Archives July 2021

I have only made one round trip this morning for about 10-points per contract. The buys are green, the green horizontal bars, and the sells are the red horizontal bars at the trade locations. I am in a second buy off the falling wedge reversal into the double bottom at 4386 at this writing.

We had a surprisingly strong bull microchannel off the open, and I bought the close of the second bull bar. I sold on the climax bar that broke out of the channel. I planned to buy the first retracement, but the bear bar was too big. Where I sold, you could also have shorted. However, I was reticent to short against such a strong bull opening that filled the entire gap down this morning.

From there, we formed a sloppy, choppy falling wedge, typically a reversal pattern to go higher. There were many scalp trades in that region, but I don’t tend to be a scalper.

The area (also identified as one of our key levels today at overnight halfback) provides much indecision because all the 21-period and Algo lines congregate there from the various upper time frames. Traders have been going back and forth, trying to find the path of least resistance.

More importantly, up around 4394 is where the 5-Day Line (our Navigator Stop Line) and the Nav Trigger on the daily chart sit. We want to close above that level today to stay short-term bullish.

By the way, black bars are down bars; grey bars are up bars. Yellow bars are outside bars, and green bars are inside bars.

So I am currently long against the double bottom and wedge reversal. Today likely will end up a trading range so that the morning high might be the target.

One final, important note. The Put/Call ratio is back above .75. The shorts are not getting what they want so far today. Given that the last hour today is the end of the month and week, we usually get a big move anyway. I will be looking for a potential short-squeeze.

A.F. Thornton

Amazon Missed and The Markets Hissed

Yesterday saw a bull trend from the open reverse mid-day at the top of the trading channel. My chart notes appear above. Amazon is getting the blame for missing their numbers and guiding lower for the third quarter. As it is one of the highest market-cap stocks in the indices, it has a big impact on the numbers this morning.

But that doesn’t explain everything. The market reversed midday, not after the bell. After the bell, it just accelerated. Instead, the market struggles to get from the lower back into the upper half of its longer-term channel. Can it? Will it? That is the question for August.

That brings us to our five-day line stop for the S&P 500 futures Navigator Swing position. The Founder’s Group stopped out last night at 4393.75 for a nice profit. Since there is no overnight stop for calls, I am advising you to hold those positions today. Month-end and the first few days of the month typically have a positive bias. As long as the market holds above the daily 21-line, and given that our stops were triggered in the overnight market, it makes sense to give the market a day to digest everything. When dealing with futures and the accompanying leverage, there are no such luxuries. The market hit an all-time high yesterday, so getting too negative too quickly makes no sense.

Today’s Plan

The market will open with a true gap down, so Gap Rules apply this morning. Overnight inventory is 100% net short, and it won’t take much to spook these traders. While the current 29 handles lower is noteworthy against the backdrop of new highs, there is plenty of context around that price that tells us that it could certainly be far worse.

We are currently 15 points from the ONL at 4370.75, and that ONL has four TPO’s across, telling us that sellers had difficulty getting prices lower past that level. Furthermore, we are opening out of balance with yesterday’s RTH range, but certainly still well within where value has developed over the last four sessions.

Note how the ONH topped out very close to settlement, which was also the multi-session high yesterday. Continue to carry this level forward as it is still in play. Overnight halfback is also making an appearance today as it’s always noteworthy on expanded overnight ranges that are gapping strongly.

When considering early trade, note how far from the ONL we have already come. This reduces some of the shock and awe as overnight inventory is somewhat already corrected. This makes sense as the gap is due to a single stock that impacted the NASDAQ 100, thereby also impacting the S&P 500. This is different from a more systemic catalyst which would have driven futures much lower.

Watch the overnight halfback closely at 4388 as an early barometer of strength. An opening drive that can overtake the line and hold it could easily have overnight shorts on the run. Today is the last trading day of the month and weekly options expiration. So month-end money manager shifts could distort normal price action.

A.F. Thornton

No complaints, the market looks fine going into lunch. Internals have remained strong, with 3 to 1 and 2 to 1 advancers over decliners in the NYSE and NASDAQ, respectively. Tick distribution has been mostly positive all morning. The S&P 500 has, indeed, broken to new all-time highs though I would not say it has set the world on fire, and I would like to see the break become more definitive in the afternoon drive.

We started with a bull microchannel on our five-minute day-trading chart, followed by a common two-step correction back to the 21-period line. That now gives us a lower trendline for the remainder of the day. We have a short-term target of 4440, as mentioned in the Pre-Market Outlook. We may not get there today, as the market is already up quite a bit.

Our XLF and XLE swing trades lead the S&P 500 in relative performance as money continues to rotate back to these areas after three months of correction/consolidation. So far, so good, but my guard is always up.

Having passed the Fed meeting and quarterly GDP report, along with stellar earnings from many key stocks, the short-term bias remains bullish other than contending with the seasonal weakness ahead for August and September.

For now, It would take quite a reversal for July to finish as a red candle, so the trend continues as our friend until she dumps us.

A.F. Thornton

Overnight inventory is balanced, and we are currently trading inside yesterday’s range. The daily chart implications are an overall triangle balance area starting with the 7/27 (Tuesday) base between 4416.75 (now the all-time-high) and the low at 4364.75. Then we have yesterday’s (Wednesday) inside Fed range day balanced between 4407.75 and 4377.50. Now we have the overnight range inside both Tuesday and Wednesday’s range and bounded by 4403 and 4480.50.

So what we have is a classic three-day triangle into the GDP and employment reports this morning, which included the widely followed price deflator inflation gauge. That may be why yesterday’s Fed day finished smack in the middle of the range and ended up as a yawner of sorts. With the market still inside this range at this writing, we can take Monday’s approximate 50 point range triangle base and roughly project it from the middle of the triangle.

On a break to the upside, we get to a minimum target of 4440, and perhaps eventually to our 4460 Weekly Expected Move high by tomorrow. On the downside, we visit a target of 4340, right below the Weekly Expected Move low at 4346 and close to the 21-day line and mean trading this morning at 4345.

Triangles generally are continuation patterns, so the upside is more likely than the downside. However, an upside break would also take us to the upper three ATR K-Band on the daily chart, an overbought extreme.

On the other side, visiting the 21-day line would not be out of the ordinary either and would complete a two-step corrective pattern off the last rally on the daily chart. But there are other potentially negative chart implications of visiting the 21-day line today or tomorrow to leave for another (hopefully unnecessary) discussion.

I will mention the potential expanding triangle topping pattern that began to form from a 7/2 daily base candle. I don’t think the pattern is legitimate, with an 18-month cycle trough in the middle of it, but I will mention it as a potential carry forward in your narrative. A negative break in the current three-day triangle would force my stops on the Navigator swing trades, a disappointment, to be sure.

Both the GDP and Initial Jobless Claims numbers missed their estimates this morning. That may be good news on the inflation front but less than good news on the economic front. The GDP number missed significantly, coming in at 6.5% versus an estimate of 8.4%. The jobless claims came in at 400,000 versus consensus estimates of 384,000. Continuing claims also are higher than expected at 3.269 million versus consensus estimates of 3.183 million. The GDP deflator came in higher than expected as well at 6% versus estimates of 5.4%. So inflation remains high, but perhaps slowing growth will tame it as predicted by the recent fall in 10-year treasury yields.

At this writing, none of this has managed to move us out of the overnight range, though we are trading in the upper third of the range and near the top. That still gives us no clues about how to trade the open, so it is better to get some price action under our belts before taking positions.

Keep in mind that the weekly open, defining a red or green candle for the week, is 4400.50. That will make the open an important level today. Also, tomorrow is the last trading day of July. The end of the month always results in some window dressing by money managers and sometimes strange market behavior. But there is a positive bias associated with the last few days of the current month and the first few days of a new month.

The bottom line is that Monday’s low at 4364.75 is THE line in the sand. Taking out the ONH at 4403.25 or the ONL at 4380.25 starts the ball rolling in the commensurate direction, then yesterday’s high or low, followed by Monday’s high or low and so on.

I will be using yesterday’s RTH high at 4707.75 as my threshold to look for long trades. As an abundance of caution, I will watch the middle of the range and yesterday’s settlement at 4391.50 as a threshold for weakness to begin presenting for shorts. Whatever the ensuing direction, monitor for continuation.

Good luck today.

A.F. Thornton

I was a bit disappointed that we finished in the middle of the range today after the Fed announcement. That puts my guard up just a bit, especially with the sloppy, choppy behavior around 4400 the past four sessions. 4400 also is the weekly open and a big round number. Granted, the market parabolically climaxed at the highs on Friday and Monday and needed a rest. But the expanding triangle visible on the daily chart could be a short-term topping pattern.

Also, just because the 18-month cycle may have troughed on July 19th does not mean that the next 18-month cycle will be bullish. If July is a positive month, that will be seven in a row, which has not occurred since 2010. Notably, 2010 followed a significant bear market low from March 2009, just as we have from March 2020. In 2010, the market peaked its parabolic run off the 2009 bear market low in September and then went into a trading range for a few months.

An 18-month down cycle is my least likely scenario, but I take nothing for granted and want to continue to use the 5-day line as our stop. We do head into potential seasonal weakness in August and September. Eviction moratoriums and Extended Unemployment Benefits expire in a month. There are problems and rumblings in China related to government crackdowns on public companies and a potential real estate and banking crisis. There are rumors that China may devalue its currency – which would not be positive for the U.S. and Europe. In fact, the most likely scenario that would resolve all of the market issues is a trading range of 5% to 10%, like we saw in the fall of 2010.

A trading range would allow for seasonal weakness, support the continued sector rotation, and it could keep the bull market trend alive by sustaining the next 18-month cycle, but at a more reasonable slope. If the July 19th low at 4224 is taken out shortly (not something I anticipate), we would conclude that the 18-month cycle low is not yet in place. If it is taken out in a month or so, perhaps the next 18-month cycle would be bearish.

As you will see from the chart below, today, we sold off from above yesterday’s high but bounced from a small double bottom at the EMA. Then, as anticipated, we entered a trading range before the FOMC meeting, which was a triangle. There was a failed bull breakout and then a weak selloff into the 2:00 pm EST FOMC announcement.

We saw a major bull candle on the announcement, so either a trading range or bull trend was likely for the rest of the day. A weak rally ensued, then reversed from a new high for the session, affirming today as a trading range day.

A.F Thornton

The Founders Group added another 10% to our S&P 500 futures position at 4384.50. As always, do your own homework. SPY at the money August or September calls will work as will the shares of the SPY itself.

Our allocation is now 10% XLF calls, 10% XLE calls, and 60% /ES S&P 500 futures.

A.F

As anticipated, the market is balancing in a triangle pattern so far this morning. The pattern is staying above the key moving averages. That is bullish. A reversal higher head and shoulders pattern is apparent on the 15-min cash chart of the SPX or the SPY. A break above the neckline implies a 35 point move higher to 4440.

Alas, however, there is some bear news. On a 2-hour chart with overnight data, and were the reversal higher pattern to fail, you would see a loosely structured head and shoulders topping pattern of which we would be forming a right shoulder. That might imply a second down leg to a lower low around 4350. Perhaps before reaching that level, we would have a successful retest of yesterday’s low to finish the 5-day cycle tough.

Overall, I am short-term bullish, but the sloppy, overlapping nature of the rally from yesterday’s low looks corrective, not impulsive. Clearly, this could be earnings and Fed trepidation reflecting some indecision. But I cannot exclude the additional down leg possibility.

The market would experience quite a battle trying to invade the territory below yesterday’s low and the 7/14 breakout highs. That should have happened yesterday. Only a negative Fed announcement has the power to drive the market lower at this juncture.

Now you know why I don’t day trade Fed days.

A.F. Thornton

The big picture yesterday was the potential topping of the 5-day cycle. The line in the sand was Monday’s RTH low at 4297. The market gapped down at the open below all of the key MAs and this line in the sand. Once these levels were breached, you have to presume a bear trend with the next logical target as the recent gap top, also the breakout from the mid-July peaks around 4370ish.

From experience, I also know that the daily 5-day EMA and Algo trigger lines can act as magnets (and support). Yesterday, the lines sat right below 4370, and our triple POC’s from mid-July around 4367.25. As the first 30 and 60-minute ranges closed, I also had the opening ranges, and I could project a double the range target of 4364.75. The market bottomed at that latter target to the tick.

I added to our Navigator swing position at 4368.50 with a four-point stop. I believed this to be near the low of the day. The market ultimately bottomed 3.75 points lower, almost triggering my stop but ultimately bottoming.

As far as day trading in the circumstances, you had the classic breach and retreat short trade. I also periodically shorted and scalped from the 5-minute 21 EMA or meant (blue line above), which is what you due in a micro bear trend. It is a little rough when you have two consecutive falling wedges. But the failure of the first wedge to turn the market was a great WWSHD moment and led to the best short of the day.

I also picked up a nice long trade on the mid-day reversal into the close. If you were unwilling to short, simply waiting for this turn and long trade would have been enough to make your day. Also, by this time, and having reached the target set in the morning, the put/call ratio moving back to .80 should have been a clue that the shorts would likely cover into the close.

If I get time today, I will send a legend with my notes. I am working on a voice-to-text methodology that would make communicating the details easier.

Today’s Plan

The market seems to be reacting positively to yesterday’s post-closing earnings announcements. Today is Fed announcement day, so I won’t be trading and plan to work on the video I have been trying to finish. Usually, the market goes sideways into the announcement. But with the Delta China Virus strain threatening the economy, I don’t expect any changes from the Fed.

As outlined in the interim update to View From the Top Down this morning, the July 19th low at 4224 is THE key line in the sand at the moment. Carry that forward. Shorter-term, yesterday’s low at 4364.75 should also be carried forward as a reference. We are still trading in the vicinity of the 5-day EMA, which continues to be our stop for the Navigator swing trades, but could still present on your day-trading screens.

Overnight, inventory is net-long with an overnight high of 4404.50. We are trading inside yesterday’s range, so no clues for the open. I would keep an eye on 4404.50, where some reference points congregate from the last few sessions, such as yesterday’s regular session high and the VPOC from Monday. I would also watch yesterday’s value area low at 4376.25.

Good luck today.

A.F. Thornton

It can be difficult to know where you are going if you don’t know where you are. I will be covering this in more detail in the video I hope to finish today. As today is a Fed meeting, I won’t be trading.

I hope you will glean from the monthly chart of the S&P 500 index above that we just bottomed the 18-month cycle on the 19th (last Monday). And because we launched a new, 54-month cycle at the pandemic low in March 2020, the trough is barely noticeable, just like the last two similar spots in 2013 and 2017. The broad market peaked in April and should be bottoming here as long as the low at 4224 on the continuous futures contract, and 4233 on the cash index holds. Since the market has been rotational, we have to move back and forth between the various sectors in and out of favor.

You will also see from the chart above that we are headed for the top channel line of the 2009 bull market. Whether you project the channel line, or the A leg of the ABC pattern leading this market, the projection is roughly 5380. It all depends on how fast we get there, but I expect a less steep slope going forward, with some additional consolidation ranges. A normal slope is an angle of about 15%.

Drilling down to the daily chart above, we can make some short-term projections that should take us to our next target, around 4500. We already achieved our first target at 4404 before yesterday’s dip and retest. I also included a comparison, lower graph showing the percentage of NYSE stocks above their 50-day moving average. It does a better job of capturing the broad market, 18-month cycle trough.

Drilling down one more level to the two-hour chart, we see a bit more detail. Yesterday’s dip came right on schedule for the 5-day cycle. You can see the cycle toping on the lower momentum/strength chart ahead of the dip. The market behaved normally, and volume barely picked up on the dip. Once again, you can see the projected targets from the various recent ranges.

With the Delta China Virus variant rearing its head, it is doubtful that the Fed will raise rates. Most indicators, especially the 10-year treasury rate, are projecting some slower growth ahead, which should satisfy the Fed. Of course, rates could bottom again here, as we see the next rotation from tech and growth back to cyclical and value. A lot depends on this latest China Virus scare.

Again, I will cover this in more detail in the video. But at least this discussion gives you the big picture. The July 19th lows mentioned above are the line in the sand. We have moved the Navigator swing strategy long against this low. We are hoping to pick up a rotation back into financials (XLF) and energy (XLE), but the Delta variant will have a big impact on whether or not that materializes.

AF Thornton

While I would not bet my life on it, we may have just put in the low of the day when only 52 contracts traded at our old triple POC low around 4368.25. We will see if the next move can break the intraday bear microchannel.

Clearly, the laws of gravity still apply, and this is a much-needed and understandable pullback. The NASDAQ 100 bears the brunt of the losses, as another rotation is underway just as we had anticipated.

Both the XLF and XLE are beneficiaries. The Founder’s Group is bringing those positions up to 10% each on the pullbacks, and we are adding another 5% to our S&P 500 position. This will put our targets at 10% XLF, 10% XLE, and 55% S&P 500.

You can use futures or at-the-money August or September options on the XLF, XLE, or SPY. You can also use the cash ETFs.

I do not expect this sell-off to bottom until tomorrow, but it makes sense to nibble just a bit on this first decline. Stops remain very important, and I would keep stops about 4 ticks below the low we just put in around 12:15 EST on any new positions.

Inevitably, when you are investing at an inflection point, there is less risk to loss and less certainty in the outcome.

As always, do your own homework,

A.F. Thornton