Archives September 2021

We are waking up to an ugly market this morning, and perhaps a character change if the market does not make a quick turn. I have no predictions, but the pattern we have followed from options expiration lately has been a Monday blitz followed by a turnaround into Tuesday, so we shall see. All references below are to the S&P 500 continuous futures contract, which is our market proxy.

They say in the land of the blind, the one-eyed man is king. We had had our eye on the China and Evergrande problems before the crowd even noticed it. The Founders Group went back to a 100% cash position on September 10th as a result. The financial press will no doubt lay this decline at the feet of the China problems. But we know that the 80-day cycle dip is our culprit, and the blame game is a distraction.

So the reality is that we should be bottoming the 80-day cycle dip, which I have mentioned for a few weeks now. And even early last week, when the market attempted a one-day rally, I mentioned my skepticism about reaching the minimum price target for the decline while we still had time left on the clock. Now you can see why both time and price are essential aspects of predicting market behavior.

The market will tell us whether this is a buyable dip. We will observe the price action over the next 24 to 48 hours. Price needs to retake the 50, 21, and 5-day lines. But the lines will undoubtedly provide some resistance along the way. I am also watching the Navigator trigger line, currently showing a buy stop at 4483. We have a polarity trigger at 4455, but that is a very short-term indicator and not likely to end the correction.

We are opening at the August low at 4339.75, which should provide some support. That price is also the approximate measured move target for an ABC correction from the recent all-time high.

The character change mentioned above is that tagging last month’s low marks the first time we have a low in the recent sequence that is not higher than the previous short-term low. So that could portend a trend change to a sideways market or something worse like a complete trend reversal.

The analysis is a bit more complicated than that, however, in that the most crucial aspect is that this low is higher than the last 80-day cycle low, which takes us back to July 19th and 4262. This decline could simply be widening the price channel just a bit, leaving the intermediate trend intact. But the short-term trend is reversing.

Moreover, we are now opening well below the 21 and 50-day lines, also short-term bearish. And then there is the Fed Meeting Wednesday, etc., etc.

For this morning, then, Gap rules apply. These rules are essential, and they work.

Assume that there is potential for an early fade of the decline. Buy the high of the first one-minute bar, or buy the cross up through the open if the opening drive is lower. Monitor for continuation with an ultimate target of the Overnight Halfback at 4379.25.

An early short entry (assuming a gap and go) can be challenging to pull off. The better move will be to short the cross back down through the open with an initial fade. Or, draw an uptrend line from the first swing low of the day to any subsequent higher low. Then short any break of the trend line. Target the low of the day first and monitor for a continuation lower.

Please don’t get too bearish this morning. We are now well into the decline after two weeks. Watch the put/call ratio for an extreme to coincide with the price extreme. Also, if the ratio is above .80 into the close, look for a short squeeze.

A.F. Thornton

The S&P 500 survived a test of the 50-day line this morning, but traders have pounded it hard. No instant gratification bounce as we have experienced the past four months.

We are now moving into lunch, and we still have expirations going off into the close. These quadruple expiration days can be weird – so I won’t be drawing too many conclusions until next week.

Thus far, everything is consistent with the 80-day nominal cycle dip – slated to bottom next Tuesday – if the alignment times ideally (which is rare).

We are in the zone to bottom it, and the fact it is a bit deeper decline than recently experienced is no surprise.

Let’s see if traders can hold the 50-day line into the close.

A.F. Thornton

We have a quadruple expiration day on hand today, and it is not usually wise to day trade. We also have a looming Chinese economic meltdown, rumblings of World War III, the military general-led coup we recently discovered here at home, and a relentlessly stubborn bioweapon scamdemic still on tap. Other than that, all is well.

What should we do? Buy, buy, and buy more!

In all seriousness, we have a four-day balance area bounded to the north by 4483.50 and south at 4425.25. Perhaps not today, but we need to go with the break-out in either direction and target double the range. Of course, we will watch for the fakeout.

I will have more to say over the weekend, but it has paid to buy the dip once we have concluded the dip is ending. Lately, it has been ending with monthly options expiration. Today, we get weekly, monthly, and quarterly with both options and futures. Maybe that makes a difference, and maybe not.

Pull out your Balance Rules and use them on either end of the range. Otherwise, use responsive trading to day trade the range if you are inclined to trade today. Plot a VWAP or use a Volume Profile for responsive trading. You might even merge the four days in a volume profile on a separate screen.

Have a great weekend.

A.F. Thornton

The action today is a bit more bullish than bearish. Traders tested both ends of yesterday’s range, but the turn at the low came higher than yesterday’s low, so that gives a small hat tip to the bulls. The chart has some volatility to it, but the bottom is rounded.

There have been some nice trades in the trips back and forth today – but the trend remains sideways until it isn’t. Essentially, yesterday and today are almost inside days from Tuesday (depending on whether you are looking at cash or futures), so it amounts to a trading range.

In our ongoing Chinese saga, the Australians just canceled their order for French submarines in favor of U.S. nuclear subs. This will be the second country we have allowed to have these subs – so it is a rarity. Great Britain was the first. Understandably, President Macron is furious in France, but it underscores the rising tensions over Taiwan in the region.

We need to keep a close eye on the Taiwan issues, and perhaps Ukraine in Russia. Our adversaries will make their move when they perceive us to be weak. The disastrous Afghanistan exit has exacerbated the risks.

A.F. Thornton

Two thoughts this morning. First, I continue to have one eye on China. Their potential real estate and debt implosion (absent a government bailout) still have the potential to disrupt the global economy. The Taiwan threat (and its potential to distract social unrest at home) looms large. Japan is now beginning to react to the China rhetoric. So far this is noise – but it could easily become signal.

My second thought is that U.S. junk bonds are doing just fine. Given that China’s debt problems have disrupted their junk bond market (yields approaching 13%), our market is not flashing any risk-off signals as yet at 3% yields. This also has me leaning toward the current market dip being resolved soon and favorably.

U.S. interest rates seem to be moving lower from their recent consolidation. That has been challenging for Energy and Financials this year, but now Energy may be leaning forward again based on the last few sessions. Financials are still basing and failed to break out last week. Bank buybacks are helping the sector.

In a sense though, the 11 S&P 500 sectors have been all over the place – with leadership in tech and new economy stocks remaining strong.

Where that leaves us this morning is that the S&P 500, our market proxy, reached the 80-day cycle line (FLD) yesterday and made a nice pivot. But while the price has achieved the minimum target, time is still left on the clock. We will know more if we get follow-through today on yesterday’s rally. Also, we need to see if we can move past the midpoint of the recent decline without another down leg.

It seems too easy that we would just continue the same pattern as the past four months. The market loves to lull us into a pattern only to morph. My best guess is that we run the clock into next week with a small rally, some sideways action, and another leg down or retest of yesterday’s low into the Fed meeting.

So conquering the 21-day line and recent highs around 4478.50 hands the ball back to the bulls. A close below 4425.25 swing low keeps the sellers in charge as they had been before yesterday’s pivot. Today, I will stay with a bull bias as long as the overnight low holds at 4462.50, also the top of the single prints. I am looking for acceptance above 4462.50 and preferably above 4478.50.

The NASDAQ 100 is stronger than the S&P 500, having held at the 21-day line while the S&P 500 nearly tagged its 50-day line yesterday. As long as interest rates behave, this relative strength will likely maintain.

U.S. Retail sales exceeded expectations this morning. That is good news for the economy. Initial jobless claims were in line with expectations. But 332,000 is still a lot of claims – especially when we are told that there are a record 10 million plus job openings out there. I am still wondering how mandatory vaccines might impact the job market.

Stay tuned,

A.F. Thornton

We are overdue for a bounce, but it is safe to assume that sellers remain in control unless we take out the ONH at 4448.50. Use caution on early trades as the open is very close to the settlement and overnight inventory is very balanced. I usually prefer to wait for the market to settle in before I trade in the circumstances.

Any movement below the RTH Low should target the 50-day line at 4413. The 50-day line should offer strong support initially, even if we are starting a larger correction. Failure to do so would potentially be a longer-term bearish signal.

My best guess is that we find support on the 50-day line, flip back higher, then put in a second leg down into the 80-day cycle low in a week. The second leg could be a double bottom but is more likely than not to take us lower to put some fear into the bulls.

Don’t forget the blow-off scenario mentioned yesterday if we make a quick move to 4600.

A.F. Thornton

You can see from this morning’s bulletins that we are having fun with the website programming.

As the market has been one time framing lower now for six RTH sessions, there is a downtrend in place and that downtrend line marks your shift to a bullish case. The line is dynamic so mark it on your charts. I would use 4460 on the December contract as the line right now – but it changes as price moves.

Another good proxy for a bullish reversal is to look for the price to come up through the 21-EMA on the hourly chart and successfully retest the line to make sure it will hold.

On the bear side, the sellers are working to break 4434.50 which continues their rare moment in the sun.

Treasuries (as measured by the TLT) seem to be breaking up out of their symmetrical triangle – portending lower rates. So the pressure may be off the Fed as far as tapering, but the greater concern is why rates are falling. Is it a flight to quality? Is it evidence that the economy is slowing? Is it a combination of both?

Fear seems too elevated to bring us a huge selloff, so I am still of the mind that this is part of the 80-day cycle trough developing. The precise due date for the low is the 22nd.

The cycle lows rarely follow the calendar as closely as we do but this corrective phase should be ending within a day or two of that target. The next big wave down is the 20-week cycle due in late November. That is where it promises to get more interesting.

Stay tuned,

A.F. Thornton

One of the global events unfolding is the implosion of China’s private real estate market and an associated debt crisis. The Chinese government may be stepping in with a rescue and bailout package similar to the U.S. in 2008. What governments typically do to maintain power when their economy is teetering is to create a diversion. Combine this fuel with the Biden Administration’s surrender to the Taliban, and you have the worst of all worlds.

China (through the CCP’s Global Times) announced yesterday that they will now be exercising sovereignty over Taiwan’s airspace, a first. As you will read from the editorial, the CCP threatens an all-out war if Taiwan shoots down China’s fighter jets.

The West is heavily dependent on Taiwan for all kinds of computer chips. As there is already a chip shortage now, we can only imagine what a conflict over Taiwan would portend. And that is not the worst of it. Suppose the U.S. and Japan do not take a firm stand. Surrendering to China could shift the balance of world power. I have little confidence in our own leaders. Make no mistake; China owns many a US politician through bribery or blackmail, or both.

Weakness invites war, as it has many times in the past. Our exit from Afghanistan weakened our position in the world considerably. Wars typically accompany Fourth Turnings. So I am monitoring events carefully.

This news will not make the mainstream news right away, as most of our illustrious media don’t read the Global Times every day.

I will expand on this news later, as I am sending this bulletin from my phone.

Stay tuned,

A.F. Thornton

The bears sold off for 5 days, which is significant compared to other pullbacks since the pandemic low. The sell-off came earlier than in recent months on the cycle. We are in an 80-day cycle markdown, so it was slated to be a bit more serious.

Next week’s FOMC announcement will be important. That increases the chance of the market starting to go sideways.
We found support yesterday at the bottom of the bull channel, which is just a few points below Friday’s low.

September or October should be the high of the year and the start of 15 to 20% correction. There is a 40% chance it has already begun.

There have been many selloffs comparable to this one since the pandemic low. The bulls bought each one, and they will probably buy this one as well.

It has been strong enough so that the bulls will probably need a micro double bottom this week before they can get back to a new high.

We might get sharp acceleration up to above 4600 before a more serious correction begins, possibly after the September 22 FOMC meeting. If so, that would probably be a blow-off top.

Yesterday’s low is now the key line in the sand. Consumer inflation came in slightly below expectations this morning, but still high by recent standards.

We are watching developments in China vis a vis Taiwan closely.

A.F. Thornton