Market Insights: Friday, September 6th, 2024
Market Overview
U.S. stocks ended deep in the red on Friday, wrapping up a wild trading week, dropping 4% this week as investors processed a key jobs report that hinted at the likely size of this month’s expected interest rate cut. SPY opened up $0.33 and rallied to the high of the day at $551.60, seemingly unfazed by the weaker than forecast US jobs report. It wasn’t long after the open, however, that the market took a decidedly negative turn and sold off into the close, reaching a low of $539.44, closing just above at $540.36, down 1.68%. Trading volume was high at 68.44 million shares reinforcing today’s move. The Nasdaq got eviscerated, dropping 2.53% today and 6% for the week, while the Dow dropped 1.24% with IWM losing 1.89%. "Magnificent 7" stocks and NVIDIA fell, with NVDA closing in on $100, while TSLA dropped over 8%. Crude too tanked 1.43%, closing at $68.16. Gold fell as well, dropping .64% while Bitcoin got pummeled, losing 4.15% to finish just over $53K. Meanwhile, 10-year Treasury yields fell by 0.51% to close at 3.712%. Virtually every asset class got hammered today as the potential for a recession just got more real. We still favor Gold, Silver, and Bitcoin above $62K, and continue to add to long positions on Crude.
Previous Day’s Forecast Analysis
In yesterday’s newsletter, we stated today’s jobs report may be the most important economic news of the year with the potential to deliver volatility and large moves of $10 or more in SPY. SPY fell $10.50 today while volatility jumped over 12%. We gave the advantage to the Bears in the near term and stated if price broke below $548, SPY would easily move to $542 and close the August 14th gap. SPY’s low on the day was $539.44. We stated the market direction going forward would be resolved today with probabilities favoring SPY moving toward the 200 DMA and remaining in the newly formed Bear Trend Channel. Finally we stated we favored shorts from $550.50 or from our Market State Indicator’s (MSI) real time levels. $550.50 was a perfect short just after the open on a failed breakout pattern and the MSI once again provided several signals to get short and ride the trend to the lows of the day. Today's market action validated every prediction made in yesterday’s newsletter.
Premarket Analysis Summary
In today’s premarket analysis, posted at 8:10 AM ET, we stated going into the jobs report, the market was heavily skewed to the downside and to expect strong volatility. We favored rejections from the highs for shorts to as low as $539.75. The low of the day was $539.44. You may ask how we know in advance where the market will turn or what it will do. The answer is the investment of millions of dollars and thousands of hours in sophisticated software designed to do precisely what it does every single day with an extremely high degree of accuracy. Once again, the premarket and post market aligned with the upper target of $550.25 and the $550.50 level stated in the post market recap, which set up perhaps the best trade of the month, with SPY falling more than $10. Long time readers know when the post and premarket reports align, trade heavy as the probabilities for success increase exponentially. Anyone who tells you to risk the exact same amount of money on every trade does not understand how institutional traders make money. Position sizing and knowing when to go heavy or light is perhaps more important than knowing when to enter or exit a trade. Had you followed our advice today and loaded up short after the open, you may have made your entire month in just one trade.
Looking Ahead: Economic News Releases
Next week Wednesday and Thursday brings critical economic data, including the Consumer Price Index (CPI) and Producer Price Index (PPI) reports. Given the market's current sensitivity to inflationary signals, these announcements could drive significant price movements. But Monday and Tuesday there is no news of importance. Instead, early in the week the market will digest today’s selloff, seeking the path for the next leg lower. Traders should remain vigilant and prepared for additional volatility.
Monday’s Forecast
The battle between the Bulls and the Bears has been won by the Bears in the near term. The war, however, rages on. We expect prices to drop further next week as the markets wait for the FOMC meeting on the 18th. Probabilities favor continued weakness on Monday with follow through to at least $535. The Futures market for next week is pricing in a 127 point move either way for the S&P which is effectively a $25 range for SPY. This is a massive potential move and if the Futures market is correct, SPY may reach $510, retesting August lows and below the 200 DMA for the first time since October 2023. SPY is trading in the middle of the newly formed Bear Trend Channel with lots of room to the downside. The steepness of this channel is greater than the July sell off. Therefore expect more days like today until the market finds a base. The gap from August 12th at $535 which if filled, would represent a larger than 50% retracement of the August rally. There is a high probability this gap fills early next week, and most likely on Monday. Beyond $535 the next stop is $530 and then $520 where SPY will likely find support and bounce. The 200 DMA is at $515 and our model suggests prices will not reach this level. But they may get close. $520 is a level the Bulls defended vehemently and as such, we suspect should price reach this level, it holds, at least short term. The last two weeks of September are seasonally the worst of the year so the market is far from being out of the woods. A drop below $535 and price will seek $530. Above $543 and prices will attempt to move back to $548 to reenter the DMZ battleground, but we see this as a low probability for Monday, therefore until price reaches this level, Bears control the narrative and prices will trend lower. Depending on what the overseas market delivers on Sunday, Monday favors a volatile trend day with further downside and large moves. We do forecast the market settling down by Tuesday, were its likely the market will get at least a one-day reprieve with sideways to slightly higher prices. For Monday our model projects a range of $532.50 to $547.50 (white box on chart), further expanding from today, anticipating more volatility and trending price action.
Indicator (MSI) Forecast
Looking at a 2-minute chart of SPY with our Market State Indicator (MSI), the indicator is currently in a Bearish Trending Market State with price closing well below support and extended targets. At the close, extended targets were still printing indicating the herd is still participating in this sell off. The MSI opened the day in a Ranging Market State, reaching MSI resistance at $551.72 without any extended targets above, giving us the green light to short this level, particularly since the level was stated as resistance in both the post and premarket reports. A perfect call for the high of the day. By 10:04 am ET the MSI has rescaled to a Bearish Trending Market State with extended targets below which printed all session implying a strong trend which should be respected without any opportunities for long trades. A test of resistance at $545.69 at 11 am and another short from this level to the day’s lows. Once again, the MSI provided valuable, real-time information for its users, keeping traders out of trouble and on the right side of the market.
In the MSI’s current state we favor shorts from overhead resistance at $545.69. With the market closing at $540.36 with extended targets printing, we do not favor a mean reversion long until extended targets cease to print. The range of the MSI is narrow and it will likely rescale lower in the premarket. We recommend every user of this tool look for short opportunities from levels plotted by the MSI, and if extended targets continue to print, we favor riding the short trend to the levels indicated above.
Dealer Positioning Analysis
Dealer positioning for Monday suggests that Dealers are selling $549 to $555 and higher strike Calls, while buying $541 to $548 Calls. This implies Dealers want to participate in any recovery on Monday but are not certain this will transpire. When Dealers are confident the market will move higher, they will sell Puts as well as Calls. Based on Dealer positioning, any recovery on Monday looks limited to $545. To the downside, Dealers are buying $540 to $525 and lower strike puts in a 1:1 ratio to the Calls they are selling/buying, implying a slightly Bullish view of the market for Monday. Perhaps Dealers expect a dead cat bounce on Monday. Our model does not concur. This positioning has not changed materially from yesterday.
Looking ahead to next Friday, Dealers are selling $562 to $564 and higher strike Calls, while buying $541 to $561 Calls again implying their desire to participate in any bounce next week. Dealers are not selling Puts. To the downside Dealers are buying $540 to $525 and lower strike Puts in a 2:1 ratio to the Calls they are selling/buying suggesting a balanced view for the upcoming week. This positioning has not changed materially from yesterday and once again, our model does not agree. When our model and the Dealers are different, its highly likely Dealers have other hedges in place with Futures which are not reflected in options data. This happens when volatility is high and options become pricey.
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
