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Pre-Market Outlook – 5/14/2021

AF Thornton 0 Comment

Just One More Thin Mint...

One of the funniest movies I ever saw was “Monty Python’s Meaning of Life.” Admittedly, I was punch drunk after staying up four days taking law school finals.

There is a scene where an obese man is stuffing his face, and at the end of gorging his meal, he asks for “one more thin mint.” After swallowing it, the man blows up from so much food. It reminded me of how I feel about the market this morning. It may want “one more thin mint” before it finally blows its top.

Yesterday went precisely according to plan. It was an inside, short-covering day. The short-covering was something to behold, as it usually is. But it was almost too good. And I am reminded that an inside day is typically a continuation – not a topping – pattern.

Yesterday, every index either bounced from its 50-day line or trendline – just as the indexes should in a bull market. Not a single one of our quartet, the S&P 500, NASDAQ 100, Dow, or Russell 2000, broke the uptrend. Nor has the overnight crowd been able to drive the indexes further south in the last 24-hours. Each one of these indexes has moved across its channel, allowing for a final, higher wave – perhaps that 5th and final Elliott Wave – to take us up to complete the intermediate top.

And even the declines into Wednesday’s lows were symmetrical, three-wave or what we call “two-step” patterns. Three-wave patterns are corrective of the prior trend, not impulsive as would reflect a trend reversal. There are what we call “head and shoulders” patterns to reverse higher in both the NASDAQ 100 and S&P 500 futures this morning. I even see “V” reversals on the 195-minute charts.

Another item of significance is our old friend 4115 on the S&P 500 Futures. The level provided support for a month before we finally broke through it mid-week. It was our “balance area low,” as we referenced it the past few weeks. This prior support should now be resistance.

The 21-day line sits just above 4115 at 4130. The futures are invading that space this morning. A close above 4130 on the S&P 500 today would be significant.

A close above 4177 would save the proverbial butts of the Weekly Options Market Makers. The Weekly Expected Move low sits right at that level for expiration today. Granted, part of the breakdown Wednesday was caused by these players neutralizing their deltas by selling futures, but there might be a few of them left to help drive the market to that level.

The final underpinnings in the bullish possibility this morning are the spike in the VIX (volatility index), Put/Call Ratio, and volume on Wednesday’s lows. For the most part, these spikes are as high as we experienced around the election last year when we were bottoming the second wave of this China Virus rally after a few months of sideways action. Short-term spikes in volume and fear are associated with a low that will hold, rather than a market about to break lower. 

That does not mean that the low will hold down the road. But it makes a rally more likely than a decline, at least in the short term.

If all of the above leads to a pivot higher here, we can anticipate another algo buy signal today, or more likely on Monday. And we would have to attribute the adverse action this week to a news-related distortion caused by the oil pipeline shutdown and ransom scheme.

You already know the bear case if you have been following these pages. We hit the proverbial brick wall at the current level, then reverse lower, confirming the intermediate, nominal 18-month peak.

Let me also mention another distinct possibility here. We always tend to think of rallies and declines, leaving out the distinct possibility of the market getting stuck in a trading range. If so, we would have the bottom in place now, and we would stall at the old highs and reverse lower again. We could play that ping pong game for a few months, perhaps with a final break as the nominal 18-month trough arrives about six weeks from now. Keep that possibility in your back pocket.

All of this underscores the importance of keeping an open mind to all possibilities, no matter our opinions. In one sense, I would feel better about this latest scenario, having lost some money executing on a buy signal precisely a week ago today. The signal rolled over on the news events and stopped us out Monday morning. Of course, that is why we use stops, as nothing is perfect in life or trading.

Today’s Plan

This morning we have overnight activity that has moved above the highs a bit on inventory that is 100% net long.

As we have a slight true gap higher at this point, the early session may be a tug of war between the inventory that needs to correct and the shock and awe that we are trading above the May 12th high. The morning activity will tell us a lot about the market.

Overnight activity has broken the downtrend of the last four sessions in the S&P Futures. Note that this trendline is very steep. Even with today’s gap, prices are still below the 21-day line.

Also, note the potential “V” reversal in play, and we will see if it takes hold. The measured move is the S&P 500 all-time high. Key resistance levels above are 4115 (prior support), 4130 (21-day line), and 4177 (the Weekly Expected Move low).

Sorry for the delay this morning. I am in the midst of an emergency. Check back later as I will be adding some charts to this discussion.

Navigator™ Signals for Day Traders

Pre-Market Outlook – 5/13/2021

AF Thornton 0 Comment

This morning, I woke up from a dream that Jimmy Carter was still President. Maybe I was subconsciously triggered by yesterday’s gas lines and the rising inflation. Does anyone remember “wrap-around” mortgages? How about Ted Kopple and day “_____” of the Iran Hostage Crisis? And then there was the beginning of the end on Sunday, August 15, 1971. President Nixon announced that the United States was abandoning the Gold Standard on that hot, Sunday, summer evening:

“The third indispensable element in building the new prosperity is closely related to creating new jobs and halting inflation. We must protect the position of the American dollar as a pillar of monetary stability around the world.

In the past seven years, there has been an average of one international monetary crisis every year …

I have directed Secretary Connally to suspend temporarily the convertibility of the dollar into gold or other reserve assets, except in amounts and conditions determined to be in the interest of monetary stability and in the best interests of the United States.

Now, what is this action—which is very technical—what does it mean for you?

Let me lay to rest the bugaboo of what is called devaluation.

If you want to buy a foreign car or take a trip abroad, market conditions may cause your dollar to buy slightly less. But if you are among the overwhelming majority of Americans who buy American-made products in America, your dollar will be worth just as much tomorrow as it is today.

The effect of this action, in other words, will be to stabilize the dollar.”

Well, it eventually took a Fed Funds rate of 18% to stabilize that dollar, tricky Dick! And Jimmy Carter, though I disagreed with his politics, never stood a chance. He is a very decent man. But Nixon, having laid the groundwork, dealt President Carter a lousy hand. And to think, the world was panicking over the Vietnam War deficit spending. Weimar Germany, the Great Depression, and the world war that followed were still very real experiences to that generation. What would that crowd think of our debt now? Perhaps death is kinder than we know, laying that generation to rest before these times. One thing is for sure, as far as we know, there has never been a complaint from the grave.

Sometimes, it is simply the luck of the draw as to the timing of a presidency. Land on the wrong cycle, and your fate is cast. But when all of this is said and done, August 15, 1971, will mark the beginning of this country’s end – at least as we knew it. With the current debt, deficits, and unfunded liabilities, it is difficult to believe that the United States will avoid the downfall of every other fiat currency in history. Perhaps we will all be studying Mandarin soon.

Today’s Plan

We have overnight inventory balanced in the S&P 500 futures. We will be opening towards the top of the overnight range, with prices having explored slightly lower levels from yesterday’s close. Treasuries were flat overnight and have yet to respond with a routine, correction-based flight to quality. Treasuries seem to be pacing the S&P 500 index, a somewhat unusual correlation.

With opening inventory balanced and prices opening inside of yesterday’s range, there is little to guide us at the open. On the daily chart, prices are close to 3 ATRs from the mean and sitting just a hair below the 50-day line. Price also sits on the intermediate trendline and on top of a gap from April 5th. All of this (plus short covering) should lead to a meaningful bounce here. If so, any recovery should lull less experienced investors into complacency. You know, “don’t worry, everything is fine, dear.” If we don’t bounce this morning, carry that forward as another chink in the armor.

In a failure to bounce, we enter the April 5th gap and volume air pocket down to 4014. Given the S&P 500’s affinity for hopping in 50-point increments, it is a short step to 4000. The market could bounce there. If not, additional support lies in the 3925 to 3975 range – with 3950 (the next 50-point increment) as a good target. The 21-week line, also critical support, sits at 3940.

I am a bit torn in my outlook this morning. The put/call ratio spiked yesterday to a level not seen since the November election. The ratio suggests a lot of accumulated shorts, and they are a fickle crowd. It does not take much of a rally for them to panic buy and cover their positions. 

On the other hand, the retail crowd may just be waking up to the fact that a precipitous correction is underway. The late arrivals could aggressively sell any rally attempt today – taking us back down the aforementioned ladder. 

The likely compromise between the two opposing forces, especially coming off three days of expanded range, would be a balancing/trading range day inside yesterday’s regular session range. Responsive trade later today from the established range would be the likely, best trades.

The new overnight swing low is bearish, at least partially testing the unfilled early April gap. But regular session activity is the only activity that really counts in a gap fill.

Note that the market has started to pay attention to rates again as the recent tech weakness recoiled from higher rates and infected the indexes. Keep a chart of the TNX handy.

As long as prices hold within yesterday’s range, I am a responsive range trader today. Should prices get out of range to the downside, I will target the overnight low first and then look to the full gap fill outlined above.

Good luck today.

A.F. Thornton

Navigator™ Signals for Swing Traders

View from the Top – Interim Alert

AF Thornton 0 Comment

Welcome to our Nightmare

It might be hard to believe this evening, but 40% of the stocks in the S&P 500 hit new all-time highs on Monday, and that may actually be a record (and a buying climax). In March 2020, I projected an “ideal” date for the peak of the 18-month cycle to be May 8, 2021 (this past Saturday). It was not hard to predict, as I used the average length of nominal 18-month cycle peaks going back a few years. But even as of Monday, I doubted my own work, and then we were stopped out of our remaining positions in the Founders Group on a violation of the 5-day line. 

There were still many constructive charts on Monday. This market has been nothing, if not relentless. But the news of the cyberattack on one of the largest oil pipelines in the country was too much to bear. As we have seen in the last 48-hours, the ripple effect through the economy poured more gasoline on the inflation fire – no pun intended. We now see gas price shock, lines at the gas station, and more transportation bottlenecks. So the catalyst arrived, and down we go.

I was watching two key stocks this morning for clues about the future. One was Visa, and the other was the XHB (Homebuilder’s ETF). That covers consumer credit trends and the largest purchase consumers make (that has been inflated to the moon over the last 12-months). As you will see below, both are telegraphing unpleasant circumstances.

Even this morning, the market fought hard to hold support for the first few hours. But if you followed the playbook in the Pre-Market Outlook, it was a rewarding day. And there is little doubt that the 18-month peak has arrived, with the only remaining question being how far down we will go before the decline is finished. 

As mentioned over the past few days, the 200-day moving average is a typical target for the 18-month cycle trough, usually followed by a retest. The correction then ends with a somewhat scary capitulation – a dastardly down day that may trigger exchange circuit breakers on heavy volume. Only time will tell. Of course, there may be nothing normal or typical in the current circumstances.

Perhaps the most disturbing aspect of this initial stage of the downdraft is that there was nowhere to hide (except cold hard cash and a slight blip higher in the Energy ETF). U.S. Treasuries – normally THE haven during a stock market decline – were off significantly today. The inverse of the U.S. Treasury sell-off is that interest rates actually rose on the day – a most unusual circumstance in such a steep stock market decline. The U.S. Dollar rallied – perhaps driven by the attractiveness to foreigners of higher U.S. interest rates and a flight to safety.

The inverse stock/bond behavior is a shout-out to our old friend, WWSHD (When What Should Happen Doesn’t). If stocks decline, interest rates should fall, making the U.S. Dollar less attractive. The counter-scenario at hand might portend a deeper (as opposed to shallower) trough ahead of us.

For now, the put/call ratio and volatility index both closed a bit overdone on the fear side. We should get a short-covering bounce in the morning off the 50-day line on the S&P 500, also the former channel top line. It is hard to believe that we already got to the 50-day line today. As you know, that was my ultimate target if we broke support this morning, but I thought it would take a few sessions to get there.

Typically – or perhaps better stated – ideally, the market would rally a bit here and give us the penultimate shorting opportunity on a long, third wave down in Elliott Wave terminology. We shall see.

In the meantime, there are more stocks to short in this decline than I have money to short them. We will start with the pumped-up popular stocks with no earnings. We can work it from there.

By the way, at one point tonight, Bitcoin was off nearly $10,000. Apparently, Elon Musk decided that Bitcoin was bad and no longer acceptable to Tesla because it had too large of a carbon footprint. Of course, this was after Tesla recently sold their Bitcoin for a $1 billion profit. How about a “green” donation, Elon? Apparently, Bitcoin tripped hard on the news.

One more quick point, if you would kindly indulge another small rant. The Fed released a paper last week discussing the dangers of the asset bubble underway. In a series of Fed governor speeches over the past week, the Fed has been jawboning the market down. 

Any notion that the Fed will save this market, then, is sadly misplaced. They want it to fall. If it falls, the ensuing calamity will likely temper inflation, and the Fed won’t necessarily need to raise rates and bankrupt the U.S. Treasury.

Wall Street having already been alerted, the Fed can now lay the problem off on the 8 million new retail traders in the market since last year. Wall Street will cheerfully introduce the newbies to the concept of “south” now that they only understand “north.” If that is not enough, the Fed can consign losses to all the “buy and hold” 401(k) plans out there.  You know, “invest for the long-term.” Perhaps stated another way “stay in until we get out.” 

A good stock market walloping also should scare the little people into spending less and maybe getting a job for the meager serf wages offered. Maybe the wages can even fall further, with the ongoing, massive, illegal immigration. They need jobs too! 

By the way, how many baby boomers are about to retire? The number is historic, you say? What is it the young people text to each other these days, “Laugh out Loud?” Do you see how this works?

Ahh, the World Economic Forum’s Great Reset – “You will own nothing, but you will be happy.”

For now, it’s Davos or bust. These are, indeed, extraordinary times.

A.F. Thornton

Navigator™ Signals for Day Traders

Pre-Market Outlook – Update (Charts Added) 5/12/2021

AF Thornton 0 Comment

11:35 am EST - S&P Futures 4082

It has been quite the battle this morning, and bears have managed to tip prices below yesterday’s low and the overnight spike low from the CPI report. The tempo is unusually labored thus far. 

Also, the S&P 500 and NASDAQ 100 are breaking their trendlines at current prices. The S&P 500 is trading below the balance area low we identified yesterday at 4115. Notably, the day is not over, and things can look completely different by the close.

At current levels (and we don’t know if participants will accept prices here quite yet), the Dow (which had kept the stock markets propped up until the last minute) is now trading below its 21-day line. That means all four major indices are now operating in unison (S&P 500, Nasdaq 100, Dow Industrials, and the Russell 2000), below this key reference line. 

Also, this morning, one of Sentiment Trader’s risk-off models has flipped to defense. Again, all of this is preliminary but helps build the case for the intermediate, 18-month cycle peak we have been expecting.

There is a lot of chatter about ending unemployment benefits early so that workers are motivated to accept an apparent plethora of available jobs (at meager wages). Chatter about the Fed being way off the mark on inflation containment causes market participants to anticipate a change in Fed policy, no matter what the current policy statements may be.

Think of current Fed policy as the punch bowl at the party. Everything changes if they take the punch bowl away. Having said that, the longer they wait, the worse it will be for the markets when the bubble bursts. 

Of course, this assumes that the Fed does not want inflation. That is a huge assumption for a Federal Reserve that has cozied up to the U.S. Treasury – which now has a massive debt (and wants to add $4 trillion more). Believe this – either that debt has to be monetized (inflated away), or the U.S. will risk a default, either outright or by robbing entitlements such as Social Security or Medicare.

As I indicated yesterday, I have been experiencing that vertigo feeling lately – an uncomfortable feeling that we are not on solid ground and our country has lost its footing. I still feel like I am working on the top floor of a tall building. Everything looks fine working on my floor, until I look out the window and it is a long way down.

A.F. Thornton

Navigator™ Signals for Day Traders

Pre-Market Outlook – 5/12/2021

AF Thornton 0 Comment

Wednesday Morning - 5/12/2021

The headline Consumer Price Index inflation number was released this morning, showing an annualized inflation rate of 7.2%. Surprise, surprise? Apparently so, as the consensus expectation was more along the lines of 2.4%. What planet are these economists living on?

Up until that moment. I would have written that overnight futures traders in Asia and Europe could not push the S&P 500 index to new lows, a bullish sign in the short term. Even after the Government released the headline number, the S&P 500 plunged 50 points, recovered, but is now heading back down again. In fact, overnight traders tested both ends of yesterday’s range but could not find acceptance above or below. Again, I carry that forward as potentially bullish in the very short term.

That sets us to open inside yesterday’s range, with overnight inventory net short. So we may see a counter auction higher at the open, though there is little else to guide us and the pre-market volatility may negate the counter auction theory. The Nasdaq100 and S&P 500 are now trading below their 21-day EMAs, which tips my macro bias negative.

We will be gapping back down into yesterday’s large range. While yesterday’s rally and relatively strong close seemed bullish, prices did not fill yesterday’s large gap. Prices filled it only fractionally. This still left a very large void above yesterday’s high. 

Value (where 70% of the volume traded) broke decisively lower from Monday. Last night’s overnight activity stopped right at the Value Area High, indicating that sellers are still in control. As set forth above, the CPI data release did take prices below yesterday’s low briefly. Undoubtedly, traders ran the stops under that low, but I still carry that forward as price exploration.

As the overnight high around 4150 stalled at the Value Area High, I will trade from the framework that sellers are dominant, and we should sell rallies unless we find acceptance above that level. Carry forward yesterday’s regular session low at 4103.75, as it was at a very technical level that is visual and mechanical for all traders. That could make this low weak should it be revisited.

Bottom line, bearish below 4150 today. But also carry forward that the overnight low at 4095.50 breached the regular session low at 4103.75 (also the prior support level from April). For now, those lower prices were rejected. Always remember, however, that overnight trade has less importance than regular session trade. Retesting the overnight low would be a bearish signal this morning and potentially put the daily 50-day line into play on the S&P 500 in the 4040 area.

A.F. Thornton

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

Epilogue – 5/11/2021

AF Thornton 0 Comment

The markets left us hanging at the close, as they often do. And that leaves me sitting on my hands for now.

The S&P 500 index gave us a nice fade trade off the open, buying the high of the break of the first one-minute bar. But the trade ended at the opening price. As is typical on large gaps, the market went sideways for most of the day in about a 50-point range (Gap Rule #4). Try as it might, the index never got back through and above the opening price, an overall sign of weakness. Also contributing to weakness, the index closed below its 21-day line. But the index spun a bit of a tail, held the 4015 support discussed here, and held the trendline connecting the March 3rd and March 25th lows.

The price behavior, then, is a bit ambiguous. It would seem that we still have a sideways, balanced pattern, with repeated “look above” and “look below” attempts that fail. It isn’t easy to discern if the last high was the 5th and final wave of the runup since March 3rd, or simply part of this move across the channel and into the trendline – perhaps still a 4th wave consolidation with a 5th and final wave rally ready to get underway.

And that brings me to the NASDAQ 100, which was stronger today, filled its gap, and closed at the top of its daily candle. The NASDAQ 100 behavior and position lead me to believe that the S&P 500 index is, indeed, topping. The NASDAQ 100 remained under its 50-day line, and the price could not get back up into yesterday’s range at all. Despite its relative outperformance of the S&P 500, the weak price action that preceded the NASDAQ landing today somewhat negates any positives. But the NASDAQ 100 held its trendline (though a sloppy looking structure) and still has a pattern of (slightly) higher highs and lows.

The Russell 2000 small-cap index held its support lows but has broken its 21-day line and a rising trendline. The Dow remains the stronger-looking index, at least on the chart, and has yet to violate anything significant.

I am unmotivated to take any new positions until the picture is a bit clearer. Still, my bias remains that the market has topped and will spend some time sorting through valuations, interest rates, and inflation expectations. Like the pipeline cyberattack, any more black swan events, and you may need to lock me up. Lately, I feel like I am walking around in a moving elevator. I prefer more solid ground.

A.F. Thornton

Navigator™ Signals for Day Traders

Pre-Market Outlook – Update 5/11/2021

AF Thornton 0 Comment

Tuesday - 2:00 pm EST - S&P Futures at 4150

The NASDAQ 100 has managed to fill its gap at this writing, which is encouraging. But the index saw considerably more damage than the S&P 500 and currently rests on the top of today’s daily candle at its 50-day line. The S&P 500 has been weaker so far, has not filled its gap, and sits just below its 21-day line. 

On a positive note, the S&P 500 is holding this morning’s low and the swing lows from April that congregate around 4115 (on the cash index) and form the bottom of our widened balance area. We would expect buyers at 4115 – but will it be enough to keep the current trend intact? If we can keep the candle spike into this morning’s low, we can also hold the trendline connecting the March 4th and 25th lows. 

Another positive force is the Weekly Expected Move low around 4178. While it has been materially breached this morning, market makers have an incentive to push prices back to or above that level before Friday’s weekly options expiration.

The 4150 level, then, is the moment of truth. If the market continues lower this afternoon and closes below 4115, then we have confirmation of the 18-month cycle peak, a trendline break, and we break the recent pattern of higher highs and lows. We would then definitively shift gears to shorting rallies.

There is another possibility. The market could hold here and try to resume the rally. That would put yesterday and this morning’s sell-off as news-driven but severe liquidation breaks centered around the oil pipeline cyber attack. The considerable damage in the NASDAQ 100 (trading below its 50-day SMA) would suggest that the intermediate cycle peak we have been expecting is at hand. Either way, we should know more by the close.

Before the deterioration yesterday, many positive charts reflected companies benefitting from the normalization of travel and leisure and infrastructure spending. The prices were moving out of basing patterns, so the sudden decline undoubtedly changed the tone. It only takes a match to light the fire, forcing market participants to take a sobering look at the totality of our current economic and inflation circumstances.

I will update you after the close.

A.F. Thornton

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