Archives July 2021

Mid-Day Outlook – 6/8/2021

24-Hr S&P 500 Index Futures - Daily Candles

So far this looks like the same playbook as the last two sessions, just from a lower level. This time, however, we got the real liquidation break and we are cleaning up a lot of the mess underneath us. 

This could qualify as a test of the 3-month break-out, depending on how you draw it (see chart above). From all appearances, the WEM low and Algo trigger line are pulling us back up out of the hole, and there was support just above the 21-day line and last week’s low at 4277.

RTH S&P 500 Futures - 5-Min Candles

As has been the case mid-day lately, we are pushing the fib retracements to see how high we can get. The 5-day line, now significantly violated, could now be resistance which would also be the 50% retracement of the decline this morning. In my opinion, the easy money off the double-bottom has been made. But we will see what they can do with the afternoon drive.

The short-term bottom looks even more solid with the Globex data in place, so you had a great long this morning. I am not quite ready to go for a swing long as yet, but I will see how we close.

A.F. Thornton

Pre-Market Outlook -6/8/2021

Murphy’s law, I decided to venture out a bit today, so here I sit harborside at a Cafe in Sami, Kefolonia, Greece sipping a frosty Mythos. I am doing the outlook from my phone – so there are a few limitations.

Naturally, here comes the liquidation break I have been harping about for days. So there will be a true gap down at the open, and gap rules apply (bluprintquantitative.tempurl.host/glossary/gap). Inventory is net short so an initial gap fade is possible.

A potential cycle top looms, and this could finally be it. Absent that, a trading range or wider bull channel is the most likely outcome of the daily chart micro bull channel morphing on us – so don’t get too bearish too quick. It will not be unlike yesterday’s 5-min chart that morphed into a trading range, but now the same will happen on the daily time frame.

You know all your levels below here. Keep the daily 21 and 50 in mind as pivot points.

You will find the gap rules here. Remember that large gaps tend to stall and move sideways the rest of the day. Ideally, we will retest the breakout from the three-month trading range around 4250 or so. I will be tempted to do a swing trade there.

I am not trading today, but will still post the possible trades in the Epilogue later tonight. 

Be careful today, it has the potential to get wild. 

A.F. Thornton 

Epilogue – 7/7/2021

Yesterday’s script tracked much like Tuesday. We reversed down from a new high at the open but then reversed back up from a parabolic wedge sell climax and waterfall decline that ended at the conjunction of Tuesday’s value area high, the longer-term bull trendline, 5-day EMA, and hourly mean (21 EMA).

We rallied back to the high but entered a trading range for the rest of the day. The trading range was predictable both as a break of the bull micro-channel from the morning and because the price was trying to jump the ’50 handle at 4350, which normally is a bit of a task. Because the day closed near its high and the reversal up was strong yesterday and today, traders will continue to expect at least slightly higher prices going forward.

But after yesterday’s pullback in an 11-day bar bull microchannel on the daily chart, the bulls are probably unwilling to buy aggressively without a week or two of sideways trading. In other words, traders expect higher prices, but not much higher over the next couple weeks.

Targets above continue to be the top of the bull channel on the daily chart, which is around 4,500, and a measured move up to 4,404 based on the 3-month trading range. The bears can get a reversal at any time, but bulls will continue to buy every 1- to 3-day pullback.

A.F. Thornton

Mid-Day Update – 6/7/2021

So far, all you had to do this morning is follow the Epilogue from yesterday. We had a textbook Breach and Retreat trade, weak internals, a test of the LT uptrend line, a test of yesterday’s VPOC, and a sell climax (almost tagging the ETH 5-day EMA and tagging the RTH 5-day line). 

The only question now is whether the market will get through and maintain the 50%, 62%, and 78% retracements, or roll over again. Draw your Fib retracements. We are testing the 21-period mean at the moment on the 5-minute. 

We may now have a trading range, which is the typical transition from a bull microchannel. Excellent trades again so far – 30 points per contract. 

My next update will come after the close, as I am wrapped up for the day and headed to a dinner. I will mark the trades I took, and the rest of the trades that I would have taken had I been here, after the close.

A.F. Thornton

Pre-Market Outlook – 7/7/2021

We are set to open inside yesterday’s range, with overnight inventory net long. We are in the top end of the range, and overnight traders had absolutely no success pressing prices lower, forming another poor low keyed off yesterday’s VAH around 4330. The S&P 500 index remains above the 21-day line, so the short-term bias is still bullish.

Yesterday, we sold off in a bear trend from the open with a series of sell climaxes. Because we fell below Friday’s low, we technically ended the bull microchannel. The midday bull trend reversed up from 4305, which was lower than Friday, just above the WEM low at 4300, and a major trend reversal from just below the 5-Day EMA. We closed in the upper half of the day’s range, increasing today’s chance of more sideways to up price action. I would expect to test Friday’s all-time high by the end of the week, if not today.

Since buying climaxes on the daily and 60-minute charts were unusually extreme recently, we could go sideways for a week. Also, wide-range days like yesterday are typically followed by low-range days. Having said all of that, there is no evidence of any weakness overnight or this morning.

There could be a fade at the open, as overnight inventory is net long, and there are still profits to be taken from yesterday’s turnaround. On the other hand, there could be poorly positioned shorts from yesterday that may cover at the open, which will offset the inventory sales. Again, none of this really helps guide us in taking a trade at the open. 

For my part, I will wait for the 30-minute breach and retreat trade or go with a breakout and retest of the all-time-high (also the recent highs from Friday and Yesterday). Still, the first target is only up to around 4357 – so you better have strong internals or dominance by the FANGMAN+T group if you are expecting a successful breakout of any magnitude.

Today’s Plan

I don’t see a clear opportunity for early trade, but there are still potential measured moves above us at 4250 from yesterday and 4400 from the three-month trading range. If we can surpass 4348, the market could move towards those goals. Keep in mind that markets generally have to work to get through the ’50 handle lines. If this market doesn’t, take that as a positive WWSHD signal. We also have a top channel line around 4490 if the market wants to climb Mt. Everest.

Below us are the usual variables and your carryforwards listed on the chart above. To your list, add yesterday’s halfback at 4325.50 and the VPOC at 4319.25. Watch the ’33 handle as it often trips traders in both directions. We are well above all trigger lines and moving averages for now – a very bullish state of affairs. Yesterday’s failed breakdown also puts a mark in the bullish column. 

A violation of yesterday’s low around 4305 would also violate the 5-day line – so that is about the only potential I see of changing the tone from positive to negative. Use a close below 4205 for at least two hourly bars before you pull the negative tone trigger. 

Nothing has changed from a macro perspective. The market is still overdone and ripe for an intermediate correction. Yesterday was a dress rehearsal. All the caveats still apply – which is why I am not interested in swing trades necessitating overnight positions at this time.

As always, be careful.

A.F. Thornton

Epilogue – 7/6/2021

S&P 500 Futures - RTH Data - 5-Min Candles

Tuesday, we saw another “mini” liquidation break. On the whole, the reaction was bullish. Once again, the market sold down to the 5-day EMA and then flipped higher, which has continued overnight. We filled the most recent gap, which also provided support. Friday’s low also held, at least on a closing basis.

The day started with a downside breach of the 30-min range, supported by weak internals. Tick distribution popped below 500 for most of the morning, with cumulative ticks remaining below zero, The S&P 500 A/D line headed straight south to -400 from the open. In other words, internals supported the breakdown of the 30-minute range. The wild card was the positive NASDAQ 100 action, but a lot of that was due to one stock, Amazon. Shorting turned out to be  the right move on the 30-minute breach and retreat trade – at least for the S&P 500.

I collected 29 points per contract on the day, with two fairly easy trades. First, I shorted the 30-minute breach and retreat (see chart above). This is my favorite trade when overnight action gives us no clue about the open. Second, I bought the trendline break back up (also see chart above). When the market is trending, which is only about 20% of the time, trades are a lot easier than range days.

Assisting in identifying the bottom yesterday was an expectation that bulls would buy the first pullback; we were filling Friday’s gap (gaps should provide support in a decline); we were at the 5-day EMA, which has provided support in the latest microchannel; we saw a positive momentum divergence on the low; ticks had already exhausted at -1000; and we saw fewer downticks on the final low. This is all well and good, but never anticipate the low – always wait for a true pivot.

Drawing trendlines and looking for trendline breaks also was helpful. Once you believed that a bottom was in place, drawing in your fib retracements where you are bound to encounter resistance, or even another trend reversal, also was important. Of course, watching price as it relates to the 21-period mean (green line) also helped, as did the Navigator trigger line.

By the end of the day, price was in the third push higher. After three pushes in a trend, it is best to step aside as trades in the direction of the trade get riskier. Also, I generally do not like to trade the final hour as there are often inventory and mutual fund adjustments that are unrelated to price and trend. Trading can be an art as well as a science, so if you want to take a late-day trade that is fine. I also passed on another short trade that presented after the first short in the morning. The theory on that was that pigs get fat and hogs get slaughtered.

I will discuss more in the morning outlook, but the wide-ranging price bar for July 6th should provide some new go / no-go price boundaries. If we break above the bar, the bull phase continues. Below it, you will need to grab your parachute. Also noteworthy, the value (where 70% of the volume occurred) moved slightly lower for the first time in 11 sessions yesterday. It was overlapping with Friday, so not as negative as it could be. Always remember, value is more important than price. We are trying to track where volume is allocated, as much as price. Price without volume (and time spent at the price), can be very misleading.

S&P 500 Futures Volume/Time Profiles

For now, however, 7/6 was nothing more than liquidation break lite – but it does demonstrate my concerns. It could be a shot across the bow, so we need to be careful. On a positive note, it likely scared some weak hands out of the market. That tends to strengthen the underpinnings of price.

A.F. Thornton

Mid-Day Outlook – 7/6/2021

The morning sell-off this morning will wake you up after a three-day holiday weekend. Banks (KBE), Financials (XLF), Energy (XLE), and the like are taking the brunt of the damage. the NASDAQ 100 is diverging north on further strength in bonds. The liquidation break helped repair some structure underneath us, but not nearly enough.

This all reminds me a bit of early January 2020, when bonds were inexplicably rallying along with stocks as has been the case recently. We had similar momentum, breadth, and strength divergences. I said back then, one of these asset classes has to be wrong. This is eerily similar.

The behavior looks like an economy that might be slowing – just like it did before the first China virus arose from Wuhan. I worry a bit about the market already reacting to the Delta Covid-19 variant. The Phizer vaccine is said to be ineffective. Others are saying the Moderna vaccine caused the Delta variant. Then there is the new, Peruvian, Lambda variant. It is thought to be vaccine-resistant. Could this be driving more shutdown fears? Even Warren Buffett recently stated that a worse Pandemic is in our future. He says he is shocked at how complacent people still are about the risks.

As a side note, who chose the Greek alphabet for these new variants? Is it because I am in Greece? [Insert Twilight Zone Theme].

The market just managed to turn higher, but not until we got all the way down to the 5-day EMA around 4305, just above the WEM low around 4300. But the rest of the story now depends on where we close. The 5-day line has called all the turns in the bull microchannel. We shall see, but so far so good. The afternoon drive will tell the tale.

Remember, the most likely course for a breaking bull microchannel is a trading range for a bit.

A.F. Thornton

Pre-Market Outlook – 7/6/2021

We have been in a strong price rally from the June 18 low, which has become an 11-bar bull micro-channel (one-time-framing higher). That means every low was at or above the low of the prior bar. It is a sign of strong, relentless buying. 

Volume has been summer lite, so when institutions finally step in, they could crush the short-term bullish momentum traders in a heartbeat. That is especially true when price action is at such an extreme as now. It will soon attract profit-taking. At the very least, there should be a one to three-day pullback within the next few days.

The bulls will buy the first pullback. The bears typically need at least a micro double top before they can get more than a few days down from a microchannel. The measured move target is still around 4,400 for the breakout above the three-month trading range. There are
several choices for the top and bottom of the range. Many computers will use the May 7th high and the May 12th low., which puts the measured move up as 4,404. The top of the bull channel is around 4,450, and it is also a magnet above.

As usual, I will ignore the limited holiday trading that occurred Sunday night and Monday. I will instead use Friday’s session as the reference point for today. So from that perspective, we will be opening inside Friday’s range but in the upper one-third of the profile. Overnight inventory is balanced, so there is little to guide us for opening trade. 

The short-term bias remains bullish but with a significant risk for a liquidation break on the weak structure underneath us, which is becoming even weaker. Even on the profile chart, the price action appears to be a vertical blow-off. We are approaching a three-ATR channel line on the 24-Hr S&P 500 Index Futures daily chart. Read the commentary from “View from the Top Down” this morning to better sense the macro picture.

Besides the absence of volume, evidence that momentum traders are running the show continues to mount with an overnight low right at Friday’s halfback and many other weak lows, VPOC’s and gaps below us. At some point, this shaky structure will repair and repair swiftly.

The overnight distribution has a 45-degree line from the low to its widest point. Carry this forward into your narrative. Normally, this is a short-term bullish signal. Holiday trading may make the principle less reliable today.

We have a marginal, new all-time in Globex, so there is little to discuss on the upside other than measured move targets and top channel lines. I continue to list all of the Key Levels below, which will be targets should any liquidation break occur.

It has now been 11 sessions since we’ve had any lower value, not to mention that we’ve been one time-framing higher for those sessions as well. That should tell you that only a move below Friday’s RTH Low at 4319 has the potential to change the tone to negative.

Today’s Plan

We have about a 42 point WEM forecast for the short trading week that remains. Added to Friday’s settlement, that gives us a WEM range between approximately 4300 and 4385 on the futures contract for the rest of the week.

I will use the 30-minute breakout/pullback strategy since there is no inventory adjustment to guide us at the open. Watch internals for confidence on any breakouts. Remember, the default is a range day.

If we head north, I will target the Friday RTH high at 4341.75 (also close to settlement at 4342.80), the overnight high at 4348, the measured move at 4404, and then the WEM high at 4385. Always watch for moves above and below the open this morning as they tend to help cement the direction.

If we head south, I will look to the overnight low and Friday’s halfback at 4333, Friday’s POC at 4324.50, Friday’s low and gap top at 4319, Friday’s Gap top at 4312, and then target to target for the rest of the VPOCs, weak lows, etc. you have been carrying in your narrative on down to the WEM low around 4300, which should contain further damage for the week. We have been overshooting WEM levels for the past three weeks, so carry that forward as well, especially if a serious liquidation break materializes.

Be careful on the long side today and for the rest of this week; the laws of gravity have not been repealed, at least to my knowledge.

A.F. Thornton

View from the Top Down

In This Series, We Examine the Stock Market From a Big-Picture, Swing-Trading Perspective
24-Hour S&P 500 Index Futures Daily Candles

As it did in the last writing, the analysis starts this week with the failed bear breakdown back on 6/18. Granted, it was a quadruple witching Friday, leaving a few doubts about the validity of the anticipated decline. But what has followed has been a virtual melt-up in the NASDAQ 100 and S&P 500 indexes, which are now throwing exhaustion and “Trend Reversal Imminent” signals on the Navigator Algo as you will see when you click on and enlarge the S&P 500 index chart above. 

If you were quick to the punch, this was a classic, “When What Should Happen Doesn’t” buy signal. Shorting the rally at the former high failed twice for me in the following week. As well, the Navigator Algorithm itself threw a weak buy signal on 6/24. 

Nevertheless, the Founders Group chose to ignore the potential swing buy signals instead favoring short-term day trading rather than a longer-term position. Most of any long positions we have taken from the daily 5-EMA have been home runs – though many of the buys were in Globex. When I am back in the States, such signals won’t be as easy to execute as they have been in the European time zone.

Our reluctance to take swing positions was simple. This high into an intermediate trend, you can get caught in a liquidation break that can wipe out several weeks of gains before the close of a given day, when most swing traders (not sitting at their computers) could lose all the benefits of their trading gains. Worse, the break could start in Globex, giving you no ability to preserve your gains before the open. Stops are helpful, except there are no stops on call options.

The weak structure underpinning the rally so far continues to support a large liquidation break ahead. Immediately below us are unfilled gaps and untested points of control. As presented in the Chart below and viewed from a year-to-date perspective, there is a virtual “air pocket” between 4100 and 3900 on the volume profile. We have discussed these low-volume nodes before. When the market enters these zones, it moves very quickly until it finds another high-volume node to hold it.

24-Hour S&P 500 Index Futures / YTD Volume Profile

Also under consideration is the stealth correction occurring under the surface in the value or cyclical names. Accompanied by a rally in treasuries, the lower interest rates have boosted tech and growth stocks at the expense of Financials (XLF) and (XLE) Energy. (You could try some long calls on the latter two sectors on the theory they will play catch-up). Absent that, the negative breadth, strength, and momentum divergences on the S&P 500 Index itself cast some doubt on whether this rally is sustainable before a good-sized break. 

Those divergences would need to right themselves this week to keep this uptrend going, but sentiment extremes and the 18-month cycle also still loom as negatives. Unfortunately, they give us very little guidance on timing the peak.

NASDAQ 100 Cash Index (QQQ)

One other carry forward continues to be the butterfly topping (harmonic pattern) in the NASDAQ 100 (QQQ) shown above. This pattern would support the intermediate peak we are expecting at or near point “D,” particularly when the NASDAQ 100 is the lead player in this rally. That gives us a bit more headroom, but not much.

My ideal scenario is a peak, intermediate correction, and then a continuation of the bull into the end of the year, or at least a transition to a trading range. Bull channels, especially tight ones, tend to morph into trading ranges, and that would not surprise me before summer is over.

My swing-trading outlook remains neutral to slightly bearish. I do not see anything cataclysmic on the horizon, just a market that is short-term overdone and in need of an intermediate decline of about 10% to 15% to reset. If you examine the Volume Profile Chart above, that would take us to the high volume node around 3850 (also the 200-day moving average) at the extreme. The June low might hold us in place as well, perhaps avoiding the air pocket that causes me some concern.

The main thing to remember at this stage is that the declines will come swiftly and may carve deeper than the time it takes for you to get back to your computer to push a button. They could happen overnight in Globex before you wake up. This is not a concern when you use stops. However, you cannot set a stop on an option, so keep that in mind.

My mid-year outlook video will be out by Friday.

A.F. Thornton

Pre-Market Outlook – 7/1/2021

Yesterday - 6/30/2021

Yesterdays RTH Session S&P 500 Index Futures - 5-minute Candles

Welcome to July. We had a double bottom test of the previous day’s RTH low on the open in yesterday’s regular session, but the ensuing rally reversed down from a wedge top. Then, after a three-hour weak bear channel, bulls rallied again in the afternoon drive from an expanding triangle and a higher low into the close.

The market ran into resistance just above the Globex and yesterday’s early day high near the close, but still managed to achieve another marginal all-time high. Notably, the June candle closed near its high. As such, July might gap up on the monthly chart.

We stayed above yesterday’s low, leaving us now nine full days in a bull micro-channel, keying off the 5-day EMA. We should get a pullback soon, as today is a Fibonacci turn date, but the bulls will buy the first one to three-day pullback. Also, we have the usual long bias on the first few trading days of the month. I am looking for a liquidation break to take us back to test the 4250 breakout, and we would have to consider a swing entry point there.

Yesterdays RTH Session S&P 500 Index Futures - 5-minute Candles

I took three trades yesterday, as illustrated on the chart above. The first netted six points, the second netted fractionally better than break-even, and the third netted six points. Generally, it is not advisable to take the middle trade over lunch and yesterday was no exception (unless you like chop).

On these low volatility days, consider using more contracts, tighter stops, and going for fewer points.

Today's Plan

Deja Vu. Another new marginal all-time high in the overnight session and a very nuanced overnight low that came down very close to halfback and the POC. Short-term momentum traders remain in control, and the potential for a liquidation break gets stronger every day.

The Key Levels list (below) continues to grow as we keep listing all the recent VPOC’s and the small gap. We’ll keep that going until the end of this week. Next week, the market is closed on Monday.

We have to continue to do what works until it doesn’t. You have all the Key Levels right in front of you to tell you when it stops working.

You will know a liquidation break by an increase in tempo and a relatively swift taking of some of the Key Levels. The slower tempo in the context of what we have been experiencing is a continuation of the current dynamic. Assume pullbacks are buyable – especially at the 5-day EMA.

It has now been eight sessions since we’ve had any lower value, not to mention that we’ve been one-time framing higher for those sessions as well. That should tell you that only a move below the previous day’s regular session low has potential for change. Note the weakness in the NASDAQ 100 the past few days compared to the S&P 500. Carry that forward as a potential warning for a large, liquidation break.

Yesterdays RTH Session S&P 500 Index Futures - 30-minute Candles

The Key Levels on your chart should be 4305.75 (last night’s ONH / ATH), 4277.00 (Yesterday’s RTH High), 4286.00 (ONL / Halfback / POC), 4277.00 (Yesterday’s RTH Low / Double RTH Bottom from Previous Day / Weak Low) 4270.20 (6/28 VPOC / Weak O/N Low) 4260.75 (Weak Low) 4256.25 (6/24 Prominent VPOC), 4251.25 (Gap Top) 4246.25 Gap Bottom 4239.00 (6/23/ Prominent VPOC). 

Always be cognizant of your roundies (100-handle block/point scale – 4100, 4200, 4300, etc.) and half-roundies (50-handle block/point scale – 4150, 4250, 4350, etc.). As an example, we are flirting with 4300 at the moment. A daily close above 4312 almost ensures that we will hold 4300 and move to 4333, and a daily close above 4233 almost ensures we will go up to 4350. A close below 4288 almost ensures a test back to 4250.

When you clear your chart and step back, you will observe that the S&P 500 moves and hesitates around the scale in 50 point increments – 4200, 4250, 4300, 4350, etc. That is what the battle is all about – capturing gains in 50-point progressions. Step back on a daily chart with nothing but candles in front of you, and you will observe this for yourself.

Keep the butterfly harmonic topping pattern now almost complete on the QQQ daily chart. That should be carried forward in your narrative relating to a potential liquidation break. The NASDAQ 100 was leading the troops, but its relative strength has waned for two days now.

This will be my final commentary until Tuesday, other than the macro View from the Top discussion, which I will publish Monday.

A.F. Thornton

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