Market Insights: Monday, September 9th, 2024

Market Overview

U.S. stocks bounced back on Monday after the S&P 500 had its worst week since early 2023, with inflation once again in the spotlight as investors considered factors that might impact upcoming interest rate cuts. SPY opened up over $4 after falling overnight to major support at $538. The short squeeze then began and by the time the markets opened at 4 am ET, SPY was moving higher and continued to move up into the open. After a brief pullback to $543, SPY headed to the highs of the day at $547.71 before pulling back once again, ending the day near the day’s highs, gaining 1.12%, closing at $546.41. Trading volume was low at 40.37 million shares. The Dow surged over 450 points, or 1.2%, and the tech-heavy Nasdaq was up more than 1% with IWM ending up .28%. "Magnificent 7" stocks all moved higher with the exception of GOOGL, while NVDA jumped 3.54%. Crude rallied over 1%, while Gold also rose .36%. Bitcoin managed to gain 5.4% closing above $57K. Meanwhile, the 10-year Treasury yield rose by .05% to close at 3.70%. We continue to favor Gold, Silver, and Bitcoin above $62K, and are adding to long positions on Crude.

Previous Day’s Forecast Analysis

In Friday's newsletter, we anticipated a high probability of further market weakness and volatility today, predicting a likely range for SPY of $532.50 and $547.50. After the close Friday the market indeed displayed strong downside movement, with SPY falling to a low of $537.86, in line with our expectations. However by the time the markets opened Monday, Futures had rallied and SPY was in a classic short squeeze scenario, recovering half of Friday’s sell-off. We expected this to play out on Tuesday and were surprised by how quickly the Bulls were able to squeeze shorts. We stated above $543, prices would attempt to move to $548 and this is exactly what transpired with SPY finding major support at $543 in the morning session and moving to $547.71 by 1 pm. As forecast, the market delivered large, trending moves in both directions between the $543 and $548 levels identified, with SPY failing to sustain any rallies above $547.71. Today is a very good example of why we always provide levels for both rising and falling markets.

Premarket Analysis Summary

In today's premarket analysis, posted at 8:27 AM ET, we identified targets above at $548.30 and targets below at $542.25. We viewed $544.90 as a critical barrier to any further upside and suggested if the market stayed above $542.25, our bias toward a positive outlook would remain intact. We favored long entries from lower support areas rather than pursuing breakouts above $544.90. We stated should the market successfully break over $544.90, we saw a potential move up to $548.30. Finally we stated if the market fell below $542.25, downside potential extended as low as $535, although we considered this less likely for today. And like clockwork, the market found support at our lower target and rallied toward our upper target, once again validating our premarket analysis. If you are not making note of these levels on your charts each day to know when and where to trade, you are not planning your day and as the saying goes, if you fail to plan, plan to fail.

Looking Ahead: Economic News Releases

This week brings critical economic data, including the Consumer Price Index (CPI) and Producer Price Index (PPI) reports on Wednesday and Thursday. The market has been quite sensitive to inflationary signals, therefore these announcements could trigger significant price movements. Until then however, there is no material news which will move the market on Tuesday.

Tuesday’s Forecast

While the edge has now shifted slightly to the Bulls, the zone between $543 and $548 should be viewed as a new battleground between Bulls and Bears. This zone will be choppy, with sloppy two-way price action. Much like today, above $543 and the Bulls will push SPY to $548. Below $543 and $535 is back in play. Even if the Bulls are able to push price above $548, the DMZ from last week will be activated and price will move into a more fully established battleground between the Bulls and the Bears. After today’s successful short squeeze, our model projects prices trading in this new zone between $543 and $548 for at least another day. Today’s move higher while powerful, was on low volume therefore we aren’t yet convinced the Bulls can move the market significantly higher. Even if the Bulls do push SPY above $548, we SPY peaking at $550 on Tuesday, therefore there is little upside left for tomorrow. For Tuesday we favor mean reversion shorts from $548 and higher to $545 initially, with $543 as an additional lower target. SPY remains within the Bear Trend Channel from the August highs which stopped todays’ move higher to the penny. The steepness of this channel suggests continued downside movement could be fast and furious. With two way, choppy trading we also favor longs from $543, but any break on volume of $543 and we would stand down. For longs our preferred method to enter is a failed breakdown signal or other bottoming pattern which would give us the green light to go long. We would be careful to try any knife catch entries if the market falls on Tuesday. Our model projects a range for Tuesday of $539 and $551.25 (white box on chart), further expanding from today, anticipating more volatility and trending price action.

Market State 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 mid-range. The MSI has not rescaled since Friday. This is quite telling and indicates the downside pressure on the market has not fully abated, even after a 1% up day. The MSI stopped printing extended targets below Friday after the close which gave the all clear to go long at the $538 level, as suggested in Friday’s newsletter. Certainly overnight traders did well with this long trade. But at the open, the MSI levels worked true to fashion with $547.70 holding perfectly. This resistance level set up a perfect short from the day’s highs to the lower support level of $545.69. Users of this tool understand we only favor mean reversion trades in a trending market state if the MSI stops printing extended targets. Once SPY reached support at $545.69, a mean reversion long back toward the highs was a solid set up, displayed perfectly by the MSI.

In the MSI’s current state we favor shorts from overhead resistance at $547.70 and longs from support at $545.69. That said, both of these levels have been tested a few times today and as such, we see the possibility that this range expands to the $543 and $548 zone as mentioned above. We would surely look for opportunities at MSI levels, but also keep in mind the potential for moves beyond these levels. In volatile markets, larger stops are required as zones expand due to volatility. If you are uncomfortable with more risk, we suggest sizing down to ensure your stops are not too tight so you do not get whipped out of trades. MSI’s range today is still quite narrow and we would like to see it rescale on Tuesday as new volume is incorporated to the MSI. In the meantime, scaling down to a 1-minute chart will provide more immediate, and more granular information. Once again, the MSI provided at least two great trades today, centered around the levels provided in these newsletters.

Dealer Positioning Analysis

 Dealer positioning for Tuesday suggests Dealers are selling $549 to $554 and higher strike Calls while buying $547 and $548 Calls in small size, implying Dealers are looking to participate in further upside. They believe however, any upside for Tuesday will be limited to $550. To the downside, Dealers are buying $546 to $540 and lower strike Puts in a 2:1 ratio to the Calls they are selling/buying, implying a balanced view of the market for tomorrow. This positioning has changed slightly from Friday where the Dealers correctly so, had a more Bullish positioning.

Looking ahead to Friday, Dealers are adjusting their positions, selling $552 to $563 and higher strike Calls while buying $547 to $551 Calls. This again implies Dealers are positioned to participate in any upside, however they do not see prices moving higher than $560 by Friday. To the downside Dealers are buying $546 to $530 and lower strike Puts in 3:1 ratio to the Calls they are buying/selling suggesting a cautious stance in anticipation of further economic data releases. While not Bearish by any means, Dealer positioning has shifted from a balanced view to a more protective view of the markets.

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