March 2021 | Archimedes Methodologies

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At the moment, where the NASDAQ 100 leads, we will follow. The Founders Group stepped up to a fully invested position yesterday, with half in the S&P 500 and a half in the NASDAQ 100. The market will open well above yesterday’s entry prices, thanks to Europe jumping into the indexes with both feet last night. Let’s see if we get a follow-through in the regular session today.

The potential head and shoulders reversal patterns, marking the 20-week and 20-day cycle pivots, remain in play but require a move to the 20-week neckline today or tomorrow to maintain symmetry:

If the pattern progresses and succeeds, that tells us we are on the right track. If it fails, that also tells us something. In the latter case, failure could foretell a rare, left translation peak in the last nominal 20-week cycle of four in the nominal 18-month sequence. So I am keeping an open mind to all possibilities, but the probable outcome is moving to the neckline and eventually break higher.

In the meantime, energy stocks are moving down to their trendline, so I keep an eye on that. Interest rates are in a short-term down cycle – and that is helping lift the NASDAQ 100 for now.

Other than the issues above, I am looking to get the 5 or 8-day exponential moving averages under us to use as a rising stop. I will publish levels later this morning.

Day Trading Plan

A new day confirms the slow rotation back into tech, with returns in the Nasdaq 100 doubling the S&P 500 overnight and making me look smart. Naturally, I relish these days and bank them for the days I don’t look so smart. Breadth’s weakness tells me that the rotation isn’t solid yet, and the whole thing still seems to carry an air of falling apart at any moment, but the rotation is happening.

The gap higher this morning is in the middle of yesterday’s range for both the NASDAQ 100 and S&P 500 futures, and hence gap rules are not in play. Overnight inventory is balanced to slightly net short. Current prices are ticking in the upper third of the overnight ranges. This indicates some strength going into the morning session.

For all the late-day selling yesterday, note that value (where 70% of volume occurred) was unchanged. This keeps the status quo intact more than any other data point. The Globex highs in the NASDAQ 100 and S&P 500 futures at 13150 and 3919, respectively, should be seen as potential breakout levels. There is nothing else pointing to the open’s potential direction, so let the market sort itself out for 30 to 60 minutes and follow the usual quartet pattern.

Founder's Trading Journal

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The Founder’s Group just added 25% Nasdaq 100 (at 13050) and 25% S&P (at 3912) 500 to go to a fully invested position. Risks remain elevated here, so evaluate your decisions carefully.

Founder's Trading Journal

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Somehow this intro got deleted in the first publication. I wished everyone a happy anniversary, as a year ago today, the China Virus crash bottomed and the Founders Group went to a fully invested position. What a day that was, as I communicated on these pages. It was one of the braver moves I have made over the years, and I fear I am becoming more conservative in my old age.

So far, the market has followed through on our reverse rotation thesis as tech led the rally yesterday and seemingly is confirming the same overnight. There was selling in both Asia and Europe last night, but the market traded in a rather tight range that landed in the middle of yesterday’s regular session range. This tells us little about what to expect from today. But I am pleased with our progress so far, as we begin this last 20-week cycle before the 18-month cycle inflicts a reality check on the markets.

By the way, the volume could have been better yesterday. Perhaps a better way to look at volume is to break down each daily candle and put the volume out to the right – looking at volume at price. For even better context, we can look at the amount of time the market spent at each price. The volume concept is called “Volume Profile,” and the time concept is called “Market Profile.”

Essentially, you are looking at something that starts as a bell curve and forms various shapes and patterns that can tell us a lot about the market and where traders are positioned. This works on any financial instrument that involves volume, whether it be an index, ETF, or stock.

We focus on the bulges to the right in the profiles above, indicating what price had the most volume and caused the market to spend the most time. I think you can see that the price that attracts the most volume and where the instrument spends the most time is a key piece of information, whether you are looking at a single day, the Globex overnight session, or the regular day session. In my case, I also look at an aggregate of the last 10-days. The “10-day POC” marked by the yellow line above is the price (about 12950) that has attracted the most volume over the past 10 trading sessions (about two calendar weeks).

On the NASDAQ 100 profile above, the settlement at yesterday’s regular session close was 13071. Since most of last night’s trading occurred below that level, we can say that traders are coming into today’s session net short. As the session opens today, those traders may help drive a rally as they go to cover their shorts this morning. Overall, however, the overnight profile is in the middle of yesterday’s regular day session, giving us little direction about today’s regular session trading. Every profile gives different information about the day that might be ahead.

The Navigator swing strategy is 25% S&P 500 and 25% NASDAQ 100, and I am looking to add to those positions on pullbacks.

Today’s Day Trading Plan

Now that you have a better sense of the profiles as set forth above realize that a lot of the key levels and concepts I talk about here come from the profiles above.

Yesterday, I noted that the Friday low should be considered secure. Accordingly, and for now, pullbacks to the 15 or 30-minute 21 EMAs are buyable unless we take out Friday’s low. The NASDAQ 100 continues to lead, which gives lower odds of any short setups working in the S&P 500.

Overnight inventory is net short but not 100%. The entire overnight range is within the RTH range, which indicates balance.

Use yesterday’s settlement at 3812.62 (S&P Futures) and 13071 (NASDAQ 100 Futures) as bias lines. Otherwise, follow the quartet and monitor for continuation. There is a lot to digest, especially in the NASDAQ 100, from yesterday’s gains.

A.F. Thornton

Founder's Trading Journal

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We are having an awesome morning thus far, but I take nothing for granted. The Founders Group moved our stops up as follows:

SPY – 389.75

S&P 500 Futures – 3897.50

QQQ – 314.75

NASDAQ 100 Futures – 12967.50

I will update these pages if our stops change for any reason.

This information is provided for educational purposes. Always do your own homework.

A.F. Thornton

Founder's Trading Journal

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At the end of the day, trading is nothing more than a hypothesis overlayed on randomness that may or may not play out. Even more fun, when a trade fails to play out, your lizard brain blocks all access to your cerebral cortex and higher thinking, almost guaranteeing a loss. If that wasn’t challenging enough, it seems we always have a “soup de jour” of sorts that traders hang on every month. Call it the “issue du jour” – or classic groupthink.

Right now, the issue is interest rates. But it changes. I remember when we hung on every monthly trade deficit. Then there was the budget deficit. If those issues were so important in the 90s, what the hell does anyone think now?

And so it goes with interest rates. They have not yet even reached pre-China Virus levels. Anyway, to be successful at this, you have to have perspective and see the game for what it is – a game. You have to play the game better than most other traders.

Of course, there is pressure on rates. But will it be the end of the world if they go to 2%? Really? Ensure the person you are listening to is not a Hedge Fund manager on CNBC who is short and trying to talk the market down.

History does not bear out that higher rates kill the market, but here we are in the game – so let’s play it. Right now, it is a contest between financials and tech stocks. To make it interesting, we have the cyclicals moving around the periphery. Rates go up, financials – particularly banks – perform well. Rates go down; tech stocks perform well.

Looking at it another way, the NASDAQ 100 rises when rate scares abate; the Dow rises on cyclical prospects, and the Russell 2000 / S&P 500 benefit from the financials. Actually, the S&P 500 gets yanked in every direction.

So we are 50/50 Nasdaq 100 and S&P 500 to work all ends toward the middle, giving an edge to reverse rotation back into tech, at least for the short-term. Then, as the 18-month cycle peaks, we will go back into full correlation again – and we will head for the hills.

Based in Italy and one of the foremost experts on Hurst Cycles, David Hickson put out a great video on Saturday reviewing the current position of the cycles and the coming 18-month peak. It is a bit technical but worth reviewing for the bigger picture.

Meanwhile, back at the ranch, our latest mix and signals appear to be working well this morning, now that quadruple witching is over. By the way, here is some European humor for you:

Scary, right? So far, I am gleaning that the Europeans think we are a bunch of idiots in the US. But they have always had a superior attitude.

Day Trading Plan

One would think that being six hours ahead of New York trading. I would be in the future and have some advantage over the U.S. traders. I had a lot of fun this morning (here) trading the Globex markets (there), so I was not left with crumbs as usual in the US. I could get used to this. But anyway, I don’t typically trade on Mondays – but if you do – here goes it…

I would assume Friday’s low to be secure in the S&P 500 until it’s not. Today will be all about whether or not the overnight NASDAQ 100 strength continues into today’s session and overcomes the S&P 500 index relative weakness.

While the NASDAQ 100 futures moved out of Friday’s range overnight, the S&P 500 futures were unable to duplicate the success, and as such, the extremes of Friday’s S&P 500 range are the main key levels. Even with NASDAQ strength, there is potential for the S&P 500 to remain within range. There will be a small gap higher at the open, but it is not a true gap, so gap rules are not in play. Overnight inventory is balanced in the S&P 500, so let the market sort itself out before jumping in with both feet.

I will communicate new stops on our current positions later this morning.

A.F. Thornton

Founder's Trading Journal

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Founder's Trading Journal

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We are spoiled rotten of late. It seems that no matter the dip, the market takes off out of a “V” bottom and never looks back. But now, as the nominal 18-month cycle matures, the market is settling back into more typical behavior. Let me digress.

I talk about cycles incessantly. The reason is, cycles give us context. Just like you can take a quote from someone out of context and render the opposite meaning, so too you can take a peak or trough in the market out of context and get the wrong impression. The quote example leads to inconvenience. But the market example can cost you money.

Last March, the markets bottomed a number of cycles simultaneously, from the nominal 54- month (four-year Presidential cycle) on down to the nominal 18-month, 40-week, 20-week, etc. That is why the dip was so pronounced. When long-term cycles nest with all the shorter-term cycles below them, we experience the most pronounced corrections. The Mental China Pandemic was simply the catalyst – but the dip would have occurred regardless. Fundamentals can exaggerate the amplitude of the cycles, but the nest of lows would have presented anyway. Here is an example of how the 9-month cycle is phased:

While it is true that the nest of cycle lows exacerbates the dip, it is also true that the rally on the other side of it is usually something to behold. The new bull run that comes out on the other side is usually so strong that the shorter cycles are barely discernable at all, especially in the first nominal 54-month cycle that ensues. In other words, the market barely dips, and when it does price only spends a nanosecond at the trough. We have seen this over and over since last March.

The aforementioned behavior is different in more mature cycles. In a typical dip as the market matures, there is a retest after the first run out. That is how financial markets were behaving before last March. You might have heard this described as “Elliott Waves” or “three pushes.” Essentially, these theories reference the fact that the markets tend to move in five waves; three advancing waves and two correcting waves as can be seen in the chart below:

Closely examined over the years, these waves have particular characteristics. There is no need to review that here – as it is a science in and of itself. Notably, for this morning, the first 1-2 sequence involves anywhere from a 50% to 80% retracement of the first run out or blue “1” wave as labeled above. This forms the “2.” And this makes sense because at this point in the “1” wave rally, there are a series of declining peaks and troughs leading into the dip, so until the market has a dip that presents the first higher trough, few people jump on board. When the trough turns at a higher level than the troughs preceding it, you have a classic trend reversal and everyone jumps aboard. And not just buyers come flooding in, but the shorts also panic buy to cover. Hence the longer run in the “2-3” sequence as compared to the “1” wave illustrated above. Makes sense, right?

Then there is the head and shoulders pattern. Recall our discussion back on February 24th. Here is a refresher illustration, using a reverse head and shoulders, the relevant pattern this morning:

Recall that I pointed to this pattern as a typical pattern presented when bottoming a cycle. As you can see, it also marks the transition of a trend reversal, which is what we see at cycle lows.

So where am I headed with all of this? Take a look at the NASDAQ 100 index as it currently presents this morning? How does this all tie together?

Allow me to summarize the possibilities. Emphasis on “probability” as nothing is for certain in the markets, and we must always keep an open mind. Yet for the Founders Group, we put our money where our proverbial “probabilities” lie, especially when our algorithms confirm a buy signal.

So here is the argument: (i) we are retesting the nominal 20-week cycle low, which is now the “head” in the illustration above; (ii) this is the first round of the nominal 20-day (calendar day) cycle out of that trough; (iii) the average length of the 20-day cycle trough to trough has been about 10-12 trading days, and we are on day 11; (iv) we see a potential head and shoulders reversal pattern coming in the right at the mark; (v) since the cyclical indexes are stretched, we expect a reverse rotation back into growth stocks, currently spooked by interest-rate scares; (vi) the Fed said nothing Wednesday to cause concerns about any reversal in the accommodative rate policies; (vii) while the momentum in the markets has waned of late, market internals remain very strong; (ix) the NASDAQ 100 and S&P 500 indexes tagged their 20-day future lines of demarcation yesterday, further confirming that the 20-day cycle has reached its projection.

The Founders Group was stopped out of our 8-point stop yesterday on our S&P 500 position. We are currently reestablishing a 25% position, along with a 25% position in the NASDAQ 100. We are still using futures, but it is fine to buy the cash indexes (SPY or QQQ) or April 16 at the money calls on the same. I will communicate stops later this morning. If you did not honor yesterday’s stop on the S&P 500, hold the position for now and add the NASDAQ 100.

A.F. Thornton

Founder's Trading Journal

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Founder's Trading Journal

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Just a brief note, we were stopped out at the end of the first hour yesterday on both our 50% Nasdaq 100 and 50% S&P 500 positions. We stopped out at 13035 and 3939, respectively.

The market opened below our 5-day EMA stop point. As you will recall, our stop for the day session was an hourly close below the 5-day EMA. Since we opened below it, we took the closing price at the end of the first hour since the market could not punch back through the stop line. This is somewhat of a judgment call and depends on market conditions. In a fast market, we simply would have stopped out at the open – but conditions yesterday allowed us to wait until the end of the first hour. We made substantial profits in both positions.

When I first started trading, the gray hairs told me that to be a successful trader; you have to learn how to take and handle a loss. After these many years, I have concluded that to be a successful trader; you have to learn how to accept a stop and then watch the market take off without you. That is what happened yesterday afternoon.

I am not sure what anyone was expecting from the Fed, but the crowd was apparently short. After the announcement, the short-covering was something to behold, and the market spiked higher. However, the overnight crowd took the market right back to the pre-meeting levels this morning, so I don’t feel too bad. We will see what the day brings.

As before, I am traveling but would not be day trading until next week anyway. Today and tomorrow, many market-makers will be dealing with quadruple witching – a day that occurs each calendar quarter when stock index futures, stock index options, stock options, and single stock futures expire simultaneously. The cross-currents distort the normal market – and I have not found it worth trading.

At some point, I will discuss some techniques, such as pinning trades, that can be fun for derivative expiration days.

We will hold to our cash position, looking for another entry point, long or short, as circumstances dictate. Risks remain very high here, and I believe that financial stocks continue to hold the keys to the castle. Our friends over at Kimble Charting published this salient chart yesterday:

This is a time to be cautious. In a perfect world, what we have here is a recovering economy and likely an early-stage secular bull market. Nevertheless, the market is overdone by any measure and well ahead of itself. This would lead to a 10% to 15% correction in normal conditions – likely to be coincident with the 18-month cycle low. That will present soon.

If the doom and gloom folks are correct, we could start into the 80-year cycle correction, a much harder cycle to call but the one that promises to be most brutal to the current generation. The last one bottomed after the Great Depression. The mid-point of the cycle was the bottom in 1974. The next bottom is due any time – and we have not even started into it.

If you are trading, keep stops tight. Always have a disaster stop set. If you are stuck in positions for tax or other reasons, consider using some options or futures to offset risk, almost like insurance. If you want to play the lottery, consider buying cheap, out of the money puts. At least until the 18-month cycle correction is behind us sometime this summer, risks are extraordinarily high.

A.F. Thornton

Founder's Trading Journal

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I need a couple of days of travel time, and the next few days are as good as it gets. It would be best if you did not day-trade on Wednesday through Friday. Tomorrow (Wednesday), we are on the Fed announcement watch. The board starts meeting today. Nobody anticipates any change from the Fed, but that may be the problem as market participants may be looking for inflation vigilance. In any event, it is not advisable to day trade on a Fed announcement day.

Additionally, Friday is quadruple witching day. No, this is not a day to honor Hillary Clinton. It is a day when stock index futures, stock index options, stock options, and single stock futures expire simultaneously. The cross-currents, having little to do with market direction, are nearly impossible to anticipate or trade.

You could try some day-trading on Thursday, but being sandwiched between the two salient non-trading days – day-trading on Thursday is not advisable either – just less risky than Wednesday or Friday. Traders and market-makers often start hedging on Thursdays as they prepare for expiration Friday.

As a housekeeping item, this will be my last commentary until next week, given this week’s less than desirable day-trading circumstances. Our portfolio remains 50% S&P 500 and 50% Nasdaq 100, and we have been rewarded handsomely for picking up the 20-week cycle trough, especially on the NASDAQ 100. I will send out a commentary if the macro picture changes or we achieve price targets. In the meantime, I have some commentary I have been writing on various subjects that I will publish sporadically through the weekend. Monday morning will be the next focused commentary.

Today’s Plan for Day Trading

The S&P 500 notched a new all-time high in a spike in the last five minutes of yesterday’s regular session. The overnight high is a new all-time high and should be carried forward as insecure until it is confirmed or exceeded in the regular trading session. At this writing, the S&P 500 (and NASDAQ 100) are slated to gap (true gap) open. Yesterday’s settlement ended on a spike, but yesterday’s volume and time points of control failed to migrate higher, a slight negative.

As to where the markets are positioned just before the New York open, both spike and gap rules are in play this morning, with early indications being bullish and trading above the spike. Given any conflict, I will be favoring spike rules. The NASDAQ 100 is just now coming alive, as I had been expecting.

Respecting our core trading vehicle, the S&P 500 index futures, the spike’s base at 3948 is important today as it is also the prior all-time-high. Buyers should be present there as the market retests the breakout level. Keep that market-generated information in mind should that level come into play.

Regardless of price action, where value develops will continue to be important, as will the relative strength on the NASDAQ 100. Good day trading is often like keeping a lot of balls in the air at once. We absorb the price exploration data, watch sensitivity at the key levels, make our decision, and execute. We set our stop just in case we are wrong.

When I am executing perfectly, following every rule I know (whether in micro-day-trading or macro strategy), the market likely will disappoint me in at least four out of every 10 trades. Keep this in mind, as it is in the realm of statistical probabilities and in no way a reflection of your character or skill as a trader. It is how you handle and manage each circumstance that defines your success and drives your ultimate returns.

A.F. Thornton

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