Archives January 2022

Every bubble and mania has its rock star. Perhaps Bitcoin will fit the bill for this era. I love the technology, and I am sure Central Banks worldwide will eventually enjoy it for their currencies. But I never drank the Bitcoin Kool-Aid as a hedge or long-term investment.

Not that gold has been a rock star in the wake of the recent inflation spike. Perhaps that is further evidence that inflation will be short-lived. But gold is slowly rising – and the Russia / Ukraine situation may have as much to do with it as inflation. The Gold ETF (GLD) had the highest inflows in its history on Friday – nearly $1.5 billion. The fund started in 2004.

Thus far, Bitcoin has dropped in half from its peak and is more correlated to the stock market and “risk-on” assets than “risk-off.” Maybe the adage that the more things change, the more they stay the same still applies.

As always, my preference is to hold the real gold rather than a fund. Someday, there will be an accounting for “paper” gold that may show some shenanigans. In other words, there might be more contracts than gold to back them up. Only time will tell.

A.F. Thornton

Since we lost the equality of an ABC corrective pattern at yesterday’s low, we have to consider an impulse pattern down, usually consisting of three drives. And if this is a bear, this is just the first leg down of a larger three drives. Here is the potential path:

It is going to be a long year…

A.F. Thornton

Dumb Money Confidence is very pessimistic and Smart Money Confidence is optimistic. This suggests we are closer to a trough than a peak.

Confirmation from AAII:

Stay tuned – the nominal 20-week cycle is trying to bottom.

A.F. Thornton

We are bouncing off the Weekly Expected Move low, and the Founders Group is adding a couple more February monthly expiration call debit spreads for a trade.

This is a high-risk trade, as the tape is still decidedly negative.

A.F. Thornton

We opened with 1500+ downticks and 458 decliners out of the S&P 500. We are first testing the overnight futures low at 4319. We will see how it goes from there. Commodities, Gold, and Treasuries are the only green on my screen thus far.

A.F. Thornton

Navigator Algorithm – 100% Cash – On Buy Alert

The markets will open down 2% this morning, but with yesterday under our belt, that is just a blip on the radar screen – no problem right? We have our big boy pants on now.

But in reality, price is retracing about half of yesterday’s spike low, so still in the realm of recovery. And I suspect there are a lot of shorts still out there hoping for a crash that will run for the hills on any strength today. Again, patience is a virtue for a good swing trade. We will see what the Navigator Algo telegraphs.

For day traders, I would focus on the spike base at 4346. There is potential for more short covering should prices get above it and find acceptance there.

Should sellers maintain control this morning, traders should note halfback at 4311.50 and the Volume POC / WEM low at 4275 or so, both of which would be downside targets short of yesterday’s low at 4212.75.

Yesterday’s sellers broke the October low and breezed right past the 10% correction before reversing course on the “mystery put seller” and closing well above both levels. The significant spike left at the end of the session puts spike rules into play this morning. With the current 70 handle gap down, the most bearish outcome of the spike would be to open below it, which appears unlikely at this writing.

Although we are opening within range, we closed at the highs yesterday on emotional buying. To open this far away from that settlement would imply that there will be some disappointed longs at the open who are suffering from poor location.

Wherever we go from here, we will probably retest yesterday’s low in a few days to shake out any weak hands left in the market. Typically we would rally a bit further first, perhaps to test the 200-day line from underneath. I am betting traders will extend the rally to the WEM high at 4489 before rolling over into a 5th wave down.

Russia / Ukraine is still the wildcard. We will hear from the Fed tomorrow. Perhaps the market will bide its time and do nothing until we hear from them.

A.F. Thornton

I think it was clear from my commentary today that I was on high alert for a turn. The post mortem is that there was still a hangover from Friday’s options expiration at the open today. The number of LEAP options (Long-Term Equity) expiring was the second-highest in history on Friday.

I won’t bore you with the technicals, but there was still delta hedging in the futures market at the open today. As there was no attempt to fade the gap higher, it was clear that sellers were firmly in control of the tape. Market Makers were still selling futures to neutralize their portfolio deltas from Friday.

After plunging more than 4%, stocks staged a furious rally, the likes of which have been seen only on a handful of occasions, before closing green. Putting today’s historic reversal in context, this was only the sixth time since 1988 that the Nasdaq reversed a 4%+ intraday drop to close higher. The other days were 10/28/97, 10/26/00, 7/15/02, 10/10/08, and 11/13/08. As for the S&P, this was the biggest intraday comeback since November 2008, when the US was in the middle of the biggest financial crisis in recent history.

The Founders Group covered the short position from Friday when the market was down about 3%. Simultaneously, I sent out an alert to subscribers that it was advisable to close any short positions.

As soon as the European markets closed mid-morning, some of the more aggressive sectors, such as the IWM (small company stocks) and the DIA (Dow Industrials), began to show relative strength into the final stages of the plunge. Then there was a divergence on the advance/decline line and downticks by about noon EST. This behavior typically leads a low – so the Founders Group picked up a couple of call debit spreads.

Then a colossal put seller (betting the market was bottoming) came into the market and triggered the short-covering rally (see the blue line in the chart from SpotGamma below). Was it the Fed Plunge Protection team? We will never know for sure, but I suspect it was.

The Founders Group then picked up a futures contract on the first slight dip after the low, but a bit higher than we paid for the calls. I closed out the futures contract right before the close and am still holding the call debit spreads overnight. I put out the trades to subscribers from my phone – though the communication was a bit unpolished. The new phone app will be available to subscribers starting Monday from Pro Trading Room.

As to swing trades, the Navigator Algo flashed an “E” exhaustion signal, along with a “Trend Reversal Imminent” signal on the system panel (see below). These signals eventually led to a preliminary buy signal and green arrow at the close. But I would like to see some follow-through (and perhaps an upward break of the Algo line) before issuing a Navigator Algo swing buy. I was encouraged by many good setups as I scanned through the major stocks and sectors tonight.

I have a couple of short videos coming out tomorrow with additional detail. Here are the sectors today in order of return, so you can see where the money flowed:

Since a lot of this was short-covering, I am not sure this tells us too much about future fund flows quite yet. We need to watch leadership in any follow-through rally for additional clues (if we get the follow-through). Value stocks are likely to lead growth stocks for a bit longer, but we shall see. The offense sectors did lead defense today, a preliminary change.

At best, we may have an oversold bounce to monitor for continuation into the rest of the week. We also need to get past the Fed meeting Wednesday and some leading tech stocks reporting earnings later this week.

If this is a bear, we will likely recover only half of the total decline from December before we roll into another leg down. Even before that, we may still need to retest today’s low in the next week before traders and money managers have the confidence to buy in earnest.

The Weekly Expected Move high sits around 4489 on the S&P 500 Futures and 448.84 on the SPY, which may cap gains for the rest of the week.

Of course, we may wake up to more consternation tomorrow, but it is less likely after such a strong comeback and reversal. And then there is Russia and Ukraine.

Strap in, and I will keep you posted.

A.F. Thornton

Short covering rally into the close – a character change. More tonight. Sending from my phone – apologies for the repeats from this morning. Need to get better at this phone app.

A.F. Thornton

(Published at 8:30 AM PST / 11:30 AM EST to Paid Subscribers)

We are likely to see a short-covering rally begin soon. The market is in a logical place for a rally and turn. It is inadvisable to establish further short positions and day traders should be preparing to go long.

Breadth is leaning toward oversold, though new 52-week lows are still expanding.