Market Insights: Wednesday, September 4th, 2024.

SPY gapped down over $1.85 today, retesting the lows from Tuesday. The market tread water until the JOLTS Job Openings report was released at 10 am ET. The report came in weaker than forecast and SPY initially sold off on the news, then rallied reaching the high of the day of $554.43 where it found major resistance and traded lower the rest of the day, closing at $550.95, up 01% and virtually unchanged from Tuesday. The report detailed the number of job openings was at its lowest level since January 2021, although there are still eleven jobs available for every person seeking employment. Bad news perhaps, but not as bad as it seems. That said, the market’s fear is the Fed is behind the curve and the trajectory of economic indicators points to a looming recession. And as we stated, bad news is now bad news so today, the market simply couldn’t find enough buyers to push prices higher. The Nasdaq fell .31% with the DOW rising .09% and IWM losing .17%. "Magnificent 7" stocks had a mixed to down day with TSLA, NFLX and META rising while the rest, including NVDA fell. Trading volume for SPY was below average at 46.59 million shares. 10-year Treasury yields dropped 2.27% closing at 3.757% while Crude fell another 2.13%. Gold moved slightly higher by .09% while Bitcoin fell .16%, remaining below $58K. We are Bullish Gold, Silver, and Bitcoin above $62K, and continue to nibble at long positions on Crude. We say nibble because this is a very small starter position until Crude settles closer to $65, currently trading at $68.83.

In Tuesday’s newsletter, we stated to be wary of today’s economic news given the markets’ reaction to ISM Manufacturing PMI yesterday. We stated today would provide two-way trading with some trending price action with SPY likely to move in a $5 range between $550 and $555. We stated to favor shorts from $555.28 but to also look for mean reversion longs from a retest of yesterday’s lows. At the open there was little to trade given SPY was at $550 so after the JOLTS report at 10 am, the mean reversion long we suggested set up on the test of yesterday’s lows at $549.52. We mentioned there was a high probability the market would retest this level, which of course it did to the penny. This long worked well, running all the way to our $555 level where we shorted on a failed breakout pattern, riding the trade to $550. The ping pong between our levels worked perfectly today. A late in the day mean reversion long off $550 capped off our day as our Market State Indicator (MSI) told us to wait to enter this trade until the MSI stopped printing extended targets below. This was the green light to go long at 3:16 pm ET into the close. Three set ups exactly as outlined by our model in yesterday’s post market recap.

In the premarket analysis at 8:50 am ET, we stated the market needed to make an aggressive move above $551 to attempt to reach our upper target of $554.90. With the JOLTS report due 30 minutes after the open, once the report was released, we saw SPY move aggressively toward our target. The $551 level held all morning with several scalping opportunities from this level. But today the market moved as expected and detailed in the post market recap with two-way trading between our indicated levels. The premarket added another spot for traders to seek trades, which once again worked out to the letter.

Tomorrow in the premarket ADP Non-Farm Payrolls will be released along with Unemployment Claims, and at 10 am ISM Services PMI is due. With the market reacting harshly to weaker than expected economic data, we expect more of the same tomorrow. As such trade what you see. Volatility is above 21, which implies larger price moves which could certainly come from tomorrow’s reports. SPY is still stuck in the DMZ between $550 and $555, and just like today, tomorrow will likely see control bouncing back and forth between the Bears and Bulls. If prices dip below $550, there’s not much stopping price from dropping to $542, where the gap from August 14th would close. However, this break needs to happen with strong volume and conviction. Ideally, we’d like to see price break below $550 followed by a retest, creating a failed breakout pattern—our signal to short $550. Until then, our model predicts sideways, two-way price action between $550 and $555. As stated yesterday, should $550 fail, watch for price to pause at $544 and $542. It’s probable Thursday SPY continues sideways, building energy for its next move, waiting on an external catalyst to pick a direction. This is a time where traps are set for both Bulls and Bears, therefore we recommend waiting to enter trades until everything aligns in your favor. What may appear like a huge sell off, like what we saw today from 2 pm to 3 pm, is more likely a trap set for the Bears to get short, only to have their faces ripped off. This is a time to be in control, wait for major levels and triggers to enter trades. Remember September is seasonally Bearish so it’s entirely possibly the advantage favors the Bears. But as long as price trades within the DMZ, there is no edge either way. Of course we are still being vigilant of the situation in the Middle East.

SPY has traded two days outside of the Bull channel from the August lows. It’s likely tomorrow a new Bear channel will form, similar to what happened in August. Price is likely to continue to trade around the 50 DMA before picking a path. Focus on economic news reports going forward, but also remember, don’t fight the Fed. While it’s possible the economy enters a recession and does not develop the soft landing wished for, with the Fed cutting interest rates, the Bulls will have the advantage once the market finds support. September and even October may be challenging but it’s still probable the year ends higher than we are now. Again it’s still too early to make a prediction for September so until our model gives us a longer-term view, trade both ways and wait for a resolution to the $550 to $555 (DMZ) zone. We recommend reviewing the premarket analysis to receive the latest market updates prior to Thursday’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 mid-range. There are no extended targets below. As we suspected yesterday, today the MSI rescaled lower twice while printing extended targets below. The last rescale came late in the day with price at support. We held off on a mean reversion long from the $550 level until the extended targets stopped printing at 3:16 pm ET. This was the green light to go long from support to our first target, premarket level of $551. When taking a countertrend trade, the probability of price reaching the other side of the MSI is low. You must know where to take profits on any mean reversion or counter trend trade. A good starting point is halfway to the other side of the MSI. In other words, 50% of the size of the MSI range is a good first target. The probability of success for mean reversion trades is only 40%. But if your reward is double your risk, mean reversion trades can be quite profitable. To put this in perspective, when trading with the trend, the probability of entering a trade on one side of the MSI and price reaching the other side is just over 70%.

In the MSI’s current state we favor short trades from overhead resistance at $553.29, with mean reversion longs from $549.67. Keep in mind the model’s broader levels of $550 and $555. The $550 level has held for two days with several tests of this level. As a level gets tested, it become weaker. As such we advise caution simply “knife catching” longs from the $550 level. Instead look for support to fail and to be reclaimed. A failed breakdown pattern is best. But other patterns like double bottoms can work as well. And while MSI resistance is currently $553.29, it’s possible price moves closer to $555 before failing. With an elevated VIX, MSI levels or “zones” widen as market participants try to trap traders. Do not get caught in a trap. For mean reversion longs wait for the MSI to stop printing extended targets and better, wait for the range to shrink indicating a weakening trend. Wait for a pattern to emerge that you know and understand before entering a trade.  And of course if the MSI rescales, trade the updated levels in real time. For Thursday our model projects a range of $543.50 to $556.75 (white box on chart), expanding slightly from today, indicating trending price action for Thursday. That said, given price is trading in the DMZ, expect two-way price action.

Dealer positioning for Thursday to the upside has Dealers selling $557 to $560 and higher strike Calls while also buying $551 to $556 Calls. This implies a belief by the Dealers that SPY may find support at $550 and move higher toward $557. It appears that $558 is a ceiling for Thursday. To the downside, Dealers are buying $550 to $546 and lower strike Puts in a 1:1 ratio to the Calls they are buying/selling implying a somewhat Bullish view of the market for Thursday. Dealers continue to be positioned for price to range between $550 and $556, but are also ready to participate in any upside with little fear of further downside risk.

Looking ahead to Friday, Dealers are selling $561 to $570 and higher strike Calls while also buying $551 to $560 Calls. This implies Dealers believe prices may rally this week to as high as $565. To the downside, Dealers are buying $550 to $540 and lower strike Puts in a 2:1 ratio to the Calls they are selling/buying. This implies a balanced view of the market which is likely to trade between $550 and $565. Dealers believe SPY will continue to move sideways rather than continuing lower. This positioning is similar to yesterday with Dealers keeping a balanced view of the markets going into Friday.

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.