Archives January 2022

Long-Term Perspective – 100-years of History

While it is rare to have successive down years in the market, it does happen. The market experienced it four times in the last 100-years as marked on the chart below. What causes us to be cautious, besides common sense, is the longer-term position of the indexes. For example, the Dow has reached the top of its 100-year channel on the yearly chart below.

Then we can observe that the indexes share the top of the 100-year channel with the top of the 2009 bull market (monthly) channel – using the S&P 500 Continuous Futures Contract as our proxy.

As if we could top all of that, the weekly or intermediate channel is peaking at the same intersection.

So to say the market is overbought, overvalued, stretched, or whatever your favorite term might be is an understatement. What investors will now begin to experience is regression to the mean. Even if we were optimistic enough to believe that the markets will hug the top of their trading channels for a while, and they might, rising interest rates and inflation would negatively impact future returns.

Am I predicting a crash? No. Unexpected, exogenous events typically drive crashes. No doubt, we may see a few along the future path. And how does that path look? Let’s review the 1965 to 1984 Dow chart from this morning once more.

Now go back to the first chart above, 100-years of Dow history, and notice how the index traveled from the middle of its long-term channel back to the lower channel line over 16 years. Now you can see the associated volatility (otherwise known as painful corrections) in the detailed chart immediately above.

I believe that we are starting the process of moving toward the middle of the long-term 100-year Dow channel. Interest rates don’t typically fall to zero. We have experienced 40-years of declining interest rates. The investing future is likely to be different. A long-term (buy and hold) investor might find themselves in one of those directionless 10-year periods or lost decades as the market regresses to its long-term mean.

So strap in. We have a pretty wild ride in front of us. But at least you now understand where we find ourselves on the market roadmap.

A.F. Thornton

Navigator Swing Strategy – 5% SPY and 5% QQQ (Call Spreads)

We are up so much so fast on our Friday positions; we are taking some profits. We cut futures and calls on the S&P 500 and NASDAQ 100 in half, from 10% back to 5% of our balance. As for the SPY or QQQ without leverage, we would wait for an intermediate Navigator sell signal and/or the sale of the other half of Friday’s positions.

A.F. Thornton

Navigator Algorithm Swing Trading Strategy – 10% SPY and 10% QQQ (call spreads)

Today is the last trading day of an ugly January for the markets. I typically won’t day trade on the final day of the month or calendar quarter. Money managers are likely to be dressing up their portfolios today, and it will take a lot of lipstick after such a brutal month. The cross-currents can trip up otherwise reliable indicators -especially as we head into the close.

The S&P 500 is down 8% on the month. Our $10,000 starting account is up about 30% with our well-timed entry on Friday. We are using leverage and call spreads to achieve the return, and if it can be up 30% – so can it go down when we are wrong. A cash account (no leverage) would be up about 1% on the month, an excellent 9% spread over the index.

My weekly outlook video is at the top of this blog and has all the detailed information you will need to trade this week. Take some time and watch it – it is well worth the 20-minutes to prepare you for the week ahead with lots of details.

Day Traders

Again, the last day of the month is not my favorite for day trading, But if you must, overnight inventory is very balanced, and we will open close to the settlement. There is little indication of how opening prices will move, except that we stalled at the 200-day line at Friday’s close, and there is a lot of resistance around that level. Given the significant move off Friday’s low, some profit-taking could be in the cards before we get anywhere this morning. The shorts may also be motivated to sell rallies, as it has paid off over the past month.

As the overnight low (4395) is above the base of Friday’s spike into the close (4385.75), the spike is being accepted (see Spike Rules), which would be bullish. I would be looking to go long on pullbacks that hold above these two levels. Monitor for continuation and target the VPOC and other target levels above discussed in last night’s video – all converging around the Weekly Expected Move high at 4521.

Any acceptance below the base of the spike can potentially change the tone back to negative.

There is an old saying (isn’t there always?) – as goes January, so goes the year. This hypothesis might indeed be applicable this year. The Decennial pattern for years that end in “2” counsels us to expect a tough first half of the year, with recovery after this summer:

I have found these patterns to be quite accurate over the years.

Watch Apple as a good market proxy. It was strong on Friday. Google reports this week which should be interesting.

A.F. Thornton

Navigator Swing Strategy – 20% Long

Price closed above the 5-EMA and triangle on a short squeeze into the close as anticipated. The best observation is that we likely have a short-term low in place. I would emphasize that it is “A” low but not likely “THE” low.

The market ran out of runway today so we landed on the 200-day line but did not conquer it. I also remind myself that short-covering is not buying.

I need to see follow-through buying by institutions to become a true believer. Even with that, the market may only recover half of the corrective decline before rolling over again.

There are many differences between this corrective decline and the garden variety pullback. We are likely to visit these levels again, though it may be on a longer cycle trough out in front of us.

As I always say, let the evidence take us where the market wants to go. Strong opinions have a way of coming back to haunt us.

A.F. Thornton

The next hurdle for the market (S&P 500 Index Futures) is t0 break the top of the triangle and close above the 5-day EMA on the day. The market is pausing to reflect on the task, as seen in the 15-minute Candle S&P 500 Futures chart above.

I know I am going a bit out on a limb, but I suggest that this first corrective phase from the January 4th peak has bottomed. Now we will see how much we can recover and whether another leg down will be necessary.

I doubt I will have anything further today—time to ride the wave.

A.F. Thornton

S&P 500 Futures (4298.50) / NASDAQ 100 Futures (13905)

We are taking the Navigator Swing Strategy to 20% invested, half in the NASDAQ 100 and a half in the S&P 500. You can use calls, ETFs, futures, or whatever works for you.

Since the buy signal is intraday, it could be negated by the close, but the context is very positive. Anyway, let’s take it a day at a time.

A.F. Thornton

The 10-Day Put/Call Ratio just climbed above 1.0 for the first time since March 2020. The ratio shows extreme fear (bullish) and raises the risk of a short-covering rally that could bring us to the bottom of this first corrective leg.

So far, the market is finding support on the Weekly Expected Move low at 4277 but resistance at the hourly mean around 4322.

I am already long some SPY calls at 4281 that I will hold for a swing trade and a couple of futures contracts at 4299 with 5 point stops. I want to accumulate the calls slowly as we might still see a flush today. Let’s see how it goes, it could be a long day.

We have breached yesterday’s regular session low, and a full retest of Monday’s low at 4212.75 on the futures appears to be underway. But the put/call ratio is over 1.0 – so watch for the flush. Given the volatility, I will be considering a couple of long calls into the flush, likely with 10 point stops. I will keep you posted.