April 2021 | Archimedes Methodologies

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Navigator Swing Strategy - 100% Cash

This new and focused publication will record my current, intermediate view of the U.S. stock market as defined by the S&P 500 index and interpreted by our proprietary Navigator Algorithm™. It will typically published over the weekend. I will issue various buy and sell signals along the way – as further discussed below. You can extrapolate the information in these pages to most U.S. equity indexes and stocks. I choose the S&P 500 index to represent the U.S. stock market because it is the most heavily traded equity index globally.

When the Navigator Algorithm™ is in a sell signal, going long the stock indexes, sectors, or individual stocks is like swimming up river. Why is this so? Because there are numerous studies that prove 60% of any stock or sector’s return is attributable to whether the market is going up or down. With so much indexing these days, the market’s influence is likely even greater than the older studies would indicate. I like to say that there is probability, plausibility, and actuality. Luck is not in my vocabulary – so why fight the headwinds of probability.

In 2020, the Navigator™ swing strategy focused on being in or out of one S&P 500 E-mini futures contract resulting in a nearly 900% return. This year, I expanded the strategy to include trades in the other major indices and options on some leading sectors, using Sector ETF’s. The returns have been rewarding, and I will have the results back today from the accountants for the first quarter. But to be frank with you, it is too much work. Just the fact that I need accountants – because the stocks, options and futures are in three different places with three different custodians – illustrates the complexities involved.

When one has a successful market model and algorithm such as the Navigator™, indeed we are open to a world of possibilities. One can broaden out to other indices, sectors, and even individual stocks. I have leaned in that direction a bit this year, mostly because I get bored.

However, I also have to remind myself that I don’t live to trade; I trade to live (the wife likely would challenge that statement). The S&P 500 index itself is diversified and safe enough that long ago, I decided that it would be less work to solely trade the index. To enhance returns, I use the leverage offered by options and futures to make all the money I need. That approach has served me well, and I am returning to it for the rest of the year in the swing strategy. It also helps to keep these writings simple and focused on the bottom line. In or out, long or short, those are the only issues.

The chart below is the best illustration of the S&P 500’s cycle location. This particular chart shows the path of the nominal 18-month cycle, the fact that it likely is peaking, and the preliminary correction target.

The peak illustrated above is happening in the context of (i) unprecedented historical valuations, (ii) dumb money sentiment extremes, (iii) nominal cyclicality, (iv) entering negative seasonality, (v) defensive sectors asserting leadership, and (vi) new all-time highs in the S&P 500 unconfirmed by momentum strength, individual sectors, and other indices that should be confirming it. So there you go, it is really that simple.

When all of these variables are coded and weighted into our Navigator™ Algorithm, we have a preliminary sell signal, perhaps allowing one last poke higher in the S&P 500. This would be a perfect week for the index to crest – though my time target still falls soon after the first few days of payroll deduction fund flows in May. To negate these possibilities, we would need to trip the algo trigger and polarity switch reflected in the system status labels at the top of the chart below. Those are the levels that would need to be breached to negate the sell signals – but be aware that the levels are dynamic and move with price higher and lower.

On Wednesday, President* Biden will present all of his tax proposals to Congress. The monsters of tech all report earnings this week, including Tesla after the bell today. Wednesday also will conclude the latest Fed meeting and Chairman Powell’s press briefing. That is a lot to chew on this week, and any one of these events could help the market put the landing gear down.

And then there is that old market axiom – “sell in May and go away.”

A.F. Thornton

Navigator™ Signals for Day Traders

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I don’t write the Epilogues every day. I like to use them to illustrate points that will help you improve your trading. Yesterday’s severe liquidation break on President* Biden’s tax announcements illustrates three important points.

First, you should always have a disaster stop. Where you set them is personal – more of an art than a science. I tend to use 15 points on the NASDAQ 100, which I trade most of the time. Tracking the Average True Range over the last 14 bars can also help you calculate a stop – perhaps one or two times the range. Believe me, my disaster stop has saved me from more than one news event over the years.

Second, yesterday illustrates the risk in the markets at this time. Biden’s tax proposal was just that – a proposal. It is likely the first volley by our current, Marxist ruling class. It is not the final number. But the markets’ knee-jerk reaction illustrates the delicate underpinnings at these levels. One should decide whether it is worth trading at all until a significant correction – maybe greater than 10% – presents. Such a correction is building right now, as there are many chinks in the armor already.

Finally, the market was saved once again by the Weekly Expected Move low. I mentioned this yesterday morning, not even knowing that such a liquidation break would present. Always have the WEM levels marked on your trading screen. Bailing out below that level yesterday would have been foolish. Perhaps one could make an argument that if the institutions had really pressed the gas pedal yesterday, the WEM low would have been obliterated. It wasn’t.

Another rule I follow, which is not hard and fast but also a savior yesterday, is that I don’t trade after lunch starts in New York. On exceptional occasions, I will take an afternoon drive trade around 2:30 PM EST. So I was not in the market to enjoy yesterday’s bloodbath. In fact, I was writing on these pages in the midst of it. And now I realize that I had not completed my description of the internals screen – which I will do later this morning.

The overnight distribution has a bit of a 45-degree angle to it. The overnight low is also very close to the volume point of control at 4127.75. While it’s not a day to trade near the bell, keep this level in mind as potentially secure in early trade and carry it forward as our line in the sand today for negative bias if it is breached.

Overnight activity since then has been bullish, with a very squat profile and balance squarely within the lower end of the value area. As traders extended the range, the halfback at 4143.50 is a key level and should be marked off as the line in the sand where an imbalance of those knee-jerk sellers from yesterday will start to feel some collective pain. Finding acceptance today above halfback should signal that the break was just short-term, rather than long-term, liquidation.

I would also say with a bit less conviction, that holding below halfback for too long with value unchanged to lower implies that more selling could be coming. But the WEM low, which is about the same as yesterday’s low, is likely to cradle us. If traders could not breach the WEM low yesterday – it seems doubtful they could do it on weekly expiration today.

If the WEM low is taken out today, the 4100 roundie then comes into play which is also the 4/9 volume point of control.

As you already know, I don’t trade on Fridays, especially when we are skirting the edge of the expected move.

Good luck today – but I would not be surprised to see a slop fest trading near the expected move for a good part of the day. The overall bias is bullish as long as the S&P 500 stays above the 21 EMA on the 15-minute cash index chart.

A.F. Thornton

Founder's Trading Journal

Morning Outlook – Important Sell Alert

Apr 22, 2021 AF Thornton 0 Comment

The markets just caved (hopefully temporarily) on President* Biden’s announcement of a 43.4% Capital Gains Tax. The current tax is 20%.

Remember, it does not take much of a gain on your home or stocks to put you in Biden’s “rich” category. While it is important to start working down the debt, this tax would wield a devastating blow to all capital assets, from real estate to stocks. This could literally kill the real estate market overnight. Do you have enough grey hair to recall the 1986 Tax Act and what it did to real estate and the Savings and Loan industry?

The proposed tax also has potential to cause anomalous behavior by investors before its passage. The proposed tax could also act as the catalyst for the 18-month cycle peak. I doubt it, but I will keep an open mind.

The ruling class in Washington D.C. right now is the most dangerous I have encountered in my lifetime. They are, in a word, scary.

Condolences to everyone, but there is a reason our Navigator Swing strategy remains 90% in cash and 10% in Gold. We are closing out the Gold position today. Taxes are deflationary.

A.F. Thornton

Navigator™ Signals for Day Traders

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Navigator™ Signals for Day Traders

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It is hard to believe that we are almost through another week.

Yesterday saw buyers recapture control, at least temporarily, but not to the level that we formed a full pivot higher on the daily chart. This morning will be a flat opening just inside yesterday’s range – in other words, balance. Overnight distribution is small and wide in the context of yesterday’s trending day higher. For now, overnight traders are accepting the higher prices associated with yesterday’s close.

The halfback at 4142.50 is my key line in the sand today for bull/bear bias. Buyers need to hold this halfway point in yesterday’s range. If they can hold above the overnight high at 4167.25 (also near yesterday’s high), so much the better. As a side note, halfbacks become important when there is a wide daily range, especially on a trending day supported by strong internals, such as yesterday.

On the upside, we have the overnight high and yesterday’s high at about the same level. That’s a visual and mechanical breakout point for many traders. Monitor for continuation on any break above there.

Do not be surprised if the market stays balanced and trades inside yesterday’s range today. As mentioned yesterday, we have tagged the expected move on the downside for the S&P 500, so that likely puts a floor underneath the market until options expiration tomorrow. Use the internals to guide you in this regard. Anemic ticks and an S&P 500 A/D line between -100 and +100 will be more supportive of balance than trend.

Acceptance of prices below yesterday’s halfback would change the tone back to negative, in my view. We are still holding Gold in the Swing Strategy, but my finger is on the trigger.

Good luck today.

A.F. Thornton

Navigator™ Signals for Day Traders

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Navigator™ Signals for Day Traders

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In my way of thinking, analysis of the market starts with the S&P 500 index. Think of it as the mothership. You can extrapolate to any other index, sector, or stock from that reference point. It is the most heavily traded equity index globally – and therefore reflects all known information at any given point in time.

The next level of my analysis begins with the price. I strip everything else off my screen. What is the price action telling me? In day trading, my price analysis starts with the daily chart. I think of it as my master chart – and I day trade in the direction of the daily chart (except at pivot points).

If I were to advise someone on getting started for day trading, I would require them to take a course like one of the courses offered by Al Brooks. Mr. Brooks has written three thick treatises on price action. Virtually everything else you see or hear about in technical analysis is a derivative of price. A derivative of price is just that – a derivative. To that extent, any indicator is somewhat secondary in reliability. An indicator is supposed to refine what the price action is already doing and telling us.

I would then want to understand the amount of time spent and the volume occurring at any particular price. I like to frame it in terms of what I call “value,” something I learned from one of my mentors, Jim Dalton. Value is defined as where the S&P 500 spends 70% of its time and experiences 70% of the volume. Often the information is similar for time and volume. The index typically spends the most time and has the most volume around the same price. When it doesn’t, that is important market-generated information.

The markets are auctions. Price is merely an advertising mechanism when you consider the auction process more deeply. Analyzing where the S&P 500 spends the most time and has the most volume gives context to the price mechanism. Thus, it is more important to know if “value” is rising or falling than price. Is the Point of Control (where the most time is spent or the most volume occurs) rising or falling? Is it at the top or bottom of the day’s price range?

This morning, I am noticing that the S&P 500 price action on the daily chart is overlapping instead of impulsive. In other words, the daily candles overlap each other. Overlapping price action tends to be corrective in nature. Impulsive action – where the daily candle cannot get into the previous day’s range – tends to lead to a trend reversal. We don’t see that yet.

With that premise in hand, all we can say for now is that we are experiencing a mean reversion back to home base – the 21-day Exponential Moving Average. That average sits at about 4070 on the current month’s S&P 500 futures contract. That is a reasonable first target for the correction at hand. We will see how the index develops from there.

Many of my secondary indicators, such as the Rate of Change, S&P 500 Relative Performance to Junk Bonds. Investor Asset Flows, Corporate Bond Spreads, Trading Volume, and Market Breadth are still positive for the longer-term trend. But, as I said yesterday, every large correction starts with a smaller one.

The Navigator Algorithm, which combines the above-described variables and more, is in a sell signal. That is why our swing strategy remains 90% cash and 10% gold. Gold was the only green on the screens yesterday. Everything else was red.

The only question is whether these few days of index retreat are a simple mean reversion or the beginning of the nominal 18-month cycle correction. Likely, we are observing both. However, one more leg higher may still be possible.

Sequentially, you can count the S&P 500 as a Wave 4 consolidation, with a Wave 5 still to come. You can conclude this by looking at the chart of the S&P 500 index above and realizing that this latest advance is longer than the first rally proceeding from the March 2021 lows. If the wave was equal to the first, perhaps it could be considered complete.

This morning, we will be opening in yesterday’s range with a balanced, overnight inventory. We are currently in the middle of the overnight range. The short-term bias remains bearish, and there is no clear indication of direction at the open, so early trade is inadvisable.

Let the market settle in and follow the usual sequence depending on the direction the market first tests (e.g., overnight high or low, yesterday’s high or low, etc.).

The last two sessions have been characterized by sellers in control, with snap-back rallies later in the afternoon as sellers have been reluctant to accept further, lower prices.

Yet, prices are moving away from all-time highs and trading in a “void” of support structures out to the left, with plenty of distance left below to our key moving averages.

This leaves us little to go on as far as where buyers should regain control. Always focus on the key levels in the 100 handle block when this presents. Focus especially on the 50-point increments.

Overnight activity is fully within yesterday’s range and fully enclosed within the value area. I am carrying forward that overnight prices were not able to make new lows. As such, yesterday’s low will be the key line in the sand today.

Good luck today,

A.F. Thornton

Navigator™ Signals for Day Traders

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Another six inches of snow on my doorstep accompanies a true gap lower this morning, although we are not that far from yesterday’s low at this writing. I could not help but reflect that Global warming continues to blanket Colorado with spring snow, just like masks prevent the China virus from spreading. I ask you, what would global cooling do? But alas, I digress, and I better be careful not to question the current Marxist orthodoxy, lest these pages are canceled.

Although gap rules are in play, overnight inventory is actually balanced, muting a full stampede of panicked traders at the open. Current prices are ticking in the lower third of the overnight range, so the primary question is whether Traders will test the overnight lows or highs first.

Yesterday’s break did what it was supposed to do: repair the two recent weak lows and move towards the April 14th volume points of control. Overnight activity has tested that VPOC, but reliable repair doesn’t happen until regular session prices trade there.

In the bigger picture, yesterday gave us a lot of market-generated information in the way that sellers continued to try and press their bets into the afternoon but got little traction. That was encouraging. Although overnight prices are now lower, this is still a carry forward as the tone of yesterday’s session has a lot more weight than the overnight session.

However, to be bullish would require me to ignore the Navigator sell signals and sell trigger violations. There is little, if any, chance I would do so. As such, I remain neutral to bearish, with the caveat that stocks are priced for perfection right now. Some backing and filling would be healthy, but it would not take much to upset the apple cart. Context also tells me that the larger cycles are due to present at any time. Let’s face it, every major correction starts with a minor one, but longer-term conclusions are premature as yet.

If there has been one thing that frustrates me about the markets from time to time, a correction will start minor, fooling you into believing it is not gaining any traction, only to accelerate after a week or two. This is the other side of the coin of sudden downbursts that take out a few weeks of gain immediately. I have never been able to create an indicator to capture this in advance or give us an edge. That is why the context of the cycles and sentiment (to a lesser degree) can be so helpful. ANYTHING is possible here, in the context of a potential peak in the nominal 18-month cycle. Ignore that cycle at your peril.

As pointed out above, we are well off the overnight low, and overnight inventory is balanced. This gives us little direction for early trade. I will focus on whether or not prices can break back up into yesterday’s range. My bias would be long inside the range and short outside of it. Yesterday’s lows are the key bull/bear threshold for all of the major indices.

Any acceptance back within the range that looks to have legs (good internals and tempo) should point you to take your key levels sequentially and monitor for continuation.

Only acceptance below the overnight low would signal enough weakness for more tradable shorts to the downside. As always, monitor for continuation and pay close attention to see if the context is supporting.

Good luck today,

A.F. Thornton

Navigator™ Signals for Day Traders

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Thus far today, we have put in a lower high and lower low on the daily chart, the first negative pivot since this last run started in early April. Add that to your narrative as negative.

We are also tripping the Algo sell trigger, turning the daily candle red, as you can see if you click on the chart above. We also have solid Navigator sell signals independent of the Algo trigger (see red and yellow sell arrows). The polarity trigger is still holding, but I have to say that I am less than optimistic about its future. The trigger level for the polarity switch is 4127.41. The S&P 500 needs to close above 4151.76 to turn the Algo Trigger candle back to blue (blue encourages us to be long – orange is short).

The intraday chart looks like it is trying to wedge into a low. The price action is sloppy enough not to rule out another push down to Thursday’s low. That is where I will begin to cover my short positions for a nice gain. I should have done the shorts at the money – then I would be retired this morning. Oh well, I bank what I can.

This is exactly what I have been warning about – a day that starts clobbering through previous gains like a knife through butter. It is too early to conclude anything beyond what the Navigator system communicated so eloquently – the market is super overbought, and the institutions are not interested in buying here. That puts the market on borrowed time until the price hits a level that attracts them.

Whether this is the nominal 18-month cycle peak will take more price action and data to conclude with certainty. All we need to know for now is that it could be, and that gives us context to interpret the chart in front of us.

Perhaps more worrisome, the volume is picking up today – indicating that some institutions are participating – but they are selling, not buying. There is a slew of important earnings reports this week, and that may add to the confusion.

Maybe we should take the week off? Let it all sort out. It might be better to use options – stay with the bigger picture as I did over the weekend. Day trading could be treacherous in the current conditions. In either event, the winds are blowing south. Market leaders today are all defensive, underscoring a change in the weather.

Be careful!

A.F. Thornton

Navigator™ Signals for Day Traders

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The market is an aging beauty, though the trend has been clearly higher. In an unusual move for me, on Friday afternoon, I shorted some out-of-the-money weekly options (expiring this coming Friday on both indexes). I say unusual because I rarely hold anything but swing positions over the weekend.

I believe that the market is aging because we have been experiencing diminishing volume for some time and recent, rapid liquidation breaks. Higher prices are both cutting off and discouraging activity. In other words, there are fewer and fewer takers as the markets try to climb higher.

This activity is expected. For context, we have been discussing an imminent peak in the nominal 18-month cycle. Dumb money sentiment is elevated once again.

On specifics, our algorithms are confirming a top is near as well. Click on and take a look at the above chart and what the Navigator system is telling us. We had an “E” signal for exhaustion a little over a week ago. That signal tends to lead peaks by about a week. We now have an “sOB” signal on the chart signifying that the market is Super Over-Bought. That signal is rare, but what follows tends to be quite unpleasant.

The first red tag on the system status labels reads “Trend Reversal Imminent.” If you look at the faint dynamic channel lines, we are about to tag the uppermost channel. Most importantly, we are sitting right above the Algo sell trigger – it would not take much negative price action to trip it.

We can also infer that the buyers at the table right now are in one of two categories. They are either short-term momentum traders (otherwise known as weak hands), or they are market makers who have to buy to neutralize their portfolios after they sell calls. I call the latter gamma squeezing. After all, how many people do you know that go running to their brokers “hey broker, the market is at the highest price it has ever been in the history of time – get me in now!”

How else do I know who is at the table right now? Momentum traders tip their hand in where they execute. They tend to be location sensitive, buying at various key levels, such as moving averages, half-backs, Fibonacci levels, etc. I know them well because I am one of them, at least as far as day trading goes.

Institutions do their research and then position themselves as rapidly as possible (sensitive mostly to their trades not moving the market). In fact, more and more these players work in what are termed “dark pools” off the exchanges and hidden from public view. The point is, they are not location-sensitive – like momentum and day traders. The institutions are planning to hold their investments over several years – so a few points here and there are irrelevant to them.

But as far as the day trading and momentum traders go, last week, the market experienced two rapid selloffs followed by equally rapid recoveries. This is often a sign of deteriorating strength. Responsive traders (responding to lower prices) are only becoming active if they can get a deal. The resulting recoveries were not supported by volume – another sign the institutions are absent.

Short-covering drove the recoveries as well. Traders sensing the deteriorating advance, short the market – but too soon. While they may be right eventually, when they are early as here, they may get stopped out. As they get stopped out, their short-covering fuels even higher prices.

Last night (Sunday night), I focused on Friday afternoon’s weak lows of 4168.50 on the S&P 500 and 13996 on the Nasdaq 100. The fact these lows did not hold is the first chink in the armor for this morning.

Then, I shifted my focus is to Friday’s lows – 13954 on the NASDAQ 100 and 4162 on the S&P 500. The S&P has already breached that low, and the NASDAQ 100 is right on top of its low at this writing. Now I am monitoring for continuation to see if there will be acceptance and range extension below these levels. If so, then the value (the range where 70% of the volume occurs) has the potential to move lower, and that can be the first sign that the market is finally topping.

If I had to call it to the day – I would be expecting the market to top around May 8th. So I am looking at the described activities as early markers. I will take some short-term profits on my puts as soon as I see a true pivot higher if that should occur today.

Any acceptance below Friday’s low should shift your bias to negative. If the markets can pivot from this area and hold the lows (maybe after running some stops below), the value can remain overlapping to higher, and we may get a few more days before a final peak.

The market is getting a blow-off to look to it – as we have seen several times since the March 2020 lows. Keep in mind my previous points – when the market fell after the blow-offs. It erased several weeks of gains in a single session.

Good luck today,

A.F. Thornton

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