 1.52%, remaining below $59K. We are Bullish Gold, Silver, and Bitcoin above $62K, and we are nibbling at long positions on Crude once again. We expect Crude to find support above $65 and are therefore building a long position.
In Friday’s newsletter, we stated the only notable event for today was ISM Manufacturing PMI which was unlikely to significantly impact the market UNLESS it deviated from forecasts. Remember we say all the time, when new information is released to the market, trade what you see. And the information released into the market did deviate from forecast with the details being worse than expectations. Bad news is now bad news as the market no longer views bad news as good for interest rates cuts as cuts are already a given. As we stated, bad economic news is bad for the market, as it should be. We also stated the market would make a run at the all-time high, which it attempted in the premarket. We stated we would short any break of $562 and if $555 failed, the market would move into the $550 to $555 battleground, where price would chop around before declining further. Finally we stated the month of September would bring exaggerated moves to the downside, given September’s seasonally Bearish history. And at the open, SPY traded as high as $561.10 before falling off a cliff to $555, where it traded sideways before falling to the low of the day at $549.51. SPY bounced from this level to close at $552.08…right in the middle of the “battleground (DMZ) zone”. The levels laid out for our readers once again proved to be the critical spots for the market, setting up our recommended trades. And our Market State Indicator (MSI) also showed us the way all day, providing valuable information in real time making executing on the day, simple and straightforward.
In the premarket analysis at 8:13 am ET, we stated the market looked less than eager to take a big leap forward and that it appeared prime for consolation. We stated we did not expect any strong upside, while our model before PMI still favored longs from $560.20. We stated if this level failed, SPY would reach $557.45 and to look for rallies. A weaker-than-expected PMI report and the subsequent market reaction were difficult to foresee, highlighting the importance of staying informed about daily economic and news releases. This is precisely why we emphasize the need to be aware of key events each day and to trade what you see.
Tomorrow, JOLTS Job openings will be released as a preview to Friday’s Non-Farm Payroll report. While we wouldn’t normally be too worried about this report, given the 2+% sell off today, be wary of this 10 am report and again, trade what you see. Volatility has jumped once again and we expect prices to move in a large range until we get out of this week. SPY is back in the DMZ between $550 and $555 and the Bears are looking to break the back of the Bulls. A move below $550 and there is little to stop prices from falling to @ $542, where the gap from August 14th will close. This is a realistic first target for the Bears. Talk about breaking the all-time highs is no longer worth having given price is sitting just above the 50 DMA. There is a high probability price retests today’s lows where we expect a bounce to as high as $555. But should $550 fail on volume, watch out below because $544 and $542 are only rest stops on the way to lower levels. It’s probable Wednesday SPY follows through on today’s move with SPY breaking today’s lows in a move to trap Bears. Control is now a toss-up so either side may win this battle. Since September is seasonally Bearish, perhaps the advantage goes to slightly to the Bears. Before today, our model saw this week as being a positive week with much more weakness coming next week and the week after. Today the model suggest the Bears have the slight advantage, but that news due out this week will direct the market in the near term. And still the Middle East still poses risks to the markets.
The Bull channel from the August lows was breached today with SPY closing well below the lower trend channel. We have been saying since early August this channel was too steep and as such was unsustainable. While we did not redraw the channel today, a day or two more below the channel and it will be redrawn. Price may move along the 50 DMA for a few days before picking a path, similar to what it did in the last week of July. We have made it clear that interest rate policy will not be a catalyst for the market going forward and stated we needed favorable economic readings to move the market higher. And today we got unfavorable macroeconomic indicators which as suggested, did the opposite. It’s still too early to make a prediction for September, but we are no longer buying dips and instead will be trading both ways, while we wait for a resolution to the $550 to $555 zone. We recommend reviewing the premarket analysis to receive the latest market updates prior to Wednesday’s open.
Looking at a 2-minute chart of SPY with our Market State Indicator (MSI), the indicator is currently in Bearish Trending Market State with price closing well below the lower channel and below extended targets. The range is narrow after rescaling lower three times today. But the last rescale came at 10:48 am ET and extended targets began printing at 12:44 pm ET which told us support at $555.28 would not hold. And sure enough, price broke lower to the lows of the day, moving beyond the extended targets. The strength of the herd was not to be underestimated. Extended targets continued to print into the close therefore lower prices are probable. The MSI opened the day in a wide Ranging Market State which quickly rescaled to a Bearish Trending Market State with extended targets below. As users of this tool know, this means get with the trend and stay with it for major gains. And today was no exception. At each resistance level, shorts were the order of the day without any thought of a mean reversion long from the lows. While the market did bounce shortly before the close, as long as extended targets print, we do not favor mean reversion trades.
It’s probable overnight or tomorrow morning the MSI rescales lower and in the MSI’s current state we favor short trades from overhead resistance at $555.28 and $557.47. But keep in mind our broader levels of $550 and $555. We would be cautious, shorting $557.47 should price approach this level. We do favor shorts from $555.28 to $550. If the MSI rescales, make sure to update these levels in real time. Should extended targets stop printing below, we favor a mean reversion long from today’s lows at $550. Today actually set up a perfect failed breakdown pattern but again, we didn’t take this trade due to extended targets printing. Should they stop printing, and should the MSI not rescale lower overnight, we favor a mean reversion long at or near today’s lows. For Wednesday our model projects a range of $545 to $558 (white box on chart), expanding significantly from today, indicating trending price action for Wednesday. VIX is above 20 so expect more volatility and larger price moves.
Dealer positioning for Wednesday to the upside has Dealers selling $553 to $556 and higher strike Calls while also selling $550 to $542 Puts. This implies a belief by the Dealers that SPY may find support at the $550 level but certainly not move lower than $542. At the same time, they are selling very close to spot price Calls and do not see prices moving beyond $556 on Wednesday. It seems Dealers believe the $550 to $555 battleground we discussed is the playground for tomorrow. To the downside, Dealers are buying $541 to $530 and lower strike Puts in a 1:2 ratio to the Calls/Puts they are buying/selling implying a somewhat Bullish view of the market for Wednesday. While Dealers were positioned for higher prices today, they are no longer positioned in this way but instead, are looking at a $5 to $6 trading range for Wednesday.
Looking ahead to Friday, Dealers are selling $562 to $570 and higher strike Calls while also buying $553 to $561 Calls. This implies Dealers believe prices may rally this week to as high as $565. To the downside, Dealers are buying $552 to $544 and lower strike Puts in a 1:1 ratio to the Calls they are selling/buying. This implies little concern prices will move much lower than $550 by next Friday. While we won’t state Dealers believe a floor of $550 is in, it does seem this week Dealers believe SPY moves more sideways than continuing lower, trading in the DMZ between $550 and $555. Any break above $555 and Dealers see prices moving as high at $565. This positioning is far less Bearish than it was going into today as the Dealers likely exercised many of their Puts given they ended ITM. Dealers have less protection today than they did Friday going into week’s end.
Dealer positioning changes daily, so we recommend reviewing our pre-market analysis on Monday morning in addition to reading these post-market recaps. This will help you understand how Dealer positioning might influence the day's price action. The pre-market analysis is available by 9:15 AM, and these post-market recaps are posted each evening. Our goal is to provide you with actionable insights that you can apply to your trading every day. Good luck and good trading.
