June 2021 | Archimedes Methodologies

Pre-Market Update 3 – 6/10/2021

Jun 10, 2021 AF Thornton 0 Comment

Leadership surrendered to health care and consumer staples – defensive. Look above and fail per balance rules in S&P 500. Likely to take NASDAQ 100 with it. Uptrend line testing. Careful here. Moment of truth.

Founder's Trading Journal

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Critical test, prices coming back into balance range as breakout initially rejected. They should not come much deeper or we could see a reversal – hence the bull trap. Moment of truth.

Apple – a bellweather – not holding VWAP.

Founder's Trading Journal

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Solid breakout on the S&P 500 with strong internals.

The initial move includes some short-covering, we will see if price is accepted in this area.

The NASDAQ 100 has broken out above its near-term high, but remains below the all-time high. If price is accepted here, the head and shoulders pattern to reverse higher is solidified.

I am continuing to lighten on my personal positions in the rally. I want the weekend to make any further decisions.

Energy and tech are leading. That is unusual as of late. Financials are laggards thus far.

Stay tuned.

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When one is half Irish as I am, I find myself always on the lookout for Leprechauns. And just because I am paranoid does not mean that they won’t steal my gold. Leprechauns come in many forms.

At least one of them has been around trying to prevent me from launching our Founder’s Group live trading room. The trades I provide to this special group of exceptionally qualified traders are something we have been looking forward to sharing in real-time. Three solid years of work and trading went into creating our discipline, strategies, and algorithms. We continuously improve them.

We were ready to go; then tragedy struck with my father-in-law rapidly deteriorating and passing after his second China Virus shot. As a result, I will be in Greece until early July – and then back again soon after. On this beautiful (but remote) Island, Gig-speed Internet is a fond memory from the States. They will be going straight to 5g, but it still is a few months out.

I cannot broadcast with something akin to dial-up – which is the out-of-the-box service here. Even my Sprint cell phone Internet is faster than the home WiFi service here.

Truly, I am amazed at how well what I do have works. I certainly would not trade a one-minute chart, but 5-minute charts seem to do fine. For now, I will begin the new service by substituting with three daily updates – plus an end-of-day wrap. However, I need to make one more adjustment for the service to have a chance at working.

If we were live in a trading room, I would constantly be sharing my thoughts. If we did a buy or sell, the “why” would be obvious. In the current circumstances, not so much.

Yesterday, by the time the Founder’s Group had sold its NASDAQ 100 position, it took me another 15-20 minutes to write up the “why” and send it out with charts. By that time, the price had moved another 30 points against the trade. What is the point of that?

And this is not the first time that has happened. That is one reason I have not published the investment performance recently. It can render false hope if traders cannot truly achieve it.

So from here on out, I will merely publish “buy” or “sell” and the relevant instrument. I will not explain until later in the day. Most likely, you will glean where I am going by reading the updates.

You have been around long enough to know that my decisions are correct at least 80% of the time and the results have been excellent. Stops, as long as you set and monitor them, take care of the rest.

Had you been able to execute close to the signals, you would be up nearly 400% year-to-date – starting with our humble $10,000 account at the beginning of the year. $10,000 is now $40,000. Last year’s returns were close to 900%. $10,000 became $90,000.

I am also working on a text alert system if I cannot figure out a way to run Pro-Trading Room from the Island. I will likely be spending most of my time here in Kefalonia over the next year, so I will find a solution. Many, many opportunities are opening up here as I am able to span so many time zones.

Also, I will be issuing passwords to the new service, as we do not want the information to be available to the public. I will send you your unique password as soon as it becomes available.

So the market continues to favor the bulls. Still, I published my very short-term concerns yesterday regarding the unusual complacency levels here as we continue to congregate around the all-time highs.

I view this lack of fear and respect for risk in the context of the 18-month cycle as being quite mature. The treasury/stock market ratio also has a negative divergence, as do the number of stocks over their 20 and 50-day moving averages. Leadership yesterday shifted to defensive names.

Consider that the rally in treasuries might actually relate to defensive posturing rather than any vote on higher or lower interest rates.

For all of these reasons, the Founder’s Group went back to cash yesterday. We will give up some gains if a positive break-out occurs this morning, but we will gladly make the sacrifice in light of reasonable indications that the breakout could be a bull trap and fail.

The inflation numbers came out slightly higher than expected, and it is a historically high number for recent times regardless. So far, the S&P 500 has rocked in about a 20-point range, taking out yesterday’s low, the overnight low, and the overnight high (all within minutes after the release).

Since we have moved below yesterday’s range, traders may want to retest that level in the regular session today. As far as balance goes, nothing has been resolved and it would be difficult to know what additional catalyst the market requires to make its ultimate, directional move. We will, therefore, learn a lot in today’s time frame.

Today’s Strategy

Today is the reverse of yesterday. Look for a possible test of the overnight low, and treat it is a go/no go situation. I would treat the top of the range similarly – if we get there. Any acceptance below the overnight low would be negative and my line in the sand for the day. If the overnight low holds, the scenario remains tipped to the bulls.

Good luck today.

A.F. Thornton

Founder's Trading Journal

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The Founder’s Group just closed its position in the NASDAQ 100 at 13870.50. My concern is the extreme complacency developed in the past 24 hours – most notably reflected in the put/call ratio. It is at the lowest end of its year-long Pandemic range.

Typically, the indicator is not as good at picking tops as picking troughs. Still, the current level is exceptionally low today, indicating a disturbing sense of security in all that we see. Every time the ratio hit these levels in the past year, the market topped – at least short term. If a double top does develop, it will seem obvious (in 20/20 hindsight).

Also, we got out as the afternoon drive rolled over at a lower peak than this morning. Sell in the morning / buy in the afternoon is fine. Sell in the morning, sell in the afternoon is not so fine.

Tomorrow, we get the inflation numbers. While there is likely to be no surprise, it may nevertheless be a catalyst for what happens next. I am acting out of a superabundance of caution in making this decision this afternoon. The risk here warrants a more vigilant, protective strategy. Also worth noting is the VIX volatility (fear) index hit its lowest level in a year yesterday at 15.15. While the crowd is not giddy, they may well be asleep at the wheel. With the SKEW at record levels as well, tail risk is as high as its been recently.

This decision does not negate any of my previous comments. Likely, the market will break out here. But we had a nice profit in our NASDAQ 100 position, and I can always re-enter.

Sometimes, the return of our capital can be just as significant as the return on our money. Tomorrow may be one of those moments. Again, the odds still favor the break higher. Nevertheless, I am always willing to look dumb as long as I lock in a profit.

Another possibility is that the inflation reports drive a rally that the professionals use to liquidate their positions. Keep that in mind as well – kind of the bull trap I have been mentioning.

Tomorrow promises to be exciting – assuming we are on the right side of it.

A.F. Thornton

Founder's Trading Journal

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Navigator™ Signals for Day Traders

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Persistence Beats Resistance?

Sometimes I think even Barnum and Baily would be jealous of the circus that goes on inside my head. We have a full moon on Thursday. Does it affect the market? Most of the time – yes. Hospital emergency rooms fill up too.

Then we roll from June into the September futures contracts on the same day. The September S&P 500 futures contract currently trades about 10 points below May. Go figure. Coincidence? Maybe. Regardless, these extraneous factors can be tricky.

The S&P 500 has been beating on the overhead resistance around 4233 or so. The all-time (intraday) high is 4238.25. There is an old saying – persistence beats resistance. There is a 75% chance the S&P 500 will break out, but the other 25% can kill you. As I said last week, it is like Grandma slapping my hand in the cookie jar every time the S&P 500 tries to soar. Yesterday was no exception, but Grandpa cannot seem to pound the market down either.

The overnight traders (remember it is daytime where they are) often love to break the market out in Globex and take away the candy from the Americans in the regular session. Thus far, they have not managed to do so, so the S&P 500 is inside yesterday’s range. I do like the sell in the morning and buy in the afternoon action the past few days. That is more bullish than bearish. Also, the value area (where 70% of the volume occurred) is unchanged for three days in a row. That is undoubtedly not bearish.

So, where does that leave our plan for the day? Ditto yesterday. We are trading inside of yesterday’s range which still reflects a balancing market. If we do break out, it is a go/no go situation. Watch internals for support or not.

We either need the majority in on the game or the FAANGMAN+T group to carry the water for everyone else. Today, like yesterday, is a bit like a look above under balance rules. Monitor for acceptance and continuation or not, as the case may be. Yesterday’s mid-day lows (4424 on the S&P 500 futures and 13829.25 on the NASDAQ 100) are my line in the sand today. My bias is positive above those levels.

Good luck today!

A.F. Thornton

Navigator™ Signals for Day Traders

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They are not making it easy today, and it reminds me a bit of yesterday. Yesterday, the market was weak all morning but left us with a happy finish. Selling in the morning and buying into the close is bullish. Interestingly, the S&P 500 and NASDAQ 100 are swapping leadership back and forth this morning. It is a bit like the wife directing me to place the furniture.

We had a two-step liquidation break off the open. The pop-down helped clear out the weak hands (it almost got mine). The market went right back into that dastardly balance range. Not again???

While the price flirted below 4022 (on the S&P 500), “value” (70% of the volume location) is unchanged from yesterday. The situation, then, remains positive and still calls for a hat tip favoring the bulls, though ever so slightly.

Don’t get me wrong; the failed breakout thus far is a disappointment. But today is far from over. I will use the 11:30 am EST lows as my line in the sand for the rest of the day.

I do not see anything newsworthy to mention. The IWM (Russell 2000) has hit its WEM high, so I am done there for the week. Both the NASDAQ 100 and S&P 500 have room to run, but it is a hard-fought battle. That is not a surprise at these levels.

Could we possibly be forming a double top on the S&P 500 with the NASDAQ 100 coming in a bit lower? Sure, but I would not call it yet. I am bothered by the shallow levels we see on the put/call ratio. The surging put/call ratio and negative sentiment gave me the confidence to go in and stay put a few weeks ago. I wouldn’t say I like it when the crowd is complacent. It always makes me want to go the other way.

Perhaps offsetting the complacency, 10-year rates continue to behave, down slightly to the 1.5% level today. As well, sometimes they launch the trading algorithms mid-day, and the gamma squeeze will help the market wind steadily higher. Let’s see.

If we maintain the lows, my bias remains long, and I will make final decisions in the last 30-minutes of trading. As usual, I will post any changes.

I think traders are selling all morning in Chicago and New York, and then the hedge funds are jumping in over lunch. Isn’t this fun? I think I might have suggested you to take the summer off. You know what they say, “sell in May and go away.”

It is 7:30 pm here in Kefalonia, Greece as I write this, with a beautiful sunset over the Ionian Sea. While I am not here on the best of occasions, it would be nice to open a bottle of wine on the beach. But the U.S. stock market is open until 11:00 pm!

As always, stay tuned.

A.F. Thornton

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

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Breakout, Double-Top, or More Chop?

The market gods were smiling with forgiveness yesterday. When I confessed my sins on these pages, providence lifted my burdens. So even though I missed the initial moves off the 21-day lines in the indexes last week, the powers above brought the market halfway down Friday’s bar to give me another chance. It was as if a kind hand dropped from the clouds, opening up with the next opportunity.

For the Founder’s Group and the Navigator Swing Strategy, I put us into the NASDAQ 100 at 13,733. I saw a bit more conviction and relative strength there than the S&P 500. The index followed through with a double bottom and positive momentum divergence on the intraday chart. The NASDAQ 100 is moving higher in Globex at this writing. In fact, we are more than 100 points or about $2,000 per contract ahead of our entry, and breaking the neckline of a bottoming head and shoulders pattern that is now reversing higher and should take us up to test the all-time highs, if not higher. We will now use the 5-day stop line as we recently did on our S&P 500 position.

Yet, there is another lesson in these past few sessions that I would like to share. It happens often enough that you might want to place this one in your notebook. It can happen in any time frame. And while I mentioned I am not a pattern trader, I still don’t ignore them. Patterns can help us see the markets in different ways, and even set price projections when the patterns take. A great website for learning patterns and their possibilities is Bulkowski’s PatternTrader.com.

The lesson starts with last Thursday’s labeling of the NASDAQ 100. I had identified a potential head and shoulders topping pattern and labeled it as you will see in the first chart below. Of course, it was a qualified opinion. I often opine in such a way. But let’s face it, I am of no use if I am constantly saying “it might be this” or “it might be that.” And in further confession to the heavenly powers that govern these markets, the pattern did have a negative influence on my decisions last week no matter what I said or how much I was fooling myself.

When we are stopped out on the 5-day line, an Algo sell signal is painting, Tesla and Apple are breaking down, and we are in a large down bar, a topping pattern would merely seem like icing on the cake. I take my stop, head to the beach, and take Friday off, booking the profits and ever confident in my forecast. Thank heavens I didn’t stick around and short the market!

But it is never quite so easy, is it? I have achieved my trading success by combing unrelenting curiosity with constantly questioning the current consensus. Frequently, a topping head and shoulders pattern (or a bottoming head and shoulders pattern) can morph into the same design but smaller and in the opposite direction. This morphing has often happened to me – and it should be in your notebook. I now always consider the possibility.

So there you have it, the reversal’s reversal. Perhaps we will coin that phrase. And with the overnight action breaking out decisively, the NASDAQ 100 seems well on its way to challenging its old high. The pattern projects a move to 14,600, but even if we make it up to the old high at 14,064, the Weekly Expected Move high is at 14,038. That is a rough combo to take out before Friday. Perhaps we could do so next week. Also, remember that even as we break the neckline of the bottoming head and shoulders reversal pattern today, the index could fall back and retest the neckline before it decisively moves higher.

I suppose another item bears mentioning. Last week, the cyclically sensitive sectors such as energy, metals, financials, and industrials seemed to be rocking the universe. Yet this latest move has been all about the interest-sensitive growth stocks, responding to a somewhat unexpected rally in the bond market accompanied by falling 10-year rates. Who would have thought – only a few weeks ago?

Please make no mistake; interest rates will rule sector allocation as we advance and rates will most likely be moving higher. We should let growth do its thing here, but after the cyclical stocks and sectors rest a bit, they are still very much on my radar. Recall my comments from last week, set alerts for these cyclical sectors and stocks around their 21 and 50-day lines, depending on each instruments’ unique behavior. Perhaps the back and forth between cyclical and growth stocks will be with us for some time as the markets move forward.

I might highlight one more element of successful trading if you will kindly indulge me. No matter what happens in trading, you must be willing to jump right back on the horse to succeed. And no question committed students can and will succeed if they are engaged. I am not saying it is easy to do so, but I will constantly harp on this point.

I missed Friday’s move, but I waited patiently for the next opportunity. It came sooner rather than later, but that should not matter. Successful traders (and investors) are market sociopaths. They have no conscience but nearly an automated response to conditions as they present, right or wrong positive or negative.

Today's Day-Trading Plan

Hard to believe, but the S&P 500 futures tested 4215 last night once again and survived. I also noticed that some European indexes, including the German Dax Index, are already trading at new post-pandemic highs, aided by a strong Euro. Actually, at an exchange rate of 1.22 Euros to the Dollar, I am keeping my money in Euros while I am over here. It stings!

At this writing, both the NASDAQ 100 and S&P 500 will open above yesterday’s range and near the candle top. A true gap higher is possible, and gap rules would apply if the true gap presents. Inventory is balanced, so there is no typical incentive to fade a gap – making a gap-and-go scenario more likely. If we make it to the old highs (only a hair above us on the S&P 500), the market will present us with a go/no go situation. Monitor carefully for continuation and be on alert for the bull trap. I don’t know how to tell you to avoid it – but if I had two contracts, I would sell one at the old high and get my stop to break even on the other to keep it as a runner for a continuation of the breakout.

On both the S&P 500 and the NASDAQ 100, don’t lose sight of the WEM highs at 4280 and 14,038, respectively. Even with a true gap higher on the open, the gap won’t be large enough to engender shock and awe, providing less potential for early trade given that there is no overnight inventory imbalance. The better trades might develop later rather than earlier in today’s session.

Upside references and targets are visual and mechanical for all. The all-time highs are the apparent targets on strength, monitoring for continuation after that. On weakness, watch the back-to-back settlements around 4226 on the S&P 500 to see if sellers get more active below them. I would not even consider the short side of anything unless we were below those levels. Continue to carry forward the gap below us we discussed yesterday.

A.F. Thornton,

With Sincere Gratitude to Providence

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

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As expected, the market is balancing back into Friday’s range so far this morning. Maybe I have not lost my touch after all. The S&P 500 has twice tested the top of the old range at 4215. It needs to bounce on this second touch for me to stay positive. Tick distribution is favorable so far, and the cumulative tick has been building positive as well. So it is not as if the market is going down; it just isn’t going up.

There is nothing particularly negative at the moment. The (now apparent) news-driven gains from Friday have stalled. Perhaps we are still missing a catalyst after all. I do like the positive momentum divergence on the morning low on the 5-minute RTH chart.

The Founder’s Group has taken a position in the NASDAQ 100 at 13,733. The reversal down pattern now has a turnaround up pattern on the right side, if it takes. We are running a 15 point stop – using a little discretion to give the trade some room.

Growth stocks are strong this morning, as is the IWM (Russell 2000). The S&P 500 Advance/Decline line is about even. It is hard to get the breakout the bulls want without solid internals. Mixed internals rule the day thus far.

I would put odds at 60% that we still break to new highs in the next few days and about 40% that we don’t. Of course, that is more of an educated guess than anything else.

We shall see if the market will take a run at the highs mid-day or perhaps on this afternoon’s post-lunch drive. The put/call ratio is low, indicating complacency here, which is unhelpful.

It was important to determine early on that we would be balancing this morning. That way, you don’t become overly negative about your existing long positions.

As outlined in the morning’s commentary, I think the tone changes if we drop below 4209 and into Friday’s gap area. So carry that forward in your narrative.

Watch for the bull trap as well. The leprechauns may run us up and above the old highs this afternoon, only to take our gold while they run the stops and bring it back into range. Today is a quiet day so far, and that is when the leprechauns come out to play.

Stay tuned.

A.F. Thornton

Archives June 2021

Pre-Market Update 3 – 6/10/2021

Persistence Beats Resistance?

Breakout, Double-Top, or More Chop?

Today's Day-Trading Plan

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