Archives December 2021

Bull markets don’t die of old age. The Fed kills them. And with the Fed admitting last week that inflation is no longer transitory, the thought that the Fed is considering homicide has been infecting the markets from top to bottom. The damage is serious, and we deal with a deeply wounded market.

All time frames (Monthly, Weekly, and Daily) have ceased one-time framing higher for the first time this year. Again this week, options market makers are pricing in considerable volatility. The expected move is double the normal range in each direction from Friday’s close (120 points on the cash index). For the cash index, the WEM high is 4665, and the low is 4411. As one concern, weekly options pricing allows for a potential move to the October low before the market makers start losing any money. It is a great time to sell premium as an options trader.

However, now that the market has everyone’s attention, it may be ready for a bounce. I gave an uber-aggressive long “trade” signal late Friday at 4604 on the S&P 500 (apologies for the 4614 misprint). I am holding a call debit spread this morning, good through the 21st, and we will see if it becomes profitable. Using a spread to tamp down your Vega risk is critical, as a straight call profit can get muted if the volatility abates.

This aggressive swing trade is not supported by a Navigator buy signal, which has yet to materialize. This trade is more of a technical day/swing hybrid and oversold play that I will not hold for long. I may sell into any strength in the next few days. But it is useful to review the technical context.

The market sentiment is close to a short-term, negative extreme which is bullish. For example, the VIX and the Put/Call ratio are at the highest level for the year. The CNN Fear/Greed index is at an extreme as well. In other words, fear is back, which is positive for a bounce.

Price is intersecting with the weekly mean, the 50, 89, and 100-day lines, the weekly channel uptrend line, and a 50% retracement of the October to November rally. These are technical levels where institutions typically add to positions.

Additional bullish reads include the laggards (like the Dow (DIA) and Russell 2000 (IWM) bouncing Friday while the monsters of tech (NASDAQ 100 – QQQ) were finishing the initial phases of their declines. Neither the Dow nor the broad NYSE put in new lows, diverging from the other indices. So far, the DIA and IWM are holding their 200-day lines. Junk bonds are not confirming Friday’s lows either, and we had fewer decliners on the A/D line. There is more, but you get the picture.

This confluence gathers around the 4550 level, which should be the key level to watch for now. If 4550 does not hold, it is a quick trip to the next confluence of support at 4500. Short term, I expect a bounce up to 4625 or so, then another roll down to test last week’s low at 4492. All of this down leg should culminate in a final low or retest around the 15th when the Fed wraps up its latest meeting and announcements, and the 80-day cycle trough is due. The fact that cycles bottom around quarterly earnings and Fed meetings is no accident.

Swing Traders

You can watch for my technical setup signals, but the better wisdom is to enjoy the holiday season and wait for the Navigator Algorithm to reset on the daily timeframe. This is a dangerous market with a lot of volatility. Last week, we had 2% and 3% daily swings, which is stunning with five or 50 to one leverage on a futures contract. There are more of those swings in front of us.

This is not the typical correction we have seen over the last year. This decline is much more serious and could signal the onset of a cyclical bear market. However, bull markets rarely transmute to bear markets immediately. The market usually establishes a trading range first, and I could see such a range forming from the October low to the recent highs (roughly a 10% range). Otherwise, if this is merely a deep bull correction, we will see some spike lows (remember those?) and fireworks before the uptrend resumes.

Money managers and hedge funds still have record long positions and margins. Unwinding all of that, should these professionals head for the exits, will make last week look like a blip on the radar screen. As well, Libor Rates inverting and the crash in oil prices warn of a potential recession ahead. With Consumer Confidence in the proverbial toilet, a recession is definitely on the table. It all depends on the virus fear mongers, the Fed, and the fiscal stimulus coming out of Congress.

Day Traders

It does not get much better than this as far as volatility goes. However, no matter how it looks on your screen, these are huge price bars, even on a five-minute chart. Consider reducing position size (e.g., use micros rather than minis on your futures trades) with the volatility at hand.

What the market is doing right now is bouncing the laggards that led the market down while the large-cap tech stocks finish correcting. So your best trades could be the Dow and Russell Futures today, rather than the S&P 500 and NASDAQ 100 – both of which bear the brunt of the large-cap tech stocks catching up to the correction.

We will come into the open with overnight inventory net long – so expect some profit-taking first. Use Friday’s candle range as your balancing area. You are looking at a playground roughly from 4500 to 4600.

If we head north, watch your downtrend line which could stop any return to 4600. The 5-day line (currently at 4564) is the flex version of the downtrend line and has been provided considerable resistance since the decline started. Closing above this flex line (and trendline) will be the first step to bringing back the bulls.

Going south, the intermediate, weekly channel uptrend line can also stop any return to 4500. The 100-day line is the flex version of the weekly channel bottom/uptrend line. Closing below those lines bolsters the bear case, likely to establish a trading range from the October low.

Use a break above the overnight high at 4572 or below the overnight low at 4531 as your first directional clues. Breaks of the trendlines also help you determine direction but watch for fakeouts. As always, monitor for continuation, which is best accomplished using a market and volume profile chart. When you see volume and time at price confirming direction, you have the “continuation” we look to confirm.

The bottom line is to consider long trades at the low end of the balancing range and profits at the high end. Be very careful taking positions in the middle, which is where we are slated to open at this writing.

Short trades are off the table for now unless or until we start closing candles below Friday’s low at 4492 on the hourly chart. Even then, it would be a quick trip to 4450. Otherwise, the market is very oversold here, and you should consider covering any short positions on weakness. The lows of the last three trading sessions congregate around 4500, so it is an identifiable line in the sand.

Also, keep in mind that we tend to put in lows on Monday and turn it around on Tuesdays. This is a notably strong seasonal period for stocks. However, the Santa Claus rally may not ensue until after the Fed meeting on the 15th.

Be very, very careful here. Don’t box yourself into a corner and watch position size in this volatility.

A.F. Thornton

Very, very aggressive swing traders, this is your moment at 4604 with a 15 point stop. The put/call ratio is approaching 1.0. as the market puts in a short-term double bottom. I am using a wide stop to allow for a flush. This trade could go for a couple of days. There is no Navigator buy signal – this is a more technical setup trade. At the very least, I would cover any short positions.

A.F. Thornton

All market references below refer to the S&P 500 Index Continuous Futures Contract – 24-hour Session.

Oil has been my “One Thing” lately. I always try to find one thing that tells where we find ourselves in this crazy environment. Oil has fallen more than 20% in the last month – otherwise known as a bear market. It looks like there is some accumulation around the $65 level. But the implication is that the markets expect the China Virus insanity to continue and negatively impact the economy. It is already starting in Europe, and they can ill afford any more policy mistakes. Neither can we.

Prices at the pump should begin to fall. Perhaps this will lead to a peak in inflation. Why? The crash in oil / gas-pump prices tells me that the policy errors by the Federal Reserve may now lead to faster tapering – and deflation. They will need to be the most skillful Fed in history to avoid an asset implosion and debt crisis. Demand should wane – right as supplies skyrocket. What timing!

But this crash potential has me doubting whether they are really going to taper or raise interest rates. They could be jawboning us. That may be all they can do to avoid the inevitable reckoning ahead. Perhaps this latest virus salvo is part of the engineering to do the Fed’s job for them, leaving the politicians blameless.

Let me also say that this is the most serious conundrum any Fed has faced in my 34-year career. They have inflated assets and now goods and services at the expense of the lower and middle classes. Is it any wonder that there is a wealth gap? Is it any wonder that there is so much unrest?

Oil is telling us a recession is possible in 2022. If so, look out below. And since the powers that be had already taken the “Great Recession” label for the last debacle in 2007-2008, let’s coin a new phrase. How about Armageddon? It will seem so when the piper has to be paid.

It was only a week or so ago that I was waiting for the breakouts in the Dow, IWM, XLF, and DBC to retest, and I had my finger on the trigger. All three indices crashed through their retest levels and now sit back at the bottom of their trading ranges. It is a “Look Above and Fail on the daily charts per our Balance Rules. It is also a notable reversal from a final bull flag.

My thoughts continue to be that this latest virus scare has been engineered. See the real story here (forward to the interview with Dr. Robert Malone, inventor of mRNA). I have discussed the disconnect of the latest virus to reality in previous writings. It is Mass Formation Psychology at work. The question remains, who is running the program?

Speaking of Mass Formation Psychology, all major indices are on support and should bounce here. The spikes in volume and negative sentiment support a bounce soon. The S&P 500 finally tested the 50-day line and the weekly mean. But the index still struggled to overtake the 5-day line all day. It may be worth a swing trade for a very aggressive trader here.

However, we do not have a Navigator buy signal as yet. Given the vertical bear candles behind us, I expect a minor reversal before we roll over again, at least for a retest of Tuesday’s low. And all I am doing right now is scalping/day-trading. I lay out the roadmap here every morning. Follow it, and you will wrap up your day with a smile.

To understand my approach, all one needs to do is look at last week’s overnight thrashings before you awakened. That is why I avoid overnight (weekend) trades unless I plan to stay up all night. With the VIX trading over 20, it does not make sense to hold overnight.

At the risk of being too negative, I will also disclose that I see the same setup now that preceded the March 2020 virus crash. When we get the Navigator sell signal and any such setup, I can never predict the magnitude of the decline except to ascertain the current cycle at work.

The 80-day cycle seems to be the culprit right now, and we don’t typically see crashes on that cycle. Contrast that with March 2020, when the 9-year and all lesser cycles were overdue. The greatest uncertainty is whether the 18-month cycle bottomed in October. That could be the wildcard. In fact, I warned you about this late November dip on August 30th, more than three months ago! Who says I don’t have a Crystal Ball?

Swing Traders

The check is in the mail. I will let you know.

Day Traders

Closing above yesterday’s high at 4693.75 gets the ball rolling north, but it will be a rocky road with the five and 21-day lines to conquer up to 4620. Taking out yesterday’s halfback at 4550 brings doubt to the table. Markets love to retest new lows, or at least attempt a retest in the first five trading days. Keep that in mind if we are in the southbound morning lane.

The WEM low is at 4445 if the market really wants to put on a show before the weekend, but I doubt we could tag that level this late in the week. I am more in the bounce camp than another spike low. But I am not infallible – Crystal Ball and all.

I will update any necessary comments and levels after the employment report in the morning if required. Otherwise, I think the roadmap is clear right now.

A.F. Thornton

If valuation matters, there is no precedent for where we find ourselves. The Wilshire 5000 to GDP Ratio, Warren Buffets favorite benchmark, exceeded 214% at last week’s peak.

At the 2000 market top, the number was about 139%. At the 2007 top, it was just above 100%. Even before the China Virus crash in March 2020, the number was 150%. When these markets corrected, the number rolled back to the 50% to 60% range.

As you know, the NYSE index erased seven years of gains almost overnight when the China Virus went mainstream a little more than a year ago. And it isn’t just the overvalued stock market, which is why this is called the “Everything Bubble.”

We all know this won’t end well. More money has gone into stocks in the last year than the last 20 years combined. We try not to think about it until there is some negative, vertical price action. Then it is like, “right, this is the stratosphere.”

Perhaps most concerning is that the market has become more a function of the Fed’s balance sheet than anything else. The correlation with the S&P 500 Index and the growth of the Fed’s balance sheet is nothing short of stunning.

Market participants look to the Fed rather than the economy, earnings, or other fundamental factors. So when the Fed talks about slowing the growth of the balance sheet by tapering their latest Quantitative Easing program, you can understand the market’s negative reaction.

Typically, the bloodbaths usually occur on the four-year cycle corrections. In our case, that would be a trough in 2024. Sometimes, we can start into such a decline a year early. Starting now would be very, very early. But we could certainly start with a trading range as the Fed tapers the balance sheet. And Chairman Powell admitting the obvious, that the recent inflation isn’t transitory, has the market anticipating a relatively fast taper.

Swing Traders

We are in the zone for a minor reversal. We are trading around the 50-day line and the channel that started from the correction about this time last year. Smart Money confidence is climbing to 80%, while fear indicators continue to rise. Both indications are positive for a short-term low.

Due to the size and velocity of the bear candles over the past week, I expect any reversal higher to be minor. This does not feel like the instant gratification pullbacks we have recently experienced. We need to be very, very careful here and watch for market-generated information. Turn the TV off.

I am reminded here of our good friend WWSHD (When What Should Happen Doesn’t. We normally see strong cash flows and positive returns the last few days of the previous month and the first few days of a new month. It is not happening. We are in the strongest seasonal period for the stock market from Thanksgiving to Christmas. So far, Santa Claus is missing in action. As I often counsel, success in this arena is more about watching what the market isn’t doing rather than what it is doing.

Swing Traders should continue to await my signal when the Navigator Algorithm flips the lights back on. So far, we are not there yet, but we are in the zone.

Day Traders

Spike Rules are in play this morning. Acceptance within the spike is bearish, which is where we are starting this morning. But like yesterday, traders were somewhat short in the hole at yesterday’s close, given how far away the settlement was from value and the POC.

While we are slated to open well below the Globex high, there is still potential for corrective activity early in the session. How much will be very important MGI.
Moving below yesterday’s low on faster tempo and bearish internals puts the gap and next VPOC (Key Levels) into play as targets.

The top of the gap is 4487.25, the bottom is 4479.75, and the next VPOC is at 4471.75. But remember there is about a 20-point area around the 50-day line and the channel trendline coming up from last year at 4530 or so where bulls and bears will battle out support this morning.

Overnight inventory is net long, so there could be some profit-taking at the open regardless of the ultimate direction today. You may want to sit it out for a bit until the market takes a final direction that you can monitor for continuation. The market is oversold here, at least for the very short term.

Good luck today.

A.F. Thornton

All references to the market relate to the S&P 500 Index Futures continuous contract, 24-hour session.

Traders finished yesterday’s session short in the hole, but also at a Fibonacci 38.2 retracement from the recent market top – a typical bounce point. Unsurprisingly, then, overnight trading was net long as there likely was some buying and short-covering.

That also gives us an orthodox gap higher this morning, meaning the gap is still within yesterday’s range. Fear gauges are high (which is getting bullish), and the market is looking short-term oversold (also bullish). All in all, a bounce is in order today, and then some balancing (sideways) action.

Swing Traders

Your day is coming, but continue to hold for the Navigator Algo to conjure up a buy signal.

Day Traders

I promised you a volatile week on Monday, if for no other reason than the Weekly Expected Move is double any typical week. Today is December 1st, and fund flows should be positive over the next few days.

But the monthly candle turned out negative for November, casting a negative pell over December. The cycle bottom stretches into mid-December, so any relief rally could be short-lived. Be sure to mark the monthly RTH session open this morning on your charts – it will be important this month.

After the spike higher, look for a potential balancing, inside day today and trade the extremes of the value area if the market is so inclined to deliver the sideways action. Use the halfbacks at 4600 from yesterday and overnight as your bull/bear threshold today.

Your first downside target is the overnight low at 4571.50, then the RTH low at 4557. Traders have been trying to push the market into the 50-day line around 4530 for three days, but the market does not seem to want to tag it. Nevertheless, keep the line on your radar.

Upside references begin to shift to the five and 21-day lines, both hovering around 4635 or so. Those lines have to be conquered on a closing basis to put the bull back on the table. There is a downtrend line converging on the two lines as well, so this area will be tricky, and it might be best to sit out the battle. In recent 80-day cycle declines, this same area has been a bull trap, so be careful.

Good luck today. Instructions for tomorrow’s trading room will follow later today.

A.F. Thornton