Apple and Amazon disappoint, Build Back Bankrupt scales back, it is the last trading day of October, and then there is the Fed…

The market is in a trading range at this writing, much as expected earlier this week. Balance Rules apply today, but it could be worse, right?

The trading range is bounded by 4590 on the north side and 4545 on the south. Acceptance above or below either number signals the next move, which should be double the range (about 45 points or so north or south of those numbers).

In an orthodox Elliott Wave pattern, we would be in a 4th wave rectangle/triangle from the low earlier this month, leaving a potential 5th wave to push higher into the Fed announcement next Wednesday. We shall see.

From a monthly chart perspective, there was August. Then September reversed August, and now October reversed September. There is a marginal new high for October, but it is represented entirely by the 45-point trading range discussed above. Were we to head south of that range today, October would show no price progress at all.

That makes 4545 your line in the sand. As always, watch for the fakeout, takeout before reversing back higher into the range. That is what Balance Rules contemplate.

Besides potential month-end shenanigans today, we are up against the WEM high at the top of the range around 4590, and that limits further progress before weekly options expire at the close. That also means I won’t be trading today, as the WEM high and month-end window dressing by money managers complicates the usual day trading strategies.

The MGI this morning is that the S&P 500 is down only 18 points in Globex, and small-cap stocks (IWM) will open higher even though (i) the 3rd Quarter GDP came out at a likely overstated and disappointing 2% yesterday, (ii) two big FAANG stocks (Apple and Amazon) missed their earnings targets after yesterday’s closing bell, (iii) the administration’s Build Back Bankrupt program is back on the table at $1.75 trillion (with a lot of smoke, mirrors, and gimmickry to get the number down), and (iv) the Fed will announce tapering next week.

If small-caps (IWM) were to break out of their 9-month trading range, that would indeed be something to behold. Worth a toe in the water with some calls? I am thinking about it.

The dominant narrative has been fear of the Fed tapering their monthly bond purchases in light of recent inflation trends. Is it possible that a slowing economy takes the pressure off? Easy money at near-zero interest rates has been the stock market’s fuel. Is the Fed more likely to continue the program if the economy is sputtering?

What would be the impact of the Dems passing their new spending programs? Are high inflation and a slowing economy more 1970s stagflation redux? What about a blow-off top? These are all musings for my weekend work – more thoughts on Sunday.

Meanwhile, be careful today and stay tuned for November, when the market will answer all of these questions. Meanwhile, enjoy your weekend!

A.F. Thornton

There is something for both the bulls and bears this morning. The bears can point to the last two days closing on the lows, forming a true pivot lower when yesterday closed below Monday’s low. And of course, a pullback is not surprising considering the market had been one-time-framing higher for nine sessions.

As well, both the NASDAQ 100 and the S&P 500 bumped up against their Weekly Expected Move highs on Monday and Tuesday, and that does have a way of limiting further gains for the week. But we can certainly ride the wave back up there.

The bulls can point to a new high in the NYSE advance/decline line, confirming the rally underway. Also, even in a tight bull climb like we just experienced, traders will almost always buy the first pullback, even if it eventually stalls at Monday’s high around 4590. Value was virtually unchanged yesterday; another vote for the bulls. The overnight profile has a 45-degree angle, which means traders are likely short in the hole overnight, and the low at 4545 starts as secure.

If the market can take out the overnight high (also yesterday’s halfback) at 4562.50 this morning, we can move back toward the top of the range and all-time-high at 4590. It won’t be a smooth ride, as we could stumble at yesterday’s POC around 4565. Then, we would have to take out yesterday’s high at 4576.75. Watch the market’s reaction at each of these levels and monitor for continuation.

Keeping in mind that overnight inventory is 100% long, there could be profit-taking and a fade at the open. If not, that is good, bullish M.G.I. If so, the overnight low at 4545 is the first target, then yesterday’s low at 4544. From there, you have Monday’s low at 4529 with a little noise in some VPOCs above that around 4533.

The 20-day future line of demarcation sits at 4522 or so, a normal target for the first pullback in a normal market rally. But there has been nothing normal about these markets. Otherwise, the FLD would be my target if the 5-day line at 4547 breaks for a few hourly candles.

The 5-day line is important. Apart from support and resistance, many algos are tuned to the 5-day line – so there will be some buying and support at that level. If we break it for a few hours, that opens the trap door to lower prices. When important moving averages are in the neighborhood, they can override the other levels. Keep that concept in your narrative.

From a macro perspective, the market (using our S&P 500 Futures Proxy, or even the SPY, is trying to hold a breakout over the September all-time highs. Failing to do so introduces the possibility of a double top major trend reversal. Last night, our Globex cousins failed to push prices to yesterday’s low, much less to new lows, which is a bullish carry forward this morning. Yesterday’s low at 4544 on the futures contract is the threshold that separates a new ATH from the old one. So I would use 4544 as your line in the sand if you are long. Closing some hourly candles below that level calls the breakout into question.

We have the Fed meeting next week, and the economic reports this morning continue to telegraph weakness, so this may be your last “free” day to trade before the influence of the Fed meeting starts to dominate.

A.F. Thornton

Yesterday saw price formally stall, with a pickup in institutional selling volume as price reversed and closed on the lows. Then, our overnight cousins worked on pushing prices down and through the all-time high breakout area but could not get the job done. So the bearish daily action is balanced by some overnight bullish action, if ever so slightly. This left a short, squatty profile on the overnight chart. The 45-degree angle on the profile usually places the overnight low at 4456.50 as fairly secure.

Yesterday’s low was breached overnight, but we are slated to open inside yesterday’s range. Accordingly, I would use the overnight low at 4456.50 as today’s gateway to lower prices and confirm a greater pullback forming on the daily chart. The overnight high at 4576.75 gets the ball rolling northward, leaving the new, all-time high achieved yesterday at 4590 as the next milestone to conquer. Then there is the WEM high at 4594 and the roundie itself at 4600. Keep in mind that the market-makers will fight prices above the WEM high until options expire on Friday.

I don’t hear much chatter about next week’s Fed meeting yet, but it will arise soon. The big tech earnings are capturing most of the attention this week. 10-year rates have yet to break that important neckline we have been talking about, which would imply a doubling of the level from 1.6% to 3.2%. That will be good news if the pattern fails. But it is much too early to tell for sure.

There is not much to guide us at the open this morning, so I will be using the quartet strategy. I would not be surprised if we go sideways for a few days between 4600 and 4550. Some balancing would be a good segway into the Fed meeting early next week.

Stay tuned,

A.F. Thornton

1:10: Now that they’ve move around a little, we’ve got stuff to work with…

The gap is 455.49 and below depending on which chart you look at…

It’s not been filled.

It’s no longer support since they bounced in front….

Below the gap, if they should do that is 454.25 give or take…

There’s stuff before that, but not that I’m willing to purchase for a trade…

Resistance is suspect since they just got here today, but from where I sit, 456.85 is the pivot for now…

Getting above opens the door for a test of 457.55 give or take…

Back as needed…

12:56: Checking back in…

Here’s what happened…

Instead of going to the big phat round numbers, Trick & Co. showed up and kicked em’ back to the gap left open yesterday…

We kinda discussed that earlier…

Where was support this morning?

At the gap and not before…

They’ve come up short, we know that one…

It’s either bullish or they’ll be back…

Watching and will be back with more…

11:18: No change…

Back after lunchtime to check-in.

10:30: No change…

They’re headed toward the big phat round numbers…

Whether they spike through or come up short on the first run is an open item…

Low volume, quiet tape…

The path of least resistance is sideways to higher…

Back as needed…

9:47: So…

With Stocks on the Move in the books and the SPY in float mode…

We’ll be quiet until there’s something material to say…

Back as needed…

(Treating it as a business, keeping the profit in the pocket…)

9:45: And GLW off the second price provided those painting by the numbers another base hit…

Those who only purchased the second number took an extra bag…

9:39: As for the SPY…

She’s floating toward what?

The next big phat set of numbers…

They won’t do it in a straight line and we should expect a visit from Trick & Co. in the process…

However, that’s what’s going on at present, until something changes…

9:38: And, XRX did the deal…

The rest is traders choice…

Hey, we had a nice day in the first candle…

9:36: Nice bounce on WM, regardless of whether you painted by the numbers or not, they’ve provided the base hit, too…

9:35: Nice trade on LMT…

The rest is trader choice…

9:07: We’ll let em’ go at the open, but traders should understand while in no mans land (new highs)…

Traders need not focus on the S&P until she develops some new “important numbers…”

Or, they get busy falling into a support area…

I’ll be looking around the horn for substitute opportunities…

EarlyThoughts

It’s turnaround Tuesday…

They pushed higher into no mans land headed to where?

The next big phat round numbers like ES 4600 and SPY 460…

Here’s what we need for numbers this morning…

Continuing up north is the floater situation until they get to a point where a reaction takes place – at an important spot…

SPY 460 give or take is the next big magnetic spot…

A spike through or slightly short of it, we don’t know, but in that general area is the likely target and short term destination…

On the flip side, if they fall the only area of interest in the early going is the gap left open from yesterday at around 455.50…

A double top is increasingly less likely, as we have a gap higher this morning (Gap Rules apply). Sometimes, we get a “gap and crap” as we affectionately reference it, but that is less likely as Facebook did not disappoint in their quarterly earnings last night. Moreover, the short squeeze in Tesla was something to behold yesterday, after Hertz announced the order of 100,000 Tesla cars.

More likely, we are back to a gamma spiral higher. As we are in the new high territory, there is no definitive upside resistance. The Weekly Expected Move high on the S&P 500 futures would be my target for the rest of the week, just below 4600 at 4594. Of course, 4600 itself is a magnet. Above that are Fibonacci targets. The 127.2 extension is at 4629, and the 161.8 rests above that at 4728.

If we head south, the market should find support at the former all-time high around 4550. I would get aggressively short if that level failed. Other than that, I will watch the Globex low, the previous day’s halfback, and the previous day’s low as we move along. Until the market closes below the previous day’s low, there is no potential trend change.

This could very well be the early stages of a hyper-inflation-driven stock market melt-up. I shudder at the thought because it won’t end well. But I am carrying the possibility forward in my narrative.

As always, how the market handles the morning gap will tell you a lot about the day ahead. Overnight inventory is net long, so there should be some profit-taking at the open. The trend is then likely to resume higher. The less the gap fills on the fade, the more positive the market. If there is no fade, what else do you need to know?

Traders should note all of the Gaps below us in their narrative. Gaps and spikes lead to poor structure and lots of air pockets. They increase the likelihood of short-term liquidation breaks. While the breaks are typically short-lived, they can be nasty for the uninitiated.

As usual, mark the open and look to go long when the market comes back up and through it on a pivot. The 10-day wave just bottomed and is moving higher, even though the trough is barely discernable. While we have a few more FAANGMAN stocks reporting, the Fed meeting next week is the next focus.

Interest rates will increasingly provide headwinds. But in hyperinflation, what matters are companies that have pricing power, and the market could rally despite rates. Check out INFL, an ETF that focuses on companies that do well in an inflationary environment.

Let the market tell you what it wants to do. How the market handles the morning gap is the most important MGI (Market Generated Information) this morning.

A.F. Thornton

Globex traders didn’t accomplish much in either direction overnight. We will open inside the top of Friday’s range with Globex inventory balanced. We are close to all-time highs, so use the ATH on Friday at 4551.50 as your gateway to higher prices. I would stay bullish, even above the overnight halfback at 4524.75, which is close to Friday’s POC. Below that level, I would be looking for an overdue pullback.

The market has behaved bullishly over the past week. A double-top with September highs remains possible here, and it would bring the trading range I have been expecting. Interest rate spikes in connection with the completion of the head and shoulders reversal pattern on the 10-year will be headwinds for the market and the leading FAANGMAN group, many of whom are reporting this week. This week promises to be volatile with the earnings reports alone, and then we have the Fed meeting as icing on the cake next week.

Putting the negatives aside, however, the stock market is heading into seasonal strength, and this market has been very good at defying the laws of gravity. It is likely best to follow the quartet strategy this morning. Let the market tell you what it wants to do, don’t try to anticipate it.

A.F. Thornton

The Founders Group just sold its 10% futures position at 4536.25 for a gain of 170.75 points per contract. This is the culmination of the “Cradle Trade” identified back on October 13th, barely a week ago. We have reached the Weekly Expected Move and our original target.

The market has behaved extremely bullishly. Nevertheless, pigs get fat and hogs get slaughtered. I don’t want to be the hog.

Tomorrow is options expiration and I am taking the day off, so there will be no pre-market outlook. The next publication will be Sunday.

A.F. Thornton

Globex traders kept the overnight session inside yesterday’s range. But we are not too far from the all-time high pegged at 4539.50 on the continuous futures contract. Don’t take all-time highs for granted. We have reached the Weekly Expected Move high, so I don’t expect any gains to stick at higher levels until next week.

On the 10-year treasury rate, we are at the neckline of a head and shoulders reversal pattern. If broken, it implies a doubling of this key rate from 1.5% to 3%. That will be interesting for the stock market, to be sure. We are just over a week away from the next Fed meeting, which will become a focus by next week.

The Founders Group has a 165 point gain on each Emini contract in its 10% position from last week. We are tempted to ride the position up to and through the old high. However, we will be selling out the position on any strength today and tomorrow. We will look to replace it with SPY calls on a pullback to the 21-day line in the next week, depending on how the variables of inflation, market rates, and Fed policy come together.

Even with the strength this past week, a double top is still a possibility. Interest rates and inflation expectations are the keys. The stock market can handle a certain amount of both, but not too much. Use yesterday’s high and low as your gateways today.

A.F. Thornton

Unbelievably, we have three unfilled gaps below us and an all-out breadth thrust coming off the October low. This is incredibly bullish for the intermediate picture. I had predicted a move back up to the old highs to establish a new trading range. But now, even I even doubt that scenario in favor of new highs. Steller earnings in several companies are likely to encourage the move. Inflation can drive stocks higher, at least initially.

The only rain on this parade is the continued increase in interest rates and the head and shoulders reversal pattern that telegraphs the 10-year rate doubling in the months ahead. The pattern and its implication seem inconceivable, but anything is possible these days.

Premarket indications tell us very little this morning. Our overnight cousins explored prices slightly above yesterday’s range, but they did not stick. There is a 45-degree line overnight on the profiles indicating that overnight sellers got nowhere. The pattern low around 4500 should be a good bull/bear line for day trading today. Also, keep in mind that the structure below us is shaky, given the rapid rise and unfilled gaps.

Accordingly, you will need to be on guard for liquidation breaks in the next few sessions. Today is a good day to follow the usual sequence. Traders are likely to take the initial drive to test either the overnight low and yesterday’s low or vice versa in the other direction. Mark the open and favor directional trades coming back through either side of it. Don’t be surprised if the market is rangebound today, favoring responsive trading. Use a VWAP with 2 standard deviation bands or a volume profile (or both) to trade it.

Your early clues will be ticks, the a/d line, and tempo: strong internals favor trends, and weak internals favor balancing. Look for the telltale clues of limit order trading, which also favors balancing. With limit order trading, you see traders selling strong bull bears and buying strong bear bars. Big bars in both directions with no follow-through indicate confusion and also lead to balancing. All of these subtleties can help you define your day trading strategy.

A.F. Thornton

Holy smokes! Momentum players are back at the table as the market progresses to the old, all-time highs in only four sessions. As I pointed out yesterday, how the market handled the gap fill would tip its hand. We got a partial fill only, keeping the short-term picture bullish.

We have another solid gap higher this morning, and gap rules apply. Keep #2 and #4 at the top of your list. Futures have backed off the ONH, so profit-taking on overnight gains may be nearly complete. So, I am not going to try to play the open.

As with all gaps, let the market signal its bullish or bearish bias based on how it handles the fade. The overnight high at 4504.50 is your upside gateway to higher prices. The overnight halfback at 4488 is your bull/bear reference line today.

From 4488, you have support at yesterday’s high (4479.75), the overnight low (4471.75), and then the top of the single prints (4467.75).

We are overdue for a bit of downside pressure from the 10-day wave.

A.F. Thornton