Archives 2021

I give you a lot of information every morning. But how should you use it? I know it isn’t easy. I have done this for many years, and it is still tricky at times. But you can do it if you follow a set of rules – namely “your” rules as you develop them over time. That is a subject for another discussion.

This morning, for example, I look at the daily chart, and I see a labored advance in an overbought market. The rally yesterday and this morning occurred on weak internals. It was a tech thing once again. The tech generals advanced, but the soldiers remained at the base camp. That makes it difficult to take the hill at 4700 (470 on the SPY).

But I also remind myself that we bottomed a minor cycle on the 10th, and we are in a period of seasonal strength for stocks. The market often rallies a bit before the Thanksgiving Holiday. Also, the market has been in an uptrend overall. I use this context to resolve any doubts in favor of higher prices.

When you drill down to the hourly chart, you see a head and shoulders reversal pattern to go higher, which broke out Tuesday and was retesting at the close yesterday. The right side of the pattern is in a triangle.

Whichever way the triangle breaks is your guide to the initial direction. And, to make it interesting, you have to watch for a fakeout. That means you not only have to wait for the breakout candle to close, but you should also wait for the close of a follow-through candle. That reminds me of the axiom; the more confirmation you have of a turn, the greater your risk to stop under the swing low out to your left.

Once the market takes a direction, you always have the overnight high/low and yesterday’s high/low, as applicable, to conquer. That is always the case. But each morning, I try to highlight the most critical signposts I will be watching in my daily plan, which may be these or other levels. I am looking for the price where I believe a cluster of buyers or sellers will show up. Sometimes it can be several levels close to each other, setting up a small range of support or resistance.

That is what trading is all about. You project where the buyers or sellers will show up and use that level to get on board when a pivot occurs. A “pivot” means that the price stops one-time-framing higher or lower as the case may be.

Say the market is falling. Once you have a candle that has a higher low and higher high than the candle to your left, then a pivot is usually at hand. When that occurs at one of our previously identified levels, you have the recipe for a trade. And it is the same in any time frame.

There is more to the story. You have to have a target and understand measured moves. But you can learn the techniques. How each candle behaves in the progression gives you hints about trend strength. For example, how far does the next candle invade the previous one? If it isn’t much, you have a strong trend and vice versa.

Today, I am slightly bullish but also cautious based on the weakness of the last few days and the overbought levels on the daily chart. What does “overbought” mean?

Plot the 21-period Exponential Moving Average (EMA) on your chart in any time frame. Looking at the chart visually, you can see how far above or below the EMA price has traveled. Over time it becomes evident when the market gets too far away and needs to snap back. I could trade any day plotting that line alone and knowing my key levels.

I always do my best to keep an open mind. The chart above is the hourly chart of the SPY. Add a digit, and you have a similar futures level. But let’s go with the SPY for now. You have a strong support zone from 466 to 467.50. The initial breakdown target from Tuesday’s high is 466, but we could see a pivot around 467.50 first (roughly 4670 on the futures).

Out to the right on the chart, you will see the volume at price in a sideways histogram. Wherever the peaks occur is a volume cluster that the market needs to climb over. The market usually finds support or resistance in the valleys surrounding each peak. To progress, the price needs to move through the valley to the next ridge. When I write about “acceptance,” I am referencing this progression. The volume and time at price help to guide you as you navigate to the identified support lines.

Note from the chart above that the market closed yesterday on the hourly 21-EMA and daily 5 EMA. The red dotted line is our 5-day EMA stop line from the daily time frame. To head south means we take out those two crucial levels. Closing candles below yesterday’s low at 467.40 (4670 on the futures) also ends the one-time framing higher on the daily chart. That is a significant change in tone and your line in the sand today. Translate that to your five-minute trading chart, and it will be a steep fall and an excellent short.

Of course, the best short is where the market already pivoted lower above, but the market ran out of time for a day trader, and, usually, I’m not particularly eager to hold overnight. Things can change by the morning, as they already have today. As mentioned the past few days, the market is not at a safe level for swing trading long, and it is too soon to establish a confident swing trade short.

A pivot higher and breakout above the triangle requires conquering the red resistance lines marked on the chart above, which takes us back up to test the all-time high, which essentially requires taking the hill at 470 (4700 on the futures). From there, you could ride the reversal pattern measured move up to 475 (4750 on the futures). So you target that range and see how the market behaves.

Remember, the market likes to travel in 50-point increments at a time before it consolidates again. So 4700 (470), 4750 (475), 4800 (480), etc., are always vital levels. Take everything off your chart, and mark those levels. Then step back and look at your long-term chart. You will see what I mean. Price pauses and clusters around those prices.

So now you see my plan for the day. The only question is whether the overnight trading gives me any clue as to how the market will open and whether to trade earlier instead of later. The market will gap higher at the open. It will be a true gap, so Gap Rules apply. With the imbalance of buyers and nearly 100% long inventory overnight, there will likely be a fade at the open. How the market handles this fade tells you a lot. No fade; it will be a strong day and time to get long. Slight fade and a move back through the open also begets strength. Gap and crap? Well, not so good, right?

The market starts bullish this morning, slated to open above 470 (4700 on the SPY). We need to close candles above that level to have the best chance of achieving a new, all-time high.

Good trading!

A .F. Thornton

The stock market consolidated yesterday and overnight after Friday’s pivot from the minor cycle we discussed. Of course, most pivot lows are retested, except in the rare case of a “V” bottom. So that is the question on the table before Friday’s weekly/monthly options expiration, which has tended to be somewhat of a mid-month magnet for the monthly stock market low. Are we going to retest, and will the retest be successful?

Assisting the consolidation have been some weak bond auctions Friday and yesterday. Rates have pushed higher, along with Gold and the U.S. Dollar. Gold rising makes less sense than the U.S. Dollar rising on the heels of higher rates. Weak bond auctions could be the headwinds holding stocks back a few days. Some of the behavior hints at risk aversion, so we need to be careful.

But the Commitment of Traders report on the futures market also shows a large crowd short the bond market and betting on higher rates. I always get nervous when the crowd is lopsided in either direction because the crowd generally turns out to be wrong. We could get a significant drop in rates if everyone goes to cover their short positions simultaneously.

On top of that, consumer and small business confidence have crashed. Apparently, the rest of the country outside the D.C. bubble is not celebrating the new administration’s policies and results. Go figure? But the crash in confidence is not good for the economy or stock market. A slowing economy also could mean lower interest rates. But then there is that stubborn pattern pointing to higher rates. What is a trader to do?

Swing traders should remain in cash here unless or until we get a more significant pullback or some other confirmation that another leg higher is truly at hand. Reward and risk are lopsided. A double top remains on the table, and even if a new high is at hand, I have a hard time seeing a target any higher than 4740. There is nothing like buying the peak as a swing trader.

Day traders have a better chance at these levels either way. Our overnight cousins were unable to test either end of yesterday’s range. As I had suspected, 4667 was the line in the sand in Monday’s session, and it held. So I have more confidence today in emphasizing that 4667 is more critical than ever to maintaining the very short-term bullish case.

Dropping through the 4667 level would be a nice short if there is enough time left on the clock today. Tee up the trade if we take out the overnight low at 4671. An excellent first target would be Friday’s halfback at 4664.50, then Friday’s low at 4645. Remember that any time you are trading around a half roundie like 4650, it may override any other influence and provide support.

If the market can get above the overnight high at 4687, a long trade might make sense using the cluster of POCs around 4680 as your support and stop. Then you could target yesterday’s high at 4693, moving up the food chain to Thursday, Wednesday, and finally Tuesday’s highs until traders conquer the all-time high around 4712.50. 4740 then becomes your final destination. Keep in mind that if the buyers step in, the market is likely to blow through these upper levels fairly quickly as it moves into the new high territory. Also, 4700 is a roundie and like half-roundies, these numbers provide support and resistance in addition to anything else in the neighborhood.

The trick to all of this is that the market often reverses course from its initial path. It is coming through these levels from the opposite direction, especially on a morning reversal, that conjures the best trade. An excellent way to start is to mark the open on your chart. After the market reverses and comes back through the open, look to trade in that new direction with the parameters above.

Also, never forget to mark your opening range (after the first reversal). Project the range (measured move) in both directions and look for the breach to the appropriate target. Often the level will coincide with one of the critical levels identified above.

Yesterday was a perfect example. When the market breached the opening range, it made the measured move, also the 4667 level that I had already identified pre-market.

In a balancing market, the best trades come later rather than earlier. The tone of the overnight session is balanced – and that likely sets a similar tone for the morning.

So that is how we make sausage around here. Good luck today.

A.F. Thornton

Apologies the commentary is running late today. Apparently, we are part of a rolling blackout in the Peoples Republic of Southern California this morning.

From all appearances, the minor cycle we had been discussing bottomed Friday with a short-covering rally, as often happens. We have some follow-through this morning in the form of a true gap higher. As such, Gap Rules apply this morning. Review them; they tell you what you need to do from a trading perspective.

Beyond that, keep in mind that the market is trading off the 3 ATR boundary from last week. Markets don’t spend much time this overbought before moving sideways or down. Other than the overbought levels and blow-off insanity, nothing indicates that the stock market is internally weak or compromised.

So your focus should be on the bond market. It is the proverbial tail that wags the dog. We still have a slow-moving pattern that would imply a doubling of the 10-year interest rate. The market could get past such an event, but it would be a rough ride. Again, a trading range is a likely outcome, if not worse.

Swing traders should still be holding cash. Day traders can use the afternoon low from Friday at 4667 as today’s bull/bear threshold. The all-time high at 4711.25 is in play today. It should be a battle, however, and a potential double top should be in your narrative.

A.F. Thornton

The market is keeping it simple today after a quiet, balancing session on the holiday yesterday and overnight. Above 4658.25, we have a chance of turning this market back north. Below 4642, we head south again to test recent lows. We are trading slightly above 4658.25 at this writing which implies a tiny gap at the open.

We have the mean (21-day Line) sitting down around 4650 and the breakout from the previous-time highs at 4640.75. These are both magnets and areas where the market should find support if we break down out of the two-day balancing range.

This is a time where staying keen on the bond market pays dividends. We still have had bonds, stocks, gold, and the dollar rising together. That is not only rare; it could be a warning of a black swan event ahead.

Swing traders should be in cash, waiting to deploy into the IWM, DBC, and Financials if the bond market stays under pressure.

Day traders, you have your levels for the day. Watch for liquidation breaks and remember that yesterday’s low is weak. Look out for the possibility of the market forming a trading range for a few weeks to digest recent gains.

A.F. Thornton

The Founders Group just took a 2.5% position in the DBC diversified commodities ETF. We used the 17 December calls with the $20 strike price. This represents half of our target position. We will look to add the other half at the close if all goes to plan. We will use 21.25 as a stop, and the initial target is the recent high at 21.75. We will see how it behaves there.