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Founder's Trading Journal Navigator™ Signals for Swing Traders
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You are all probably wondering if I have some “wave” fetish. There are Elliott Waves, Cycle waves, and even Fourth Turning waves. It could make one seasick. Well, there are virus waves too, and now a fourth, more lethal wave is feared.

A few days back, I quoted German Chancellor Angela Merkel on the seriousness of the new virus strain coming from Great Britain in a so-called “fourth” virus waive. Now she warns Germany that they must ‘stop this BRITISH virus’ or the country ‘will see TEN TIMES as many cases by Easter’ – as coffins ALREADY pile up in virus hotspots. Angela is so upset that she seems to have forgotten her smug, elite, political correctness rules. 

I guess Angela can say “British Virus” – just not “China Virus.” Perhaps the Germans are still a little sore about World War II. Or, maybe the Brits are not bribing as many politicians around the world as the Chinese. Anyway, Angela may find herself suspended from the next meeting of the “Great Reset.” The club has rules, right?

Flying through Germany (even with less than a two-hour layover) a week ago required a valid PC test – which takes three days to get results. That is not an easy test to time. What if you get to Germany after the test you took three days earlier comes back positive? Good luck with that. Where do you go? Quarantine anyone?

From personal experience, Greece is in complete lockdown – as is most of Europe. It makes you appreciate how bad it didn’t get in the U.S. – but the Dems weren’t in charge of the country then. Nothing is open in Greece; save a few essentials. You have to text and get a note from your mother to even be out on the streets, and you better have your papers. 

To visit my father-in-law in the hospital, you have to have a valid PC test every three days. Only one person can visit at a time. By the way, even the best hospitals in Athens are absolutely disgusting. We even have him in a “private” hospital at a cost of roughly $5000 U.S. Dollars a day. I have pictures. 

Recall that most of our medical terminology comes from Greece – arguably one of the most sophisticated societies in history. I am reminded, however, that this is where democracy first started and failed. If you want socialized medicine, take a look at it in full operation before you decide. You don’t know if you will die of your condition in the hospital – or the unsanitary conditions. We are witnessing both first hand. As my wife is an R.N. and nutritionist, she is literally coming unglued at the conditions. As someone with economic credentials, I can tell you that Europe is in serious, serious economic distress.

So now the new U.S. CDC director hit the meltdown panic button yesterday. Uncle Joe underscored the risks – vaccines for everyone, etc., etc. Naturally, this will be a convenient underpinning for another $4 to $5 trillion spending boondoggle putting us closer to bankrupting the country. You see, if the new boondoggle “infrastructure” bill is tied to the China Virus – it can pass by a simple majority – no filibuster. But there is no downside to the Dems – as this will all be Trump’s fault anyway, even though he is now golfing in Florida. In fact, for the lifetime of the youngest baby born this year, everything will still be Trump’s fault. That is true immortality for you!

Meanwhile, back at the markets, this may explain the surge in the relative strength of the Consumer Staples (XLP), Utilities (XLU), and Real Estate (XLRE) sectors of late. You see, we are told that interest rates and inflation are surging. Yet, utilities and real estate are extremely interest-sensitive and should be going down. The U.S. Dollar is supposed to be crashing, but it is going up. Gold, supposedly a harbinger of inflation, has also been going down and failed to break out yesterday. The NASDAQ 100, also supposedly interest-sensitive, still holds its own in a triangle pattern, indicating equal power between bulls and bears. The S&P 500 is a few ticks from new highs.

The logical explanation for these somewhat unusual Intermarket relationships could very well be that a fourth and more lethal virus strain is on the way. The NASDAQ 100 and Big Tech would benefit from another stay-at-home virus surge. This time, we have an authoritarian White House that won’t hesitate to dictate shutdowns from on high. Consumer Staples, Utilities, and Real Estate may be interested sensitive, but they are also the most defensive sectors in the equity universe. Their recent relative strength could indicate rotation into defense as virus fears grow – higher interest rates be damned. And cyclicals? Look out below.

But all in all, the markets held their own, at least for yesterday. They could have choked on the Bill Hwang’s Archegos hedge fund blow-up.  The Financials, most vulnerable to systematic risk, held their own as well.

Today and tomorrow will be choppy regardless, as the first calendar quarter comes to an end. Then we go into April, typically the strongest month of the year for stocks.

There is a lot of green in April too:

But these aren’t normal times. At least we are told this by some prominent investors calling for an April crash. It seems such an easy call. The 18-month cycle could be peaking. The debt is insane.

But in my experience, crashes don’t come when too many people are calling for one. I have this odd feeling that the markets will surprise everyone with a contained, reasonable 10% to 15% correction on the nominal 18-month low. You have to remember this; bull markets don’t die of old age; the Fed kills them. The Fed is feeding this bull, not killing it. Until Fed policy changes, the markets will be volatile, choppy, and perhaps unpleasant at times. But there likely won’t be a crash – absent an exogenous event.

Day Trading Plan

Assume responsive trade within the value area as the entire overnight range is within it.
My upside key level for a potential initiating move higher is the back-to-back settlements at 3964.25. If breached, monitor for continuation and target the all time high at 3978.50.
My downside key level for a potential initiating move lower is yesterday’s low at 3931.25. A test there may put the 3/26 VPOC into play at 3921.25.

Founder's Trading Journal Navigator™ Signals for Swing Traders
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This is an update to Sunday’s outlook with the morning day-trade plan included. In my own Biden moment, I mixed up Zimbabwe’s currency for Lebanon. I have also added some brief commentary about the Tiger Cub hedge fund blowing up with a $20 billion margin call – leading to 30% plunges in ViacomCBS and Discover stocks last week on forced liquidations.

So we have a four-day trading week ahead that will end with Good Friday, a holiday for the US Markets. We are coming into this week 80% invested, with positions in the S&P 500, NASDAQ 100, XLF (Financials ETF), and XLE (Energy ETF). Nothing in Globex last night has me questioning our positions pre-market. Weekly options are forecasting a plus or minus range for the S&P 500 of 60 points (a total 120 point top the to the bottom range), with the NASDAQ 100 at plus or minus 330 points (a total 660 point top the to bottom range).

Last Monday, the markets attempted to launch a successful retest of the March 5th, 20-week cycle low. The retest came in higher and appeared to cement the right shoulder of the potential head and shoulders reversal pattern I recently identified on the NASDAQ 100 Index. The S&P 500 had a different yet positive pattern as well. And the March dips coincided with the first 20-day cycle loop out of the March 5th bottom.

I was on it – positioning to 50% on the previous Friday. We started the week with the initial (unrealized) gains from our previous Friday positions and then added to the positions intraday at Monday’s lows. All was well Monday night and into Tuesday morning, as I was patting myself on the back for the NASDAQ 100 reverse rotation call. By the way, the best jinx for a good trader is when he or she thinks they have become smart. The market gods have a way of exacting revenge for such arrogance.

Several events then intervened Tuesday, interrupted the flow, and stopped us out of our positions. First, Lebanon’s currency collapse continued to rattle international bond markets. China sanctions and threats added to the global intrigue. Then, both Treasury Secretary Janet Yellen and Fed Chairman Jerome Powell began testifying to Congress, with the markets hanging on every word relating to inflation and interest rates. 

The mid-week markets then tried to digest sudden and inexplicable 30% plus plunges in stocks like CBSViacom and Discover. The plunges turned out to be driven by loan collateral sales associated with the Tiger Cub hedge fund blowing sky high on a $20 billion margin call. I ask myself – is the latter situation is a sign of things to come?

By Thursday, the markets had settled down, and we put about 60% of our cash back to work at the mid-day lows, just ahead of high volume buying that kicked-into the last hour of trading. This indicated serious institutional buying to me – and I prefer to hang out with the smart money. 

Then, we put another 20% to work at the lows on Friday, right before another explosive, institutionally-driven, and high-volume rally into the close. It is one thing for institutions to buy on Thursday. Still, when they plunge in during the last hour on a Friday afternoon before the weekend – that is the true bullish statement – especially ahead of a holiday-shortened trading week. 

Of course, the market’s resumption of the trend lines up with everything else I see, confirming that the 20-week cycle low is in. The only caveat would be if these Thursday and Friday runs were short-covering (see more on this below).

After reviewing our positions in detail over the weekend, I am impressed with how solid they look so far, appearing poised to move higher but perhaps not on to new highs in every case – depending on how early the peak in the nominal 18-month cycle arrives. The XLE (Energy ETF) position is even getting a short-term boost from the ship blocking the Suez Canal and adding to even more supply chain interruptions and the inflation spikes occurring worldwide as a result. 

In particular, I wanted to draw your attention to the NASDAQ 100 (QQQ ETF)), which appears to be moving out of a volatility squeeze on the daily chart. Volatility squeezes often lead to a big move – but they don’t forecast the move’s direction. We have to infer direction from our other work, as with the recent bottoming of cycles due, Navigator algorithm buy signals, momentum divergences, trend direction, etc. In this case, we would infer that the volatility squeeze would thrust prices higher:

The other sector that caught my eye over the weekend was gold. The U.S. Dollar has been rallying – attracting international capital to our higher interest rates. This is the Fed’s worst nightmare – justifying an entirely separate discussion (coming soon). The Fed needs to tamp down the dollar’s rise by fighting higher interest rates at both ends of the yield curve, raising the potential for both bonds and gold to rally, albeit briefly. In that sense, gold appears tradeable. A true trend reversal would take a lot more work:

Despite all the recent inflation rhetoric, gold and bonds have been trading together. Perhaps if they decouple, a more dystopian scenario could be underway. In fact, gold, dollar, and bond prices correlating in rallies could be the first seeds to spot in a potential flight to safety or risk-off transition. The Founder’s Group has not taken a gold position yet, but it is on our radar, and I will share the trade if it manifests. 

For now, I continue to encourage readers to buy small denomination gold and silver coins for a rainy day, especially when prices have dipped like this. I am not advocating so-called “rare” coins. Buy Krugerrands or other coins – or any other tangible forms – that track the spot price of gold or silver as closely as possible, are small enough to use for bartering or currency in an all-out disaster, and don’t overpay in commissions. I am talking physical gold and silver in your physical possession – not paper form.

The price of gold is heavily tamped down and manipulated by central banks, as it competes against all government inflated fiat global currencies, including the U.S. Dollar. In my opinion. Gold is undervalued, and when the central banks lose control of the situation at hand, gold will skyrocket.

I would make one final and positive point on this potential pivot higher in the stock market indexes. Coincident to Wednesday’s low in the NASDAQ 100 and S&P 500, we saw the CBOE Put/Call ratio spike, a positive sign of fear we typically want to see at important lows. Signs of fear have been rare these days – with sentiment so elevated in the wake of the retail crowd’s arrival. This gave me additional confidence to begin retaking positions on Thursday – at least in the short term.

The CBOE Put/Call ratio fear spike was confirmed by the CNN Fear/Greed Index, which has parachuted out of the greed clouds and back to moderate fear, at least right before Thursday and Friday’s rally. While we don’t see extreme fear, nor would we expect to at a 20-week cycle low,  the fact that the index had dropped back to 40 before Friday’s open, and is now neutral after Friday’s final hour rally, helps confirm that the froth is temporarily out of the market. Markets are known to climb the wall of worry when the crowd is skeptical.

As you can see from the chart below, we are at the low end of the index’s recent range – and we all know it has been difficult to scare this crowd. Note that the two extremes in fear at the beginning of 2019 and again at the 2020 March lows were coincidental with the nominal 18-month cycle lows in the stock market.

Gordon Grecko’s famous line in the movie “Wall Street” was “Greed is Good.” Well, that may work in movies, but when you are buying into the markets, “Fear is Good” and “Greed is Bad,” at least as far as investor sentiment goes. Or, as Ben Franklin so deftly put it many years ago, we should “Buy on the Canons, and Sell on the Trumpets.”

So, all in all, my conclusions are that we are well-positioned for the final run in this nominal 18-month cycle. It should take us a bit higher, perhaps to double tops in the NASDAQ 100, Energy, and Financials. The S&P 500 is likely to tag the 4000 level finally. My Fibonacci targets are only slightly above the recent highs – so I don’t know how much higher we can really go before the larger cycle asserts itself. 

At this point, we are still not quite out of the gate, heading into a shortened holiday week that may find us in light trading volume. Whether these instruments follow through or not, we must monitor a final run like this closely. This is not a run for inattentive investors or traders.

When the nominal 18-month cycle resets mid-year, you likely will be able to position and sit for a while and get out to the golf course. I know I will.

Day Trading Plan

I don’t typically trade on Mondays, and I already have large long positions as outline above. Spike Rules will govern the open and potentially the remainder of the trading day if you want to trade today. Acceptance within Friday’s spike is seen as bullish. 

Use the bottom of the spike at 3934.25 (12,874 on the NASDAQ 100) as a bull/bear line in the sand. A stronger market should not move below that level or deeper into the value area. The spike bottom can be a long setup on any weakness that touches it.

As Friday was a follow-through day with a strong close, assume that any acceptance below the Value Area Low at 3931.50 (12,782 on the NASDAQ 100) has the potential to switch the tone back to balance/chop.

A.F. Thornton

 

Founder's Trading Journal
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Yesterday saw an impressive recovery in all of the indexes, and for once, there was some real volume behind it. We saw follow-through in Europe and Asia, but starting at about 6:00 am EST, profit-taking kicked in, leaving the NASDAQ 100 negative (from plus 80 to down 80 at this writing) and the S&P 500 just slightly positive (from up 20 to up 7 at this writing).

That said, we need some follow-through today to ensure that this rally attempt succeeds where the last one stalled. There is a good argument that wave structure supports yesterday’s turn. But as we saw with the head and shoulders reversal pattern that appears to have failed, a certain number of traders will jump in on the wave structure too – but we need consensus to pull us higher.

Today, the downside is guarded on the S&P 500 at yesterday’s low, coincident with its 50-day moving average and Weekly Expected Move low. Yesterday’s low in the Nasdaq 100 is a bull/bear threshold as well, supported by the bottom line of a triangle unfolding on the daily charts.

This is a short-term trader’s market for now, so swing-trading is inadvisable. I will continue to share our trades, but if you are not in front of a computer all day, I don’t advise getting involved here quite yet. And that does not even account for what can happen overnight.

Consumer spending came out a bit lower than expected this morning, and it was down for February, putting a damper on the higher interest rate arguments. As well, Angela Merkel, Germany’s Chancellor, says, “We are now basically in a new pandemic. The British mutation has become dominant.” She goes on to say, “Fundamentally, we face a new virus of the same kind but with very different characteristics,” she said. “More deadly, more infectious, and infectious for longer.”

Suffice it to say that Europe is having a whole different experience than the U.S., returning to strict lockdowns and economic distress. U.S. cases are on the rise as well over the past few days. It is hard to see the kind of economic growth on the horizon that would continue to pressure interest rates if we are about to experience the third wave of a more lethal virus. Global growth also will be snuffed out without Europe’s participation. There are also murmurings from China about another, more lethal virus wave.

Day Trading Plan

I don’t trade on Fridays due to weekly options expiration and associated cross-currents. But the key issue today is to hold yesterday’s lows. 

The NASDAQ 100 is coming into the open with overnight inventory balanced. The index managed to poke above yesterday’s high overnight but could not hold the level. We will open in the middle of the overnight range, so the better trades will likely come later once a direction has been established. Expect the index to test either or both ends to of the range to see where the path of least resistance lies.

The S&P 500 is a similar story, opening in the middle of the overnight range. At least the S&P 500 has managed to hold above yesterday’s high overnight, indicating relative strength over the NASDAQ 100.

As previously discussed here, we are coming into the end of the 1st calendar quarter, and money managers may dump tech to put some cyclical names on their quarterly reports. So the NASDAQ 100 and typical growth names may continue to suffer through month-end, at least in terms of relative performance. That is what I mean by window-dressing. 

We continue to have seasonal and cyclical strength through early April. Both seasonal and cyclical tendencies should begin to assert the downward pressure I have been anticipating and discussing incessantly in these writings. I could argue that the NASDAQ 100 is forming a triangle on the daily charts, so be aware of the bottom triangle lines.

A.F. Thornton

Founder's Trading Journal
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We acquired another 25% S&P 500 at 3882.50 for the Founder’s Group mid-day, bringing us up to a 50% position in the core index. 

The XLF (Financials) and the XLE (energy) ETFs look like pullback buys with W bottoms. The XLE is just above its 50-day EMA, and the XLF is finding support at the 21-day EMA. Both have had their first decent pullbacks since the January runs started, and this may be a good place to nibble. The Founders Group has taken a 5% position in each ETF using “at the money” (strike price near the current price) call options. 

I will have more discussion out later but I wanted to get this update out before the market closed.

A.F. Thornton

Founder's Trading Journal

Reverse, Reverse Rotation and Cross, Cross Currents

AF Thornton 0 Comment

Somebody once sent me a Christmas card, and it told the story of a contrarian. At first, our subject was a normal investor. Then, she realized that the real money was in being a contrarian. Soon, being a contrarian became so popular, it stopped working. Ahh said our subject, now I need to be a contrarian, contrarian. The card went on and on in the most humorous way until they finally put our subject in the looney bin.

In Charles MacKay’s classic book “Extraordinary Popular Delusions and the Madness of Crowds, he wrote, “Men, it has been well said, think in herds; We will see that they go mad in herds, while they only recover their senses slowly, one by one.” Certainly, yesterday smacked a bit of crowd madness.

Of late, when bonds rallied (interest rates fell), so did growth stocks and the NASDAQ 100. When bonds sold off (interest rates rise), energy and financials rallied, and growth stocks and the NASDAQ 100 sold off. Those relationships were all broken yesterday. Rates fell, and bonds rallied, but this time the NASDAQ 100 sold off, and both financials and energy rallied. Go figure.

Likely, yesterday’s break in the routine has to do with money manager window dressing as we approach the end of the first calendar quarter. Unfortunately, and despite the overnight rally, we did not even get a chance to raise our NASDAQ 100 stops yesterday before they triggered. Price went on to break key levels in the NASDAQ 100 index, so the index is off the table for now.

Rather than rush through more detail this morning, and given that our swing strategy is back to cash, I will take some time and put out something more extensive this afternoon. But for now, our thesis remains intact. We started the final and fourth nominal 20-week cycle in the nominal 18-month cycle at the March lows. We are open to the cycle peaking earlier than normal, and there are certainly arguments to support that. But since that would be the outlier case, I would need more proof.

Today’s Day Trading Plan

As to the S&P 500 index, we will be coming into the morning session trading near the bottom of the overnight range with a true gap down, so gap rules and potential for an early upward fade of the gap are in play. Settlement yesterday was 3882, so in overnight trading, we could not hold the 3900 roundie or the 21-day EMA at 3894. We will currently test the 50-day EMA at 3864 to see if it can hold, then on to 3850 and other key levels as set forth below.

Overnight inventory is net long, so any selling at the opening could be old business (overnight traders taking profits on their long positions). Keep that in mind if we approach the overnight low at 3859, in addition to gap rules #2 and #4. Another negative, the market seems to be rejecting the old balance area between 3875 and 3940, and the 4000ish Fibonacci target set from the crash bottom a year ago continues to remain elusive. Again, we have to consider quarter-end rebalancing as having some influence over the next week or so.

Key levels currently below us to watch today will be the 50-day EMA at 3864, overnight low at 3859, the half-roundie at 3850, and the next point of control at 3830. Remember that we are oversold from the standpoint that we are trading well below the 10-day point of control at 3930 and the 10-day value area low at 3920. If the overnight low holds, then target the levels above sequentially and monitor for continuation.

Key levels to watch above us also include the overnight halfback at 3877.50 (also yesterday’s low) and the overnight high and 21-day EMA around the 3895 area (also the bottom of yesterday’s single prints). Likely, traders will test the overnight low first.

Yesterday’s action carried our two key indexes, the S&P 500 and the NASDAQ 100, below their 21-day EMAs, and I carry that forward as bearish. The NASDAQ 100 has also breached its 50-day EMA, and the S&P 500 sits right on its 50-day EMA at 3864.

A.F. Thornton

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