In looking at the market this morning, I cannot help but be concerned about the blow-off, climactic, and parabolic nature of what I see in many stocks, sectors, and indices across the board. Keep in mind that in such circumstances, the structure underneath the market is unsound.

That means that when the market rises this fast, there is not enough volume at price to catch a fall. On a volume profile, you will see what I call a lot of “air pockets.” The market will tend to fall through these “gaps” in volume fast. I call those liquidation breaks on a five-minute chart. But on the daily chart, the ride is unpleasant if you are long, no matter what you name it.

I would be cautious in holding longer-term swing trades here until we get a good break and begin to repair some of the underlying structure. Repair means that we get some solid volume at these price levels to convince us that the institutions are interested.

Stay tuned,

A.F. Thornton

It was the trader’s choice yesterday. Did the market rally on the Fed’s decision to slow the monetary easing process? Has the battle against inflation finally begun? Or was the market cheering the blow to American Marxism and Communism as the result of Tuesday’s election results? Either way, the market looks both parabolic and climactic. We can ride it. But the liquidation break, when it comes, could be swift and unpleasant.

As measured by the Russell 2000 (IWM), small caps did, indeed, break out on decent volume. If the opportunity presents, buy the retest. Buy any pullback. Target double the 9-month trading range. The ISM manufacturing report came out strong yesterday – and we have the employment report tomorrow. But the risk-on nature of what a breakout in small caps represents is undeniable.

The measured move projected from the past several months S&P 500 trading range (September peak to October low) and the top of the old weekly channel give the S&P 500 an upside target of 4800. I would get off the escalator there, though it is hard to believe it will be a straight shot to the target. As I had suspected yesterday, the failure of the rising wedge to break lower was a WWSHD contrary signal.

Overnight traders were unable to press the downside much, if any. This leaves overnight inventory net long, but we are slated to gap open, if ever so slightly. Small gaps usually fill, and there could be some profit-taking on the overnight inventory at the open. Gap Rules are in play, but I could argue Spike Rules as well.

Use the overnight high at 4662.50 as the gateway to continue the blow-off rally, with the next roundie at 4700 as the near-term target. 4650 is the price to hold. Acceptance below that level on the hourly chart could spoil the fun.

I had some emergency travel arise yesterday, so I will continue to work on a macro presentation once I am settled in today.

A.F. Thornton

Today is Fed announcement day. It is unwise to day-trade today unless you have a specific strategy that centers around the Fed decision. So I am refraining from announcing key levels, except that a sell-off for a few days is likely to follow on any day where we close below the previous day’s low. For sure, though, 4600 is a crucial support level on the daily chart and should hold unless a more extensive correction gets underway. Also, the nominal 40-day cycle dip is on the docket soon, though it may be mild in the context of the current rally and positive seasonality.

This year, the market rallied into the Fed meetings, and a few sessions beyond, before correcting a few days. What is unusual about this Fed meeting is that the market expects the governors to throttle back on bond purchases (Quantitative Easing). That is equivalent to a mild tightening. So why has the market rallied this time?

The most logical expectation is that the economy is slowing, the yield curve is inverting, and that should take the pressure of the Fed, interest rates, and inflation. The Fed’s potential action also is considered anti-inflationary. Inflation may very well be the greatest threat on the economy’s table.

In short, the Fed does not need to do anything dramatic today and has a runway to unwind some of its easy policies. Only time will tell. Success requires a delicate balance – a slowing economy that doesn’t slip into a recession. We used to call this Goldilocks from the famous fable – not too hot and not too cold.

What has been interesting to watch are the four major indices. The Dow, S&P 500, NASDAQ 100, and Russell 2000 have been vying for leadership off the early October lows like a good horse race. Uncertainty in the direction of interest rates has contributed to this contest for leadership. Rates drive sector rotation, and investors/traders have been understandably indecisive in picking the winners.

Keep your eye on the Russell 2000 (IWM) as it is on the verge of a breakout from the nine-month base. That could be very powerful should the breakout materialize. The Russell, Financials (XLF), Energy, Dow, and other cyclicals will benefit from mildly rising interest rates. Technology typically lags in such an environment.

From the bigger picture, note the rising wedges on the NASDAQ 100 and S&P 500 daily charts. Normally, that means a dip ahead. The market has been strong, and not all patterns have followed through successfully and reliably. Nevertheless, note the rising wedge pattern in your narrative. As set forth above, the nominal 40-day cycle dip is due any time and, in an ideal world, would result in a few days of weakness into early next week. A break of the wedge would get the ball rolling.

Expect a balancing market into the Fed meeting. After the Fed announcement or later this evening, I will publish a “View from the Top” macro perspective.

A.F. Thornton

1:47: The market is in a holding pattern…

If she moves and creates an opportunity before the end of the day (with enough time left on the clock…), I will comment accordingly

Otherwise, if she doesn’t move…

We’ll see you in the video tonight…

1:36: As for the SPY…

directionless floater on light volume – still…

1:35: A word on the Transports…

We all see the crazy move the Avis had – doubled in a day…

Hard to believe, but it does seem to be the culprit for the move higher in the index.

However, if you look at IYT which is the exchange-traded fund that tracks the index, it’s a real representation of what the transports are doing…

Translation, the index has a flaw that will now be addressed.

You’ll hear about (or not hear about it) in the next day or so…

12:55: Update…

No man’s land, waiting on the Fed…

A floater with the trend on all time frames is the dominant thing…

Just sayin’

Back as needed…

10:50: Not much to comment on in terms of the SPY…

They’re in no man’s land around 461.50…

Just floating…

Back after lunchtime…

10:32: After an hour we’ve got about 10 million shares traded in the SPY which is on the lighter side of very light…

They’re floating in a chop shop formation…

Waiting on the Kabuki….

Back as needed…

10:17: 460.73 against the support at 460.75 and the bounce…

Funny how that works…

10:08: Of note…

The transports are up over 5%.

Looking at the individual components, they’re not up like that….

Interesting for now….

10:07: 461.43 high so far against 461.50.

Remember – 460.75 is the short-term pivot or line in the sand for higher or lower prices…

10:02: From a very short-term perspective, 460.75 is support.

Below that and the door opens for 460 give or take…

It’s quiet and they’re floating until they find a morning pivot…

460.50 is a pretty good spot….

9:50: It’s not easy in no man’s land, but from where I sit, they’ll likely get to 461.50 give or take…

9:42: Around and at new highs is no man’s land…

We just let the SPY go until she shows a storyline…

9:37: SPY just pushing a little, but it’s very light volume and no conviction…

They’ll go back and forth…

460.75 was the official completion of the inverse from the video…

Of note…

9:33: So far, nice trade on MOS…

SPY quiet…

9:00: The pre-market activity has been rather quiet…

“Waiting on Kabuki?”

We come with no preconceived notion. Instead, I have an open mind for whatever Mrs. Market wishes to provide…

We’ll let em’ go to get a handle on the early storyline…

Look for the trading range between 4690 and 4720 to maintain in the next few sessions. Overnight inventory is net short, so that we might see a brief short-covering rally at the open. And yesterday’s price action did not get too far above Friday, with value (where 70% of the volume occurred) overlapping Friday’s volume.

In simple terms, the market slowed down a bit near the roundie (4600). This behavior is not necessarily negative nor unexpected. The Fed meeting starts today, and the announcement on interest rates and whether the Fed continues their bond-buying program (Quantitative Easing) comes tomorrow afternoon.

Perhaps a bit surprising to me is that the market has rallied hard into the meeting and announcement. The consensus expects the Fed to leave rates alone but announce a tapering of the Quantitative Easing program. Normally that would be negative for the markets. One must believe that the insiders know that the Fed will not change its policies, or the market likes the news. Another possibility is that evidence of a slowing economy takes the pressure off the Fed in the short term. So the party might go on for a couple of more hours. Who knows?

Otherwise, this is a good area to pause. We have achieved all of my original targets from the October low. So the upside is blue sky and somewhat undefended.

The first gateway to the north is the overnight high at 4610, which opens the door to yesterday’s high at 4612.75. Finally, 4619.75 is the Globex high from Sunday night. Conquer that, and happy days are here again.

I get a bit more nervous if we give up the roundie at 4600. That level is the true battle here. We have double POCs right below that level which should provide support. If they don’t, I think the idea of a sell-off for a couple of days becomes realistic. I will be using yesterday’s regular session low at 4586.50 as the line in the sand today. I will be short-term bearish below that line.

A.F. Thornton

2:18: So they’re almost home to 458.00. Between 458.15 and 457.79 is the spot.

Aggressive traders can expect a bounce from that spot.

It’s a scalp, not a marriage…

We’re running out of time on the clock, so understand if it goes against you and the time is running out, you either have to take the hit or hold and hope.

The exact reason why trades taken too late come with added risk…

Below 457.79 on candle closes and it’s wrong.

Back as needed.

2:09: Some traders can see the writing on the wall…

They’re either going to reach 458 give or take right into the closing bell, or…

Just float around the rest of the day…

Still watching just in case…

Back as needed…

1:52: The same support and important spot from this morning around 458.00 give or take should be important again if reached…

Should get a bounce unless it happens near the end of day, then anything goes…

1:29: Around, above and below the big phat round number is all they’re doing – at present…

Back as needed…

1:12: Where are they now?

They’re climbing the first-hour breakdown candle toward the high…

Maybe it’s a wedge pattern and they come back down after running said test in the neighborhood of the highs…

However, that high is also the all-time high from this morning…

Therefore, I’m not in the camp of betting they’ll come down into the close with a couple of hours left on the clock…

Just sayin’

It’s quiet and they’ve been in the light volume float mode since the early morning shakeout operation…

Back as needed…

12:42: Update…

They got back to 460 as prescribed… (459.97 high thus far…)

They’ll likely get a little higher but should peter out sooner than later for a while…

Back as needed.

11:03 Staying above 458.70 keeps the bulls working back to the big phat round number of 460.00 or higher, at some point…

Still back after lunchtime…

11:01: They really needed to get to 458 and below for another trade at present…

Now they’re bouncing away, so it’s not the same…

This is the bounce we would have been looking for…

Just didn’t get to my number…

Back after lunchtime or before if something crazy is happening…

10:57: At a spike of 458 it will be showtime again for the bulls to play defense…

Big spot.

10:37: If they drop em’…

They will likely run down and spike through 458.00.

And, if they do there should be a snapback…

Candle closes below 457.60 and the bears are in control and lower prices would be on the docket…

Back as needed…

10:30: No change for now…

They’ll move, but until they’re above one place or below another, it’s a chop shop formation…

Back as needed…

10:24: 458.00 is support.

The candle closes below and the bears pick up the fumble…

460.00 is resistance (give or take…)

In between is a chop shop formation…

10:09: And by the way…

That’s what we call “A Shakeout Operation…”

10:08: Next order of business is back to the magnetic 460.00…

Above and below and back to…

So far, that’s what’s going on…

10:05: Low of 458.20 low against 458 give or take.

Kind of on the line of give or take…

Either way, nice bounce from that area…

They’ve moved em’ quick all of a sudden…

We’ll get some opportunities as the storyline develops…

10:02: 458 give or take is the next spot where if a test is run, there should be a reaction in the other direction…

9:51: Traders long need to book profit along the way…

459.95 is the key…

Above on candle closes and she can run some…

Until she does, tests and rests are on the table…

9:50: Ran down to 459.25 and now lower.

It’s showtime for the bulls to play defense.

Below 458.00 on candle closes and it’s not bullish in the short run…

9:44: In the spirit of no surprises…

They’re doing the thing around 460.00 – back and forth…

Opportunity is scarce…

It’s a floater at present.

Back as needed…

9:36: 459.25 (give or take) should be a bounce number…

If reached on a straight shot…

9:33: Very quiet open…

In patience mode…

Remember, they’ll trade away from and then come back to 460.00…

9:16: We’ll let em’ go for a while at the open…

They’re hanging around SPY 460.00- the big phat round number…

Expect some back and forth above and below…

Remember – it’s magnetic…

EarlyThoughts

Happy Monday…

last week ended with a ramp-up right into the close…

Follow-through is what we’re seeing to start the first day of the month…

We talked about the big phat round numbers and the inverse head & shoulders pattern…

No surprises, they did the thing…

As for the numbers…

The SPY is trading at new all-time highs which is also known as “No Mans Land…”

It’s not a “hop on the bus” scenario…

It’s not a “short the market with both hands” scenario…

It’s a wait to see what happens and what develops throughout the day scenario…

The gap left open from last week is 459.25.

There will be support and a bull-bear battle before they get to the gap…

We’ve got the big phat round number of 460.00 which should be tested sooner than later….

As for Stocks on the Move…

It’s a light day in terms of pre-market activity.

We have no choice but to accept the tape Mrs. Market provides….

Overnight inventory is 100% long as the market gaps open on this 1st day of November. Gap Rules are in play as are Spike Rules. The market does appear a bit overdone here but follow the rules. How the market handles the gap this morning will be your best Market Generated Information on the day. Mark the open, and look for long or short trades when the market comes back through it from either side.

Recall that the Fed meeting begins tomorrow with the announcement on Wednesday. The market will either sell off into that meeting or begin to balance and move sideways. Trading much after today gets riskier by the hour. Let the Fed make its announcement and go from there. Also, we have a minor cycle dip scheduled into Friday or so. Keep that in mind.

A.F. Thornton