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Heads up. Or should I say head and shoulders up? Take a look at the hourly chart above. If the reversal pattern takes, the measured move is the head projected from the neckline. That would be 51 points from 4417 or a 4468 target.

Strong internals this morning thus far. Obviously, it is not a pattern until it takes. As always, watch for the head fake / look above and fail. But the pattern is encouraging.

A.F. Thornton

The narrative has not changed much so far this week. We have been experiencing an artificially induced economic recovery juiced by a lot of government stimulus. The unintended (but certainly foreseeable) consequences have been the worst inflation in 50 years. The prices of food, gas, cars, and houses have skyrocketed. Nor does the inflation appear to be abating.

But inflation is a funny thing. When prices go up, people have less money to spend. That means that there is less money to drive economic growth, especially when 2/3 of all U.S. economic activity is tied to consumers. The stimulus and added unemployment benefits all expire soon as well. Then what?

How about a heck of a lot less discretionary spending money in consumer pockets, with 14 million of them still unemployed. Those are recessional level employment figures, were they not preceded by the Pandemic figures. It is a bit like hanging out with an ugly friend to make you look prettier.

The bond market, arguably the most important market in the universe, predicts a slowdown, if not an outright recession. There is no other rational explanation for interest rates falling so much in an inflationary environment. Moreover, the U.S. dollar has been rising while interest rates have been falling. That is the opposite of a normal relationship between interest rates and the dollar. The logical explanation for this is fear – a potential stealth flight to safety by the institutions.

Rates did rise parabolically in what looks like a blow-off peak on the charts earlier this year. Given the steep, almost panic-like rise, one could propose the recent rate declines as a reasonable pullback in rates to correct the excess. But that would not explain the behavior of the dollar.

Lower interest rates are generally good for the stock market and all financial assets unless they fall because institutions have been flocking to treasuries to buckle up for a storm. A rising dollar can be good unless foreign institutions are flocking to the dollar to prepare for the same storm.

We await the July unemployment report coming out Friday morning for our next gauge on the economy, but yesterday’s ADP report already hints at a massive disappointment. And then you add in the negative consequences of the Delta strain of the China Virus. Last night, the Lambda strain from Peru was found to be vaccine-resistant like its Delta cousin. Meanwhile, we divide the country over a vaccine that doesn’t even seem to work. And tell that to the people dying from the vaccine side effects.

So the market (S&P 500 Index) remains in the balance range with Balance Rules still applicable. The NASDAQ 100 looks a bit better this morning, with the Dow and Russell a bit worse. We closed an inside day yesterday at roughly the halfway point for the range. We poked just above yesterday’s range overnight at 4408.75 overnight. So I would watch that level on the upside today as a potential buy signal, then 4417 from Monday, and the all-time high at 4422.50. Assuming we are fortunate enough to tag those levels, monitor for continuation. Be on high alert for a “look above and fail” per balance rule if we poke above the all-time-high, also the top of the balance range.

Yesterday’s low at 4391.50 would be the line in the sand and a sell signal today, as it is roughly the halfway point of Monday’s range and the overall balance range, as it was yesterday. Technically, all this has been a battle to hold the roundie at 4400, so watch that level carefully. I am anticipating more balance today, ahead of tomorrow’s employment report.

We had another Spike Channel form overnight from European trading. It started at 4394.75. We might revisit that level this morning before moving higher again. That is also the Globex low. If we hold that level, we may not even need to visit yesterday’s low at 4391.50.

Good luck today. I continue to monitor all of our swing positions carefully.

A.F. Thornton

The morning has been a sloppy choppy range fest, with a barely discernable wedge into our halfback at 4391 or so. From there, we have a swing-up that could form a reversal pattern. Unless we clear all the noise in either direction, I am on the sidelines today. The pattern had a bearish tilt all morning, but this is the typical activity that follows a spike higher into a bull channel as we saw yesterday. So the behavior is normal thus far, not telling us a lot about what lies ahead.

On a couple of housekeeping notes, I will be out next week taking some time off and finalizing our new web subscription and trading room services. Unless there is an important buy or sell signal, I will only publish the weekly View from The Top Down report. There will be no daily updates.

Yesterday was, indeed, impressive. And I can make many arguments that we should break through the top of the trading range in the next few sessions. If so, 4450 is a reasonable target, about 50 points higher than the current price at this writing. Is that a lot? No. We practically covered that distance yesterday.

The cautionary note is twofold. First, trading ranges are self-reinforcing and not always easy to break in either direction. Second, the market can pop higher from the range, only to reverse in what we call a bull trap. It is also called a final bull flag.

The reason I tell you this is not only to be aware of the risk day trading. It is easy to get lost in the weeds. But as to our swing trading positions, I always worry that anyone following these pages may not enter timely when we do, putting them at a different cost basis. I worry about the same on the exit. You have to stay alert and watch your emails so that you can execute as close as we do on entries as well as exits.

Balance Rules are applicable in this 37.25 point trading range. If we look above the old high at 4422.50 and then reverse, the probabilities are that we go back to the bottom of the range at 4365.25. If we break the downside of the range in that process, the measured move is 4350 or so.

If the volatility on the swing positions is more than you can bear, then exit on any strength today and tomorrow.

Today’s Plan

Overnight trading was inside yesterday’s range but bullishly in the upper third. However, we dipped a bit pre-market on the ADP job numbers, which came in half of what had been expected. There are innumerable signs that the economy is either slowing or anticipating a recession soon. This would not bode well for the market or our current positions, so this is weighing on my mind, at least as to fundamentals.

For downside referenced today, you have the overnight low, of course currently at 4898. I would call penetration of 4395 at the top of the single prints my “nervous line” Yesterday’s halfway point or halfback at 4391.25 is my line in the sand for bull/bear trades.

The main upside reference is the all-time high at 4422.50, but you must get through the overnight high at 4415 and yesterday’s high at 4417 first. So there will be some work if we get up there, including the usual stumble at the 4400 roundie.

However, the guiding principle in day-trading a five-minute chart is the 21-EMA. Under the line, you are looking to short from the line. Over the line, you are looking to go long from the line. You use your patterns and other work to confirm reversals when the price gets stretched too far from the line.

Finally, we may open with a small orthodox gap down. It is not a true gap, so Gap Rules are inapplicable but be aware of it.

Good luck today.

A.F. Thornton

It is hard to complain about the opportunities presented for day traders in the past two sessions. Today was better than yesterday in that it kept our swing positions in the game, but that is for another strategy.

The morning started with the bears driving the market viciously lower into a selling climax. A bull, major trend reversal followed, starting with a couple of bull surprise bars. This gave us a long position with a clearly defined two-step target and an opening range break target right above that. Price tagged both targets almost to the tick. The day ended as an outside-up day in the RTH session since we briefly fell below yesterday’s RTH low and broke above yesterday’s RTH high. I wasn’t as lazy as yesterday, putting 39 points per contract on the board.

There were more trades available than marked above. I skipped the morning short trade. I was too screen fatigued to scalp the bull channel rising into the end of the day. As the rising wedge and channel progressed, I took more of a buy-and-hold approach on the last long trade until we reached the opening breach trade target.

Stepping out to a two-hour chart, I threw a bit of Wyckoff analysis on the trading range. We now have a decent chance of breaking out, though I take nothing for granted. This morning was a shakeout, falling below yesterday’s low and bouncing right back. It would have been better to take out the first low in the range, but this was close, almost to the tick. A flush like this generally acts as a spring for a rally to end the trading range. Supply is finally exhausted, along with the weak hands.

The main fear I have is that this consolidation pattern can also act as a final bull flag. In such a case, we could look above and fail tomorrow, resulting in a bull trap. We need to be on guard for the possibility. Otherwise, we can begin to target the uncompleted measured moves above us, more clearly defined on the daily chart below, and previously discussed in these pages.

I was also pleased to see our swing positions in Energy (XLE) and Financials (XLF) leading the pack for most of the session. We have been betting on a turnaround and rotation into both of these beat-up sectors, but concerns about the economy (in light of the latest Covid scare) could spoil the best-laid plans.

As always, I will stay vigilant.

A.F. Thornton