Market Insights: Thursday, September 5th, 2024.

Today SPY opened down slightly at major support and rallied in the morning session to $553.80 where it once again couldn’t attract buyers to continue higher. By the 10:30 am ET hour, price started to collapse and SPY fell virtually straight down to the lows of the day at $547.10. At noon, buyers finally stepped in and pushed price up, chopping in a range the rest of the day between from $548 to $551. SPY closed down slightly at $549.61, down .24%. ADP payrolls came in weaker than expected, although Unemployment Claims dropped slightly. A mixed employment picture which will surely be debated after tomorrows’ Non-Farm payroll report. The Nasdaq had a better day, rising .25% with the DOW falling .54% and IWM losing .50%. "Magnificent 7" stocks moved higher with the exception of MSFT, while NDVA too gained on the day. Trading volume for SPY was below average at 44.01 million shares. We expect that to change tomorrow. 10-year Treasury yields continued to fall, dropping 1.21%, closing at 3.725% while Crude moved lower by .15%. Gold moved higher by .8% while Bitcoin fell 3.42%, pushing to $56K. We are Bullish Gold, Silver, and Bitcoin above $62K, and continue to nibble at long positions on Crude.

In Wednesday’s newsletter, we stated today would be more volatile due to the release of payroll data which would create trending price action. We stated we favored short trades from $553.29 and at this level would look for a failed breakout or other pattern, like a double top, to get short. And BOOM after the open, price moved to $553.80 putting in a double top, setting up the first perfect short of the day. We also stated if prices dipped below $550, price would move toward closing the gap from August 14th. We stated on a break of $550, to trigger an entry, our preference was to see this level break and get retested, setting up a failed breakout before entering short. And exactly as forecast, $550 failed and recovered at 11 am where a failed breakout pattern emerged, setting up the second short to the lows of the day. Another perfect call. Finally we stated we favored a mean reversion long from $549.67, but after several tests of the $550 level, advised caution given as a level is tested repeatedly, it weakens. And sure enough the $550 level failed on volume and the mean reversion long from that level was no longer an option. In fact our Market State Indicator (MSI) once again informed us to wait to enter a long from the lows, once the MSI stopped printing extended targets below. This happened at 12:20 pm ET with price putting in a failed breakdown pattern which again gave us a green light to go long from $547.50 back to resistance at $550. Once again, three set ups, outlined by our model, including a bias for the day, the type of day and levels to trade, all provided in yesterday’s post market recap. Trading is easy when you know what to look for in advance.

In the premarket analysis at 8:34 am ET, we stated the market continued to be hesitant and that if any move to the upside presented, it would be rapid. We favored longs above $552.75 and shorts below this level to $548.60. We stated the most likely scenario was a rejection of $552.75 with shorts to as low as $544.25. After price broke above $552.75, it quickly found resistance setting up a short from the double top as described above. This trade worked quite well to our first target at $548.60, finding buyers at $548. Finally we continued to reiterate our model favored trading the “edges” meaning trade only major levels given everything in between is chop. The premarket once again confirmed the post market recap short trade from today’s highs which increased the probability of success, freeing us to trade in size to maximize gains. Had you done that today with just one trade, you had a very good day.

Tomorrow US jobs report for August will be released in the premarket. We view this as one of the most important economic releases of the year given the Fed plans to cut interest rates in a stock market that is historically overvalued and on edge of rolling over. Earnings are slowing therefore the only way the market moves higher is on multiple expansion. Should the jobs report show a sharp slowdown in hiring, the Fed may favor larger rate cuts, which would actually be a negative for the market, implying their fear of a recession. Remember bad news is now bad news and the market will react accordingly. We state all the time, but certainly very important for tomorrow, trade what you see after the release of this report. Volatility is hovering around 20 and like last month it’s possible volatility spikes if the news is worse than expected. Of course better than expected news and the market will resume its march toward the all-time high. Friday is a day where SPY could swing $10 or more either way. While SPY remains in our DMZ zone with the battle raging for control of the market between the Bulls and the Bears, the $550 to $555 zone has shifted lower to $548 to $553. Still a $5 range and still the battleground DMZ, but perhaps the move lower gives a slight advantage to the Bears. If price moves below $548, we could easily see the August 14^th gap fill at $542. A break above $553 and price will attempt to move to $560, with a pause at $555. Without the knowledge of the jobs report data, our model predicts sideways, two-way price action between $548 and $553 on Friday while the market builds energy for its’ next major move. Yesterday we warned of big moves which looked like they would follow through being traps and to be cautious not to get caught in one of these set ups. Today there were at least four such traps…the failed breakout long at 10:24 am, the failed breakdown short at 12:16 pm, the failed breakdown short at 3:14 pm ET and another failed breakdown short at 3:50 pm ET. All were viscous traps set by the other side, designed to take your money which is why we advised, “this is a time to be in control, wait for major levels and triggers to enter trades.” We continue to recommend this for tomorrow given the uncertainty surrounding tomorrow’s jobs report. And we are still cognizant of the risks in the Middle East.

SPY is now trading at the upper trend line of a new Bear channel from the August 30^th highs. Price continues to tread water around the 50 DMA. But we suspect tomorrow this resolves. Probabilities and seasonality favor a resolution to the downside with SPY moving toward the 200 DMA at $515. If this does start to materialize, it should begin tomorrow. But unlike August,  a sell off this time is likely to be less violent and more controlled and perhaps not move as far. There is plenty of room to the downside in the new Bear channel so be forewarned, but also remember to keep the "don't fight the Fed" mantra in the back of your mind. Once rate cuts commence, the market may reverse course and move higher. In the near term, a material sell off will likely find support $520 where, as we have seen in the past, the Bulls will likely step in and buy the dip. Unless the jobs report is materially higher than forecast, the Bears will attempt to take control to push prices lower. The Bears have not been able to do that the last two days however so until this transpires, we recommend two-way trading while waiting on a resolution to the $548 to $553 (DMZ) zone. We recommend reviewing the premarket analysis to receive the latest market updates prior to Friday’s open.

Looking at a 2-minute chart of SPY with our Market State Indicator (MSI), the indicator is currently in Ranging Market State with price closing mid-range. The range is quite large indicating market participant uncertainty. The MSI rescaled several times today, both higher and lower, printing extended targets at both ends of the spectrum. As users of the MSI know, extended targets imply a herdlike behavior where market participants are piling into the trend. We ride these trends when this occurs and do not attempt any countertrend trades as long as extended targets print. At the open the MSI was in a Bearish Trending Market State which quickly flipped to a Bullish Trending Market State, but without extended targets above. This told us the Bull trend was weak. Additionally the range of the trend was quite narrow, again a sign of weakness. While the MSI rescaled higher once again and did print an extended target, it printed just one and again remained in a narrow range. When the double top set up, the MSI gave us the all clear for a mean reversion short at $552.76. The MSI then rescaled to a Ranging Market State and quickly rescaled lower several times to a Bearish Trending Market State, printing extended targets below signaling it was time to get on the trend and stick with it. Once extended targets ceased printing at 12:18 pm ET, a failed breakdown pattern gave us the okay to enter a mean reversion long to overhead resistance at $550. The MSI then spent most of the afternoon session in a Ranging Market State, only briefly moving to a Bearish Trending Market State without any extended targets below.

In the MSI’s current state the odds of a successful trade, entering at support or resistance to midway of the range is 50%. We don’t love those odds so in a Ranging Market State, we tend to favor trading with the prevailing trend at our major levels. In this case, $548 to $553 where we favor looking for possible trades. With the MSI currently printing resistance at $552.07 and support at $548.76, and while we more broadly favor short trades, we favor long trades from support at $548.76 but only if there are no extended targets below and the market develops a support pattern. We prefer to enter shorts closer to $553, although we will also consider a midrange short @ $550.50. We prefer to wait for the MSI to rescale tomorrow to trade the MSI’s updated levels in real time. Surely the MSI will rescale after the jobs report premarket. For Friday our model projects a range of $542 to $559.50 (white box on chart), expanding from today, anticipating more volatility as a result of tomorrow’s jobs report. This implies trending price action for Friday.

Dealer positioning for Friday to the upside has Dealers selling $559 to $560 and higher strike Calls while also buying $550 to $558 Calls. This implies a belief by the Dealers that SPY may rally beyond $550 and move higher toward $560. It appears that $560 is a ceiling for Friday. To the downside, Dealers are buying $549 to $540 and lower strike Puts in a 2:1 ratio to the Calls they are buying/selling implying a balanced view of the market for Friday. Dealers continue to be positioned for price to range between $550 and $556, but are also positioned to participate in any upside with little fear of further downside risk. This has not changed materially from today.

Looking ahead to next Friday, Dealers are selling $562 to $571 and higher strike Calls while also buying $550 to $561 Calls. This implies Dealers believe prices may rally next week to as high as $571, however, positioning shows $563 may be the ceiling for next week. To the downside, Dealers are buying $549 to $540 and lower strike Puts in a 1:1 ratio to the Calls they are selling/buying. This implies a slightly Bullish view of the market for next week. Dealers believe SPY will continue to move sideways rather than continuing lower. This positioning has changed slightly from yesterday with Dealers a bit more Bullish heading into next Friday.

Dealer positioning changes daily, so we recommend reviewing our pre-market analysis on Friday 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.