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Navigator™ Signals for Day Traders
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Climbing the Wall of Worry

I thought the title best described where we are in this latest rally segment that began in early March. The froth has been off the market, and some healthy skepticism has returned. But the market seems to want to go higher for now, and the pace is less frenetic as one might expect at current levels. Three pushes define a typical rally segment, and we are in the third push.

Though largely rangebound since Monday’s nice surge, I think there is a possibility for range expansion today, at least back up to the old high on the S&P 500 around 4238. That would put a nice cap on the week (and the month as this is the last trading day with Monday’s holiday). 

Regardless of any other issues at hand, always remember that the last trading day of the month can be a little tricky, as will weekly options expiration today. The reward will come next week, as the first few days of a new month are typically positive, with payroll contributions rolling into 401(k) plans. And then there is the summer rally, if we get one this year. 

As you will see in the chart below, we still have the 18-month cycle to contend with sometime mid-year. We keep that in mind for context, but the landing spot is not precise enough for us to definitively trade the mark. The computer algorithms are now projecting a July 10th low, but in my experience we are more likely to see the market peaking in late July, with the correction into the more usual bottoming months in the fall (e.g. September / October). 

S&P 500 Cycle Forecast - Yellow Whisker is 18-Month Cycle Range

The shorter cycles have been lengthening a bit lately, and that is not unusual. No doubt, all the proposed spending keeps the market propped up a bit. Interest rates have been behaving of late, but they will be back asserting full force soon. After all, deficits don’t matter.

Meanwhile, we are on the borderline of opening with a true gap higher (above 4211.50 would be a true gap). As such, gap rules would apply. Should the gap continue to manifest into the open, it is not so large to prevent a gap-and-go scenario – though I will be lightening up my long-term positions at 4238 (the old high) for the long weekend.

Overnight inventory is 100% long, so the initial profit-taking fade (as overnight traders take their winnings) is likely – though it appears they have already done so prior to the open. Don’t forget WWSHD – if there is no fade, that would be extra bullish. If the fade turns at yesterday’s regular session high, you can repurchase the first bar through the open or a break above the first one or five-minute bar. Just keep in mind that much above 4238 you will be fighting the market makers today – so don’t be too greedy.

Beyond the indexes, there are still many good stocks breaking out of bases and into new highs. Growth stocks and tech are seeing some resurgence, as are entertainment, travel and leisure names, but rising rates could put the kibosh on best-laid plans. Use a good stop, such as a close below the 5-EMA, to lock in your profits. We will continue to use the line on the Navigator Swing Strategy – which remains 100% invested in S&P 500 futures,

Enjoy the holiday weekend.

A.F. Thornton

Navigator™ Signals for Day Traders
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The major indices presented more trading range behavior yesterday – no surprise. We set the range Monday, finished at the bottom Tuesday, back towards the middle yesterday, and open towards the top today. 

So until options expire tomorrow, it continues to make sense to buy pullbacks one or two standard deviations below the 4200 level and sell when you are back at the level. If we break up above it, fade the upper bands back to the line. A great way to do this is to plot the volume-weighted average price (VWAP) with both sides of the standard deviation bands engaged. Anchor the VWAP to the Globex open. Perhaps you could anchor another VWAP band to the New York open after a few hours of data. I typically run it on a 5-minute chart.

S&P 500 Futures - 5-Minute Chart with VWAP and Standard Deviation Bands

Key levels above are the top of the single prints at 4214 and the all-time high at 4238. Key levels below are the overnight low and settlement at 4185. The 5-day EMA also sits at 4185 or so at the open. Acceptance below 4185 would be a potential tone change. For the Navigator Swing Strategy, a close below the 5-day EMA for more than a few hours would trigger our stop to lock in profits.

A.F. Thornton

Navigator™ Signals for Day Traders

Pre-Market Outlook – 5/26/2021

AF Thornton 0 Comment

As expected, the Weekly Expected Move high on the S&P 500 (4206) is the proverbial brick wall, assisted as it were by 4200, a more typical obstacle as most ‘100 point markers turn out to be in a climb. Overnight traders accomplished little to nothing, and so we remain inside Monday and Tuesday’s ranges.

Current price and range tells us little about how early trade will react even though overnight inventory is 100% net long. That could mute any potential fade.

The overnight failure to move below settlement should be taken as bullish and day timeframe traders can assume a “buy on pullbacks” stance given supporting context, exercising caution around the 4200 and WEM high. Only acceptance below yesterday’s low at 4185 has potential to change the tone.

As June closes, the summer doldrums lie ahead. The all-time high (in the overnight market) at 4238 could be tagged on some strength, but I would fade it back to the WEM high. A trading range into the summer is a likely scenario, bounded between 4250 and 4050 with a sell-off finishing into early fall.

A.F. Thornton

Founder's Trading Journal
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The process of learning to invest and trade can be daunting at first. For many of us, it starts out as a search for the holy grail. Book to book, indicator to indicator, guru to guru – you are always just one step away from trading Nirvana. It is not unlike a search for the pot of gold at the end of the rainbow. And yes, mischievous little Leprechauns are everywhere.

For most of us starting out, the answers had better come quickly because our capital is rapidly disappearing. And if you are anything like me, it is not likely the first round of capital on the journey. There is no experience that compares to being forced into margin liquidation. Tuition – as we affectionately reference it. I have been there more than once on my journey – and we will leave it at that.

One complication of the learning process, however, is that your head can be stuffed full of minutia. The next thing you know, you overlook the obvious – the signal buried in the noise.

In the trading world, everything starts with price action. The rest – no matter what it might be or the claims of promoters – is context. The price is doing x, but momentum is waning. Momentum is context. The price is potentially peaking on the nominal 18-month cycle. The cycle is context. Obviously, context can be ranked in its level of importance but that is a discussion for another day.

Periodically, I will strip everything off my charts and just look at price and price alone. Price is the signal – the rest is noise. First I look at the line chart, then a bar chart, and then a candlestick chart. Sometimes I turn the chart upside down just to trick all my biases. Then I add in some volume. For these purposes, I keep it simple.

Over the past year, with the most aggressive Fed action I have experienced in my career, dips (when they occurred) lasted barely a nanosecond. We have seen a lot of “V” bottoms. V bottoms are the exception. The important pivot lows normally involve a two-step process. The market puts in a low, then retests it about a week later. The safest entry is on the retest.

There is no retest on a “V” bottom. Instead, the price just touches and goes – hence the “V.” You end up waiting for the retest with your hat in hand. Any hesitation and the market has already left you in the dust.

If you ignore all the noise, we just experienced the kind of bottom as they used to be. Likely, this will be more to the norm as we carry on from the giddiness of liquidity, Fed-driven markets. So it would be wise to add this one to your notebook.

So let’s examine this bottom in simple terms:

As you will see from the chart above, we bounced where we should on the trendline. There were other supports there as well, but I don’t want to clutter the graph. That is part of this exercise – keeping it simple.

Note the volume spikes below the first low. Volume typically surges like this when traders are churning indecisively at the low. If you look back to some of the other pivot lows this past year, you will see the same phenomenon.

Then we move on to the Tuesday retest, coming right on cue about a week later. Volume spiked again, but this time it spiked less than at the first low. A spike with slightly less volume tells us that the selling intensity was abating. The fact that sellers could not drive the market into the first low was another tell. The index left a long tail (the close was close to the open) on the day, as traders realized that the bears had lost control. From there, it becomes a matter of follow-through. That is where we find ourselves now.

There was another tell confirming the lows – namely fear. In the circumstances, it is a good time to measure trader anxiety. Fear accompanies reliable market troughs.

The first shorthand for measuring that fear is the CBOE put/call ratio. It tends to spike just like the volume. Too many shorts pile on at the lows, just like too many longs pile on at the highs. But it is at the lows, when the ratio spikes, that we can more accurately predict a bottom. I replaced the put/call ratio for volume in the chart below so that you can visualize the point.

The other fear indicator that is useful at important lows is the VIX (volatility index). Volatility peaks at lows, and diminishes at highs. Like the put/call ratio, the VIX tends to be more accurate at picking troughs than peaks. I replaced the put/call ratio with the VIX index in the chart below so you can visualize the point.

All in all, these simple clues gave us a low-risk entry point for longs. If an uptrend is defined as a series of higher highs and higher lows, and a downtrend a series of lower highs and lower lows, then a reversal is when the process ends, as here. We had a short-term series of lower highs and lower lows until Tuesday, when the progression to lower lows ceased. The process ceased at the trendline, one time frame higher, where the series of higher highs and higher lows has maintained the intermediate uptrend.

In Globex last night, we are breaking the short-term downtrend line (see charts above). We need that confirmed in the regular session today. If we can then clear the high bars from last week to the left on the chart, it should be clear sailing to the old highs. From there? Who knows, but the easy trade is over.

With this market, new highs are possible. It would seem that tech is moving again. Somewhat lost in translation is the fact that tech and growth stocks generally have been correcting for five weeks.

Ultimately, it comes down to math in a capitalization-weighted index. The stocks going up must contribute enough to the index to carry it higher. That is why the stalwart FANGMAN+T stocks are so important (Facebook, Amazon, Apple, Netflix, Google, Microsoft, Nvidia, and Tesla). They may be a handful of stocks out of the 500 member index, but they contribute 25% of the weight.

What I will be watching now is the progression of each daily candle. How far is the price invading the previous day’s candle? That tells you something right there. Is the volume supporting price progression?

And what about the nominal 18-month cycle? It requires an entirely separate discussion. But if we bottomed all of the cycles all the way up to 9-years in March 2020, and this is the first 18-month cycle in that series, it is likely to peak late in the curve. Also, the probability is that the correction will not be a crash – but likely something around 15% to 20% at most. The trough is due the first week of July, give or take a few weeks on either side. That is why we can’t trade it.

The peak is not predictable, as with all cycle peaks. And while the trough is more predictable, there is too much variation. Sure, one could say that we are 75% through the cycle and I will just go to the sidelines until the correction finally presents. While it is not my preference, that is a perfectly legitimate approach. For me, the context of the cycle helps me adjust the risk I am willing to take at this point. But it does not keep me out of the market,

Today's Day Trading Plan

Yesterday, the narrative changed, shifting back into a more bullish tone by breaking downtrends on the NASDAQ 100 and S&P 500 futures. As overnight trade is higher this morning, I will latch on to the more bullish stance.

Options expire at the close, which can hold prices more where they are, especially in the afternoon. That is why I typically don’t day trade on Fridays.

The triple candle peaks out to the left (4179.50) mark the next breakout. The level also marks the 10-day point of control. Conquering that level is the next link in the chain, but it might not be achievable on a Friday with the volume concentration there.

On the downside, and there could be some profit-taking at the open on extended overnight inventory, there should be support at the beginning of the single prints at yesterday’s regular session distribution. They begin at 4142.00. I would also keep them in mind as the area where there is potential for change in tone.

Carry forward that the overnight low came right down to the settlement (4153.50) and not further down in range, closer to those prints.

Always remember the market’s affinity for climbing in 50-point increments. If the index level is on the 50 or 100 point increment, it is likely to stall a bit as it works through or finds support or resistance at that level. If nothing else is relevant on the day, traders like to test the overnight high or low and yesterday’s high or low to find the path of least resistance. So go with the flow, and look for confirmation. Strong internals in either direction often telegraph success or failure at the crucial level.s

If I were trading today, I would give the market 30-minutes and see how it breaks from that candle. In an uptrend, I like to buy dips into the 21-EMA on the 15-minute charts for both the S&P 500 and NASDAQ 100. Let’s see if the NASDAQ 100 can maintain its leadership position from yesterday.

Have a great day and a wonderful weekend.

A.F. Thornton

Navigator™ Signals for Day Traders Navigator™ Signals for Swing Traders

View from the Top

AF Thornton 0 Comment

Wednesday Evening - 5/18/2021

Interestingly, I had been expecting the larger, 18-month cycle to begin topping soon, and likely it will. In the process, perhaps I have diminished the importance of the more minor, common cycle corrections that occur along the way. And what those corrections typically do is put in a low and then retest it about a week later. If all is well, the market progresses upward. Sometimes, the broad indexes can even mask the damage occurring under the surface in these minor corrections. Nevertheless, these corrections are minor because the sectors are not correcting in unison – lacking the correlation and capitulation associated with intermediate corrections.

Ask anyone who owns Bitcoin about this dip. At one point this morning, Bitcoin was down nearly 50% from its peak. In any other security, we would call that a bear market. Yet, the cryptocurrency managed to turn around today and finish significantly off its lows.

Holders of the QQQ or NASDAQ 100 index saw a nearly 7% decline at the trough last Thursday. The S&P 500 saw a 5% decline. Those are still rotten apples when you have to eat them.

Yet, in the context of an expected”crash” that was supposed to hit us (as divined by some leading gurus), the recent declines don’t seem so bad. We may even be entering a series of rolling sector corrections reflecting the multi-tiered market forces contrasting inflation and deflation.

Frequently, the countervailing forces result in a trading range market in the major indices that lasts for a while. Often, the market will dip below the trading range to finish the next cycle trough in the sequence – such as the nominal 18-month trough we are expecting to finish in about five weeks.

In the roadmap for day traders this morning, I pointed out the various vital levels and support at hand, especially the Weekly Expected Move lows. The WEM lines have been on the chart since last Friday. I constantly harp on the importance of these levels because they matter nearly every single week. 

How did the NASDAQ 100 and S&P 500 end today? Market Makers pushed the indexes right back to the Weekly Expected Move lows – almost to the penny. As long as the indexes stay between the Weekly Expected Low and High, the Market Makers who sold weekly premium all week get to keep their money. Outside those levels, they can lose and lose in a big way. 

Knowing this, when the market dipped below these levels and hit other important support this morning, a low-risk entry point for longs presented. It was a fabulous day to take that trade. On the S&P 500 alone, the trade was worth $3000 plus per futures contract. I like to trade ten contracts and sell the first five at a lower target to achieve break-even, taking risk out of the trade. Then I ride the other five contracts with a trailing stop and let the market decide when I should get out.

Looking at the big picture then, the bears had control yesterday and today at the open. They should have been able to drive each index down and below last Thursday’s lows. They couldn’t get the job done.

For the Navigator Swing Strategy, the market gapped open and underneath our stops. Traders had every incentive to drive the market down to and below everyone else’s stops sitting under Thursday’s lows. If nothing else, the order flow alone is profitable for them.

In fact, the lows came in higher on the S&P 500, NASDAQ 100, and Russell 2000. And the bottom line is, the bears had their chance and blew it. At that point, I am buying S&P 500 futures in the day trading account, so why take the Navigator stops? Granted, this is the exception to the rule. So I waited for the close and stayed the course.

Now buyers are back in control with a very successful retest under their belts. We shall see what tomorrow brings and I take nothing for granted as the market has had a few surprises in store lately. But today was a good day for the bulls, having been on their heels at the open.

A.F. Thornton

Founder's Trading Journal
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Two critical concepts got you an awesome long trade this morning. Note them, if they are not already part of your toolbox: (i) the CBOE Put/Call Ratio, and (ii) the Weekly Expected Move low.

CBOE Put/Call Ratio

Before the turn higher this morning, and with a sense of panic in the air, the Put/Call ratio not only spiked – it gapped open to .89. That was the highest level since last October, in the range of last Thursday, and an indication that short-term fear was so overdone that a long trade was low risk. In other words, it was your first clue that the market would likely survive here.

Then, you have billions of dollars at stake if the market makers cannot keep the S&P 500 above 4105 by Friday’s weekly options expiration. Even after the first dip last week, deep as it was, the market makers brought the market all the way back to close at the WEM low by the close Friday. You simply cannot underestimate the power of these forces.

You have these two concepts, plus the traditional support of two trendlines and the 50-day line on the S&P 500. Moreover, sellers were unable to push the market back into last Thursday’s low, much less through it.

For day traders doing multiple contracts, I would take profits on half here at 4093, and keep the runners with a rising stop. For the Navigator swing strategy, we are holding our intermediate positions.

A.F. Thornton 

Navigator™ Signals for Swing Traders

Morning Outlook

AF Thornton 0 Comment

Pre-Market - Wednesday, May 19, 2021

The markets have generated important information the past few days, and it is mostly unsupportive to the bullish case – at least as to what we should be bullish about. My conclusion is that there is little, if any, tolerance for material price exploration below the overnight low in the S&P 500 index this morning without concluding that financial asset markets are failing here. 

This could suggest that the18-month correction is underway, perhaps a bit stealthy at first. At the very least, the behavior suggests that the transition to high inflation expectations is distorting the picture as money moves to more tangible asset classes, leading to a multi-tiered market that may end up driving the financial indexes sideways for awhile. I want to step back if that is the case, as the transition could be very tricky in the initial stages until new trends are solidly in place. 

Both the S&P 500 and NASDAQ 100 indices are hovering in the vicinity of their Weekly Expected Move lows, and the trendline both indices found as support last Thursday. The trendline marks the lows that date back to the beginning of this up-leg in early March. With April retail sales and Fed minutes in play this morning, the market may find its footing – but that is a tough call at this point.

We will open with a true gap lower putting gap rules into play today. As with any gap greater than 10 points or so, gap rules #2 and #4 will rule the day.

NASDAQ prices will open just below the trendline. That is important because for sellers to get and maintain control by holding a trendline break, they will fight the overnight buyers covering their short positions at gains as overnight net overnight inventory is 100% short. Remember that job one in trading is to get inside the collective head of everyone else.

So the open today will be about the opposing forces of the overnight inventory correction versus opening below trend in the NASDAQ 100. Pay very close attention to early activity even if you are not actively trading it.

For the early fade, the usual techniques are valid. Either buy the first one-minute high or buy any cross back up through the open should the opening drive be lower. Target overnight halfback but also keep gap rule #2 in mind as you do so.

The gap-and-go trade playing for the potential trending day is always the most difficult to pull off because there is oftentimes not a good reference for a stop loss – especially with the Weekly Expected Move lows ready to catch the falling prices. Assume that any early fade that is weak can be a short on the cross back down through the opening print.

AF Thornton

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