Archives September 2021

The good news is that the market is nervous about any number of monsters under the bed. There is the real estate meltdown in China, a spike in interest rates, Bidenflation, mandatory vaccine-induced labor shortages, artificial fights over the debt ceiling in Congress, and the like. But rather than follow-through to the downside yesterday, the market balanced as we anticipated.

We don’t get to hide under the covers, so we have to work our way to the closet and open the door, just in case another monster is in there. Our mission is to go where others fear to tread.

The market already knows about the monsters mentioned above – but is being indecisive. Are we pausing to go lower? Are we putting the finishing touches on the 80-day cycle low? We don’t have to know quite yet, but I still slightly favor the latter over the former.

Last night, the market pushed higher right into our buy trigger, but we came back into the two-day range at this writing. Value was overlapping to higher yesterday, and the low was weak as it touched down very close to a volume POC and an overnight low. Carry the low (4344.25) forward as your long/short threshold this morning.

Conquering the overnight high at 4389 with follow-through and acceptance trips the Navigator Algorithm buy signal, but wait for my confirming alert. We would need a couple of hours above the level to convince me.

Then, I would love to see the market conquer the bottom of the gap at 4406.25 to do the happy dance. If we breach the lower threshold, look for a move right to the swing low at 4293.75, and then we will see what happens. Traders have accumulated a lot of short positions, so watch for the bear trap and short-covering rip higher.

I don’t know how they do it, but the market-makers are keeping the market up and around the WEM low at 4472.75 for tomorrow’s weekly options expiration, but the level has acted as resistance thus far.

It’s the last trading day of the month and quarter. That could easily add to the indecisive action.

A.F. Thornton

Yesterday was a bloodbath of a retest, and the Founder’s Group took the opportunity to nibble on a 5% position in each of the QQQ and SPY. Both positions are in the green this morning thus far.

It is a bit tricky for an options strategy as the implied volatility is high for pure calls. If volatility abates, the implied volatility crush can subtract from otherwise positive returns. I will discuss that complication later today. This outlook is already a bit late this morning due to a technical glitch, so I would rather expand on the concepts later.

Although we are opening in balance, sentiment has shifted to bearish, and longs who are still stuck may see the small gap higher as a gift that decreases their losses.

I will use the ONH/Bottom of the Single Prints/Weekly Expected Move Low at 4372.50 and the ONL at 4344 as signposts for potential larger change. Should prices stay within these boundaries, then the market is balancing.

At the upper reference is potential for short-covering and below emboldens sellers and should attract new ones. If so, the swing low at 4293.75 is the ultimate target.

If we move decisively above 4372.50, a successful retest on the 80-day cycle could be finished, and we might begin a new move higher to challenge the old highs.

The sentiment is so negative at this point that I would bet on higher rather than lower prices. But with tomorrow being the end of the calendar quarter, window dressing by money managers may complicate matters over the next 24 hours.

The Navigator swing strategy remains 100% cash as we have yet to achieve an Algorithm buy signal.

A.F. Thornton

Both the SPY and the QQQ are at their Weekly Expected Move lows. The Founders Group is taking a 5% position in each of the QQQ and SPY at the money October 15th calls. This is a risky move, and it is lacking an Algo buy signal but anticipates that the 80-day cycle low is in and this is a retest.

This is a nibble, with a stop 4 tics below the 9/22 swing low for both positions. Keep in mind that we are buying at the Weekly Expected Move low for both positions and in line with a full retest of the swing low for the QQQ.

This is not an official Navigator Algo Swing buy signal. The Navigator strategy remains 100% in cash for now. We pass the information along solely for informational purposes and highly experienced traders who may want to start nibbling in the downswing.

A.F. Thornton

If the overnight markets forecast the day, the S&P 500 futures are headed south again, perhaps for a full retest of the recent swing low at 4293.75. For once, Tech and Growth are dragging the market down as Energy and Financials lead.

The key line in the sand for day trading is 4385.75, which is the breakout candle from 9/22 and not too far below the overnight low of 4388 at this writing. The bears are in the driver’s seat below 4385.75, if not already. As we are approaching the end of the third quarter, anything is possible. Earnings (and accompanying guidance) will be the focus as we close out September at the end of this week. The market is slated to gap down in a true gap so Gap Rules apply this morning.

As yet, the Navigator swing strategy has not rendered a buy signal, and the market is failing at a mish-mash of key lines congregating around 4450 (the Algo trigger, 50, 21, and 5-day lines). As a result, the swing strategy remains in its 100% cash position from September 10th.

In addition to the S&P 500 index, the Founders Group has focused on day trading Energy (XLE) and Financials (XLF) in addition to the S&P 500 futures. There has been some ancillary benefit to the Russell 2000 (IWM) due to its exposure to regional banks and energy companies. There are several financial stocks (e.g., AIG) breaking out of bases.

The underbelly of this market may not be China’s real estate problems, though it merits a separate discussion. The developing problem is much more boring. As I sit here in Southern California and look out the window, there are lines of ships all the way down the coast to Newport Beach waiting to unload. Fully 12% to 15% of all containers in existence are stuck at sea. There is nobody to unload them – or at least not enough dock workers to unload them. Here are the cargo ships waiting around L.A. It is not unlike airplanes circling and waiting to land at an airport.

Seen from a worldwide perspective, the situation is somewhat unprecedented:

This truly is a crisis and is the reason for the shortages coming this fall. The UK has plans for Marshall law as the shortages lead to tensions in the population. And it isn’t just labor shortages at the docks but also a shortage of truck drivers that exacerbates the problems in the UK and even here at home. The UK is experiencing gas lines, and fuel prices have skyrocketed in Europe generally.

In the U.S., the government told us that workers would return as soon as the so-called generous unemployment benefits expired at the end of August. It hasn’t happened. Though there are many reasons for this, the vaccine mandates have further complicated the situation. Workers are told that the unvaccinated need to get vaccinated to protect the already vaccinated from a vaccine that is not protecting them and likely won’t protect the workers either. People are not that stupid, and they choose to quit instead of being forced to take the needle.

The situation is somewhat unprecedented, but it is what it is.

A.F. Thornton

A week ago today, we were deep in the hole of the 80-day cycle trough, but we managed to recover about half the losses by Friday.

Overnight, we tested the top of the former balance area at 4472, then reversed back down to 4433. The 4472 level definitively breaks the downtrend line from the all-time high and our key reference line – the 21-EMA at 4440. But failure to hold the levels from the European open increases the possibility of a retest of the lows. The reversal looks like a “V” at the moment with no need for a retest, but we need to take the retest possibility seriously.

The overnight low at this writing is 4427, and further trading below that level would trigger my bear bias, with Friday’s low at 4410.75 being the absolute bull/bear tolerance line. Otherwise, we should be looking for follow-through from the weekly reversal last week.

As to sectors, technology seems to be lagging due to a spike in interest rates at the end of the week. Energy and Financials continue to lead.

My best judgment is that we move up to the old highs but then reverse again to establish a trading range between the all-time highs around 4550 and last week’s swing low near 4200.

The Navigator swing strategy is on the verge of a buy signal but requires a close above the 21-day line to confirm it.

A.F. Thornton

The market managed to conquer both the 5 and 50-day lines yesterday but needs to add the 21-day line to its belt to complete the recovery and trigger a buy signal. Then, the question will be whether the market can move into a blow-off stage and achieve new highs, or simply move sideways for a bit between the swing low this week and the old all-time high. My best guess is the latter scenario is more likely than the former.

In the Founders Group, we are back to buying the dip on the hourly charts. Our preference is the S&P 500 with a mix of Energy (XLE) and Financials (XLF). I will have more to say over the weekend. As it is Friday, I will not be day trading today, but I would look to yesterday’s half-back at 4411 for a bull/bear threshold.

Staying above 4411 keeps the recovery alive. Moving above yesterday’s high at 4455 is bullish. Moving into the lower half of yesterday’s range would keep the bears at the table for now.

A.F. Thornton

The fear of just a few days ago has dissipated, as the Fed leaves well-enough alone. Gap Rules apply this morning. Overnight inventory is 100% long, so a fade is possible at the open. That means that your first focus should be on whether or not the gap between the open and yesterday’s high fills. Assume yesterday’s high is the cover-point and watch closely to see if prices move deeper into yesterday’s range or not.

Failure to fill the gap is a bullish signal and puts the Top of the Gap (the old one) and ONH (balance area low) into play, with an ultimate target of the downtrend line from the all-time high. Note that the last target changes trend on the daily chart which is very important. Corresponding strong internals would be a must.

A.F. Thornton

As I take a deep dive into the current problems in China, I get a bit excited at first. While our illustrious elites have been trying to convince us that China is ready to overtake us at the global helm, the Chinese are in the process of clamping down on their semi-capitalist economy. That may be a primary reason that the Chinese Evergrande property developer (maybe we should call them “Never Grand”) is choking). President Xi is even donning Mau outfits of late.

The CCP does not want to share power with tech oligarchs or other capitalist Chinese billionaires. They are taking a lesson from Donald Trump’s experience.  What do you think would happen if Facebook or its Chinese equivalent “banned” Chairman Xi as they did with the U.S. President? We all know it would never happen. So the CCP and Xi are shoring up their power base.

If Xi is reasserting a more communist form of central economic planning (his), this is good for China’s competitors such as the U.S. and Europe. Central economic planning doesn’t work. Don’t get me wrong, even a communist economy can compete for a time, especially with slave labor. Perhaps that is why our illustrious ruling class here at home has opened our borders to millions of illegal migrants. Our elites like slave labor too.

I say I get excited “at first” about the Chinese crackdown because “stakeholder” capitalism is just as scary a trend here at home. When I put my money in a company, I am seeking profits, not nirvana. Of course, I want the company to follow the law and be a good corporate citizen. But I save the loftier goals for my charitable contributions. And the best thing that could happen to our country right now is decentralization, not central planning.

Some say defund the police. I say defund Washington D.C. We have the central government our founders feared. Like Rome, it is likely to be our undoing. Does anyone believe that we still have a Republic? I certainly don’t.

Of course, these thoughts arise in the context of the Fed announcements today. The Fed is the penultimate exercise in central planning. Think of it as Wall Street’s version of Cocaine. It takes more and more to get high (or higher as it were).

The Dot Com bubble comes along. Dropping interest rates still works to ease the pain. Then the Financial Crisis hits. Decreasing rates to zero isn’t enough. So the Fed started buying bonds and increasing its balance sheet (taking on debt and known as Quantitative Easing). As the latest crisis de jure seems to be passing, the Fed tries to normalize and start shrinking its balance sheet in 2017 and 2018. That does not go so well – as the stock market drops 20%.

Then the Pandemic hits. Some governments drop rates below zero. The real rate in the U.S. is now well below zero with inflation. But that isn’t enough either. So now the Fed has to buy even more bonds (QE III).

The point is that each period of tightening monetary policy is shorter, while each period of easing is longer. Each period of tightening is a lower interest rate than the last until we actually contemplate negative rates, and each round of increasing the balance sheet is at least double the last one. It is no wonder that inflation is becoming a serious problem.

They say it is lonely at the top. Russia no longer owns U.S. Treasuries. They prefer gold. China has substantially reduced its holdings. Japan has reduced its holdings as well. Soon, the only buyer of U.S. Treasuries will be the Fed. We call that a Ponzi scheme when Bernie Madoff does it. How does that work anyway? Can we really sell the debt to ourselves?

We all know that this won’t end well. But you can make a hell of a lot of money in the final stages. A not so unlikely scenario is that we make another “blow-off” run out of the current trough. The rally could literally blow your socks off. If the Fed is Cocaine to the markets, FOMO (Fear of Missing Out) is Cocaine to a “blow-off.”

Imagine you are coming into year-end having been protective of your client’s capital, and then the market decides to put another 15% to 20% on the board. Many a money manager that misses the gain will be fired. So FOMO kicks in, and the protective, sensible managers throw in the towel and jump in with both feet. That is typically how bull markets end. On the charts, the line is parabolic.

Where does that leave us today? Perhaps the only tool politically feasible for the Fed right now is to talk about talking about tapering bond purchases or raising rates. Likely, they cannot and will not do it. Don’t forget, Chairman Powell ostensibly wants to be reappointed in February. He won’t cross Janet Yellen or the Biden administration. That is how it works in the affairs of men and women and the other 98 genders.

Whether it is Congress with the deficit or the Fed with their balance sheet, it is always about kicking the can down the road, until we run out of road. Perhaps the most shocking aspect of this is how much longer it lasts than our instincts tell us it will.

In my chair, I have had this feeling in the pit of my stomach since March. I am sure that I am not alone. It feels like we are defying the laws of gravity.

On the other hand, with China clamping down on their free markets, and assuming our overlords clamp down ours somewhat less, the U.S. can continue to get away with what amounts to monetary murder. Because the only thing that facilitates the insanity is the fact that the U.S. dollar is still the world’s reserve currency. When that status is seriously threatened, Humpty Dumpty will take a great fall. I hope I am on our farm in Kefalonia, Greece on that day.

Today’s Plan

We have achieved the time and price objectives for the nominal 80-day cycle and would expect to move out following the Fed announcement. I don’t normally day trade on Fed announcement days, though I don’t expect anything beyond jawboning today.

We may finally be entering the sideways market I have been expecting for some time. And we could also be heading for a blow-off top from here. Regardless, I will be looking for an Algo buy signal for the Navigator swing trading strategy. But we have to conquer all of our key lines to shift back to a bullish posture. The rally needs to be monitored carefully as the market’s behavior has been weaker of late.

Key levels for day trading today will be 4411.50 which is the top of the recent gap, 4385 which is yesterday’s high and the bottom of the gap, and the swing low at 4293.75. Keep in mind that yesterday’s low at 4329.25 is also the Weekly Expected Move low and should be the worst case for the rest of the week.

I would assume further balance within the confines of yesterday’s regular session range with potential for change above and below. The larger move may easily come later today once the FOMC announces.

This is one of those days when context and news precludes a specific day trading plan, which is why I avoid day trading on such days.

A.F. Thornton

Price has flattened out but is struggling at the August swing low support identified this morning. Probabilities are that the 80-day cycle trough should launch in this time zone. If not today, certainly by mid-week. However, I want to remind you that our peg of July 19th for the 18-month cycle trough is still tentative and has implications for our current analysis. I am particularly bothered by the potential trend change indicated by the price action this morning, especially if the market continues to move lower.

Placement of the 18-month cycle low is important because the associated dip/correction tends to be the deepest we experience over the larger, 54-month cycle. A trip to the 200-day moving average and sometimes lower is typically in the cards. Today, the 200-day moving average sits around 4100 on the S&P 500 24-hr continuous futures contract. The unadjusted algorithm still places the projected 18-month cycle low towards the end of the year.

The 18-month cycle dip on the S&P 500 index (tentatively marked at 4215.25 on the S&P 500 24-Hour continuous futures contract and 4233 on the cash index) on July 19th was barely discernable in the index alone compared to the typical, expected magnitude. There is precedence for this milder-than-normal dip, such as we saw in 2017. And we tried to justify the mild dip as attributable to sector rotation. Also, the dip would be milder than normal coming out of an important low like March 2020. But we would expect the ensuing rally from the dip to be commensurately strong. This latter point is what has me a bit contemplative here.

We now have more price action since July to interpret and guide us on the S&P 500, our main market proxy. Also, I have been monitoring the behavior of foreign markets – such as the FTSE 100 in London. And I am watching other indexes here at home, such as the Dow Industrials.

One concern I have is that the rallies from the July 19th low are somewhat anemic for the typical first run out of an 18-month cycle trough. Also, unless the price reverses higher almost immediately, we are violating the 80-day cycle FLD (future line of demarcation) today, which would be an infrequent event on the first 80-day trough out of an 18-month cycle low.

If we close below the FLD, you can often expect another down leg equal to the distance just traveled from the all-time high. That would be another 200 S&P 500 points taking us to a potential low of 4150, which would somewhat coincide with the June low around 4120 or so. In the old days, this decline would come swiftly were it to occur here, in a spike waterfall decline. I am speculating somewhat, but it is vital to keep these possibilities in mind and respect the risk at hand.

This post-July anemic behavior could mean that the 18-month cycle low is still in front of us. Longer cycles have more expansive variation windows for bottoming, so they are harder to nail as to specific dates other than a range. We would know for sure that the 18-month cycle is still in play if the S&P 500 index low at 4224 on the continuous futures contract fails to hold in a further decline. Without such confirmation, placement of the cycle trough remains an open question for now.

We must keep this information in mind on this dip as it will influence how we interpret price action between now and the end of November when the next intermediate trough comes due on the 20-week cycle.

Recency bias would have us buy the dips, but this is a situation where you might buy the dip, get some immediate gratification, and then watch the market roll right over the top of you. It can be challenging if the price action rolls over hard overnight and before you wake up in the morning.

At this juncture, the tactics are the same whether the 18-month cycle is in front of us or behind. We should expect the 80-day cycle to bottom in this time zone – and the price will trough either way. It is how we handle the rally from that trough that requires potentially different tactics.

I will keep you posted on how the Founders Group handles the issue as we begin to deploy our cash again.

A.F. Thornton