Archives January 2022

(Published at 8:00 AM PST / 11:00 AM EST to Paid Subscribers)

Sellers remain firmly in control this morning. The fact that we did not get a gap fill at the open was uberly negative as mentioned in the pre-market outlook. But when the crowd gets too negative, a relief rally likely is close at hand. At this writing, the 10-day Put/Call ratio is exceeding the Covid crash high:

The VIX volatility (fear) index is above the December 2021 high:

CNN’s diversified Fear/Greed Index is back to fear, just not extreme yet:

Money Managers have raised considerable cash – which often occurs as we approach a low:

So, should we buy the dip? When the correction carves this deep and goes beyond the typical A/B/C wave, you can expect a retest of any low about a week out. So there will be a low, likely a short-covering rally, and then a retest of the low. To stimulate your memory, we will then need follow-through in a rally to confirm that real buying is at hand, as opposed to short-covering.

We don’t have a low yet, and there is no guarantee that any such low will be successfully retested. Even when we see a tradable rally, we typically only recover about half of the entire decline before we take another leg down.

In other words, strap in because the character of the market has changed. There is a lot of money to be made, but patience will be the key.

A.F. Thornton

Navigator Swing Strategy – 100% Cash

The Navigator Algorithm is approaching an extreme oversold position, but the indicators have yet to drive the Algo into a buy signal. Exogenous events, such as the Russian / Ukraine situation and Wednesday’s upcoming Fed meeting complicate any attempt to establish a short-term low.

Yet, the monthly options turn, along with the nominal 20-week cycle, counsel us to be on alert for a turn perhaps corresponding to the Fed’s Wednesday meeting and announcement, but from where? All major indices are now trading below their 200-day lines. And three of the four majors, except the S&P 500, are all trading below the October lows this morning.

Friday’s option expiration was brutal, as has been the case for monthly expirations this past year. More than 3.2 million LEAPS (Long Term Options) expired and exerted more downward pressure than usual.

There were signs of bottoming toward Friday’s close, with positive divergences on the 15-minute chart. And the stock futures markets were rallying at the open last night, but the rally fizzled when Europe opened. But since the options expiration long play has been the Monday/Tuesday following Friday monthly expiration, one needs to keep an open mind over the next few sessions.

The Fed meeting Wednesday complicates an early turn today or tomorrow a bit. In one sense, the market has done the Fed’s bidding for it based on their “Forward Guidance” plan. We have corrections greater than 10%. And the risks of a Russian invasion of Ukraine further inhibit aggressive Fed action. As of the 19th last week, the Fed Balance Sheet was still growing. Given the circumstances, I expect the Fed to stick to the last plan they announced rather than get more aggressive. Inflation expectations will tend to focus on supply chain issues that can eventually resolve. Demand will fall away quickly with current circumstances.

Of all the risks on the table, the Russian invasion of Ukraine likely disturbs the global order enough to scare investors the most. Can you even imagine a conflict with Russia with the goons in charge that helped us exit Afghanistan?

The markets are otherwise oversold by just about every measure and due for a bounce. The slope is approaching waterfall status. Fear gauges are high. The Weekly Expected Move and October low are at 4272 (the market makers got it wrong last week, so their calculations may prove wrong again). That is less than 50 points from where the futures are trading (4317) at this writing. The S&P 500 is well under its 200-day line (4325).

For day traders, overnight inventory is net short, and we will open with a true gap down, so Gap Rules apply. That leaves the potential for advanced traders to attempt an early fade. Highs of the first one-minute bar or crosses back up through the open after an opening drive lower are usually solid setups.

All traders should always note what type of fade (if any) the market delivers to gauge early strength or weakness. No fade higher indicates a lot of weakness. Should there be a full gap fill that manages to enter the range, price action above the settlement could bring in further short covering as “screens go green” around the world and everyone sees the same thing. Monitor for continuation.

A gap and go trending day scenario is tricky to predict premarket and often even once the session commences (gap rule #4). To that end, pick your starting location very carefully and know the ultimate target at the October-Weekly Expected Move low.

The Founders Group had a slight loss on Friday’s “day trade” but removed the long portion of the call spread, leaving us net short this morning. We will cover that position at the open and that should start us in the green for the week, which is the nice part of using spreads.

I am out this morning for a dental appointment but will be monitoring by phone. I will update you on any significant events.

A.F. Thornton

The 10-Year Treasury Rate is resisting its 200-week line to go higher…

While the S&P 500 Index is fighting its 200-day line to go lower…

The stock market declines are likely not over but oversold short-term conditions prevail.

Absent a significant event, I am out for the rest of the day but will update you by Sunday night.

A.F. Thornton

It is ugly this morning, but the Founders Group is picking up a small call debit spread (long) position in the SPY (S&P 500 ETF) with the February 18th expiration. We will liquidate on a short-covering rally. The Put/Call ratio is at an extreme – and the daily chart is finally approaching oversold.

This is a trade – there is still no swing long buy signal on the Algo.

I would not be short here, as the risk of a short-covering, rip your face off rally is very real as the S&P 500 tags its 200-day line. Be careful.

A.F. Thornton

Navigator Swing Strategy – 100% Cash

It is hard to believe that a week ago today, we were still able to take a long trade off the S&P 500 intermediate trend line. Now, that trendline has broken on the two major indices; the NASDAQ 100 and S&P 500. Nearly two years of higher highs and lows off the March 2020 China Virus lows are over. The NASDAQ 100 has violated its 200-day line this morning and is approaching the October 2021 lows. The S&P 500 sits on its 200-day line, having taken out the December lows at yesterday’s close.

Any doubt that the market long ago lost its footing to fundamentals, instead of anchoring itself to Fed policy, should now be resolved. As the saying goes, bull markets don’t die of old age. The Fed kills them. Indeed, this market is the extreme version of the old axiom. The correlation of the S&P 500 to the Fed balance sheet is alarming, especially when the Fed wants to shrink it.

The Fed Balance Sheet

Government Debt and Deficit Spending are the Real Underpinnings of Current Equity Prices

The question now is, where are the buyers, even if they are only short-term traders? Respecting the S&P 500, will they show up directly at the 200-day line? How about the October lows? Will anyone show up today to bring the market back to the Weekly Expected Move low? Market makers stand to lose a fortune otherwise.

This week, the options market mispriced the downside, surprising given all the risk-off indicators. Anyway, your guess is as good as mine as to when and where the traders will come in again. All we can do is look for a pivot in the price action. The market seems to be falling due to a lack of buyers in many ways. The selling only began to get intense yesterday.

As mentioned all week, we are in the zone for the 20-week low, and the Fed meeting next Wednesday will clear most of the short-term uncertainty. But we do have a significant wildcard in the Russia/Ukraine situation. Russia is all but certain to invade now. That could further negatively impact oil prices (and already has).

And of course, Russia invading Ukraine increases uncertainty over China taking Taiwan, where we get most of our computer chips. But for the Genocide Olympics in Bejing, China likely would be joining Russia now in taking Taiwan. As we all expected, American weakness has had negative consequences in the wake of the Afghanistan withdrawal nightmare.

The last time I felt like this, Jimmy Carter was President. Where is our Ronald Reagan? Where is the exceptional leadership that could carry us out of this morass? Trump hardly fits that bill. It is an awful feeling to revisit the 1970s redux. I wouldn’t say I liked it then, and I like it even less now.

Fundamentals are deteriorating too. For example, Peloton, a darling of the China Virus lockdowns, has temporarily stopped production due to lack of demand.

And then there is Netflix, a member of the FAANGMAN+T club. They disappointed on projected new subscribers in their earnings announcement last night.

Do Netflix and Pelaton signify the end of the Pandemic trade? Probably so. So while there is some sense that the economy has been recovering, it becomes more apparent every day that it is living on borrowed time (and borrowed money). The chance of the Fed overcorrecting on policy tightening looms large.

At one end of the spectrum, the 10-year U.S. Treasury rate briefly poked above its 200-week moving average to break out even higher, potentially. Rates are pushing their 200-week moving average further into a bull market mode, while the benchmark S&P 500 index pokes below its 200-day moving average into a bear mode. And if the NASDAQ 100 still leads, its 200-day line is well into the rearview mirror. Still, it is logical for some stock market traders to buy here, all else being equal.

For now, the slope of the S&P 500 is accelerating into what we call a “waterfall” decline. That is how corrections bottom short-term. In the old days (before the Fed was running the stock market), we would see a scary spike low to bring an end to the first downdraft. Perhaps that will arrive with the Russian invasion of Ukraine or sooner.

Oil prices remain pressured. Ill-conceived Biden administration energy policies and Russian invasion concerns drove oil prices to new post-China virus highs. The higher oil prices are a significant component of our current inflation woes, as oil prices usually are.

Consumer Price Index – Annual Change

Deferred pain is still pain. It is hard to escape the feeling that we must pay the piper now after deferring the Great Recession and China Virus pain. And even when we bottom this initial market decline in subsequent sessions, we will not necessarily go right back to new highs.

I would consider a trading range to be a blessing. But the possibility now of an intermediate bear, with lower highs and lower lows, has increased. Some prominent money managers with white hair and enviable track records picking bubble tops, such as Lacy Hunt, see a 50% decline ahead of us.

And then there is Gold and the convergence to decision time:

Why not a little risk-off move to Gold as Russia invades Ukraine? But treasury rates will now compete for risk-off Gold buyers. If Gold does break to the upside, it is a WWSHD (When What Should Happen Doesn’t) buy signal.

And that brings us to the U.S. Dollar. While critics of the current administration believe that Biden policies weaken the dollar, the evidence is contrary. Higher relative U.S. interest rates are attracting foreign capital, as recently confirmed by the monthly Fed data. All that selling in the U.S. stock market also raises cash supporting the U.S. Dollar as well.

If I were to forecast the stock market like the weather, it would be cloudy with many storms ahead. But we should look for some sunshine to begin in the next few sessions. So I will look for the Navigator Algo to bring us into a swing trade for our first respite rally or back to the top of a new trading range. We are not there quite yet.

Day traders should proceed cautiously today as monthly/weekly options expiration can lead to distortions. The net short overnight inventory and the true gap below the spike put gap rules into play and give some decent odds of an early bullish fade.

If you are inclined to take the fade higher, target yesterday’s RTH (regular session) low at 4465 first and monitor for continuation. While it seems doubtful from current levels, the Weekly Expected Move Low at 4550 still has the potential to act as a magnet into options expiration at the close.

Given the sheer size of yesterday’s spike into the close, letting the ONH (overnight high) at 4477.75 be a long trigger would be fine as well.

Of course, an upside test of the RTH Low at 4465 could be a short setup, somewhat strengthened by the fact that yesterday’s settlement is nearby at 4474.75. Keep your stops tight on any such short trade.

If you want to set up a bearish initiating trade, wait for any early upside corrective activity to cease and cross back down either through the settlement (4474.75) or the RTH (regular session) open. Picking the top inside of yesterday’s significant spike would be a guessing game, at best.

As always, stay tuned. It is about to get interesting. It reminds me of the old saying – when it rains, it pours. Nevertheless, the Navigator Algorithms continue to keep swing traders out of harm’s way.

Have a terrific weekend.

A.F. Thornton

The crowd is either buying dips or selling rallies when it comes right down to it. This morning, we had an excellent long, day trade on the hourly charts. The Weekly Expected Move low drew the index up – and it even overshot the level a bit. But the rally peaked about 11 am EST, and there has been nothing but selling since. And this is even though the bond market and interest rates are behaving today.

Maybe the WEM low will draw us back up again by the close tomorrow. However, should it not, then tomorrow could be a rough day, though market makers have now had a couple of chances to neutralize their risks.

The S&P 500 is threatening to take out the December monthly low as we go into the close. That would set up a potential negative key reversal on the monthly chart. The next stop for the S&P 500 would then be the 200-day line sitting around 4430. From there, we would look to the October low at 4268. And though that would be ugly, it is still only an 11% correction from the December intraday peak.

So we will continue to keep our powder dry and keep the models 100% in cash. But the downside does seem to be accelerating, and a capitulation could be just around the corner. Stay alert for a swing long signal. It feels like the old days and the corrections we used to experience.

A.F. Thornton

The WEM low is the magnet we expected this morning on the S&P 500 and has drawn the market back up from yesterday’s puke into the close. And yesterday’s spike low at the close has been negated thus far. Moreover, I like the positive divergences on the hourly S&P 500 ETF (SPY) chart.

Perhaps the close might tell us something positive today. But Ukraine remained a wildcard after Biden’s missteps at his press conference yesterday.

Lacy Hunt has a new article this morning pointing out how consistently negative real interest rates (such as we have now) have led to recessions in the past. You can calculate a good “real” rate proxy by subtracting inflation from the 10-year treasury rate. Conservatively, that puts the real interest rate at -6%.

Unemployment claims jumped today – comforting the bond market. So while last year at this time I was worried about inflation, I am still leaning towards inflation peaking. At these sovereign debt levels, economic growth is already challenging without help from the Central Banks.

With the punch bowl being drawn away by the Fed and the Eurodollar curve already inverted, the risk of recession begins to loom large. At this point in the market cycle, the risk of recession calms inflation and interest rate fears and gives Central Banks around the world some flexibility.

Anyway, let’s see how the divergence on the hourly chart manifests today. I would be more bullish if there was more fear. If this were a typical intermediate low, the fear should be higher. On the other hand, the nominal 20-week cycle is not usually a big dip. We are more likely to see that at a nominal 40-week low along the typical bullish path.

While we took out a lot of critical support levels yesterday, it is always possible that it was a flush of all the stops sitting a few ticks below, and we will come back up into range. If so, we could establish some longer-term swing positions.

We started the week looking for the rescue operation. The rescue has been on weak ground – but the week isn’t over.

Anyway, I thought I would pass on the positive hourly divergence as a bit of good news since I have not had much encouragement to pass along lately. The Algo has flipped back to buy – but it is on the hourly chart only. That did not get us too far last Friday, but I will continue to take some brief trades here and there to bide my time in front of the screens.

I want to remind everyone that the recent playbook has been a swing low on the Friday (tomorrow) of monthly options expiration or the following Monday, and then a turnaround on Tuesday. Here, with the Fed announcement on Wednesday, we might see an additional 24-hour delay. But most of the time, we rally into the Fed meeting, though times are changing.

Also, keep in mind that the S&P 500 may still be looking to establish the bottom of what will become a new trading range. We have peeled off about 10% on the large-cap indexes which is a good start back to reasonable valuations.

Stay tuned.

A.F. Thornton

While the Weekly Expected Move lows are drawing in price again this morning, it is only after we seemingly lost the intermediate trend at yesterday’s close. The Russell Small Cap index violated its one-year trading range. Trading ranges tend to double when violated, which would be unpleasant for this sector. The one-year trading range now looks like a major market top rather than a consolidation to go higher. A bear market for small company stocks (greater than a 20% decline) is now on the table.

The damage does not stop there as the NASDAQ 100, the Covid ERA’s darling and the FAANG stocks’ home base, broke its intermediate uptrend. The NASDAQ 100 correction now exceeds the 10% threshold, and the NASDAQ 100 is on its 200-day line. As well, this implies that the large-cap stocks are now joining the broad market decline which started late last year. In other words, the generals are now retreating with the soldiers.

So that leaves our core index, the S&P 500, still in the vicinity of its intermediate trendline. The WEM low is drawing the index back up this morning after losing the battle at yesterday’s close. But it is hard to argue that this index won’t follow its cousins lower as well, perhaps with some fireworks into next Wednesday’s Fed announcement.

The Founders Group barely booked break-even stops on its nibble positions yesterday before the market rolled over at the close, and we were flat stopped again. So we have nothing to show for our brief forrays at support last Friday or yesterday. The market didn’t punish us either for trying.

We remain 100% in cash with no gains (or losses) for the year thus far. Had I not been battling Covid when the year started, I would have been short from the December highs. Unfortunately, both the Covid and medicine made it difficult to think and process complex information.

It is a bit surprising that the intermediate trend is not holding. Yesterday’s treasury auction went well. There was a lot of demand which helped cap the 10-year rate at least temporarily, though it is at a two-year high. One has to conclude that uncertainty around next Wednesday’s Fed announcement has a lot of money sidelined.

So while we are in the zone for a low on the nominal 20-week cycle, lately averaging about 16 weeks, it would appear that the low will come in (likely with some fireworks) next Wednesday with the Fed announcement. That is our best guess for now.

Day traders should initially focus on spike rules this morning, with the top of the closing spike at 4549. Trading above the spike starts to negate the lower prices of the spike. Trading below or within the spike is more bearish as it confirms yesterday’s closing prices with value (time + price). Remember that the top of the spike and the Weekly Expected Move low is approximately the same price – 4549 to 4550.

Note that the POC and Settlement are at the same level today at about 4525. This becomes a good bear target for the day if yesterday’s closing spike is confirmed. As with all POC’s they tend to act as magnets. Target this level on bearish trades that have accompanying context.

With yesterday’s value area (where 70% of volume occurred) so large, it isn’t easy to point out any potential inflection points above. Be aware that rallying up through a lengthy value area is harder than rallying through normal value ranges.

The Weekly Expected Move low at 4550 will continue to act as a magnet through tomorrow’s weekly/monthly expiration at the close. After that, the trend is either broken or not. If broken, the S&P 500 has quite a bit of downside to joining its brethren. The 4550 level will be the halfway point to the ultimate low – if typical projections apply. Shorts then become more plausible to the projected pivot point.

I wish there were better news, but it is what it is.

A.F. Thornton

The Founders Group has nibbled once again on a QQQ and a SPY at-the-money call, February 18th monthly expiration. Eventually, we will sell a higher call to neutralize any potential volatility compression, creating a debit spread.

While I am inclined to manage the positions tightly and get to a break-even stop as soon as possible, it can also make sense to begin building a long position. I will contemplate that a bit longer. These positions are only about 5% of our $10,000 beginning year account.

While we don’t have an Algo buy signal yet, we are at a logical pivot point, and the risk to stop is minimal. The more confirmation one seeks in a turn, the higher the dollar risk to stop. I will keep you posted.

Going long here is certainly not for the faint of heart, but the pessimism is both rising and comforting. It is not extreme, though, which is why I want to keep plenty of powder available. I would love a straight capitulation and flush to get uberly aggressive. But we never get exactly what we want. The safe play has been the Monday/Tuesday pivot after Friday expiration. We add the Fed announcement Wednesday for some extra color.

For now, The market reminds me of watching the grass grow. It feels heavy and almost too orderly.

A.F. Thornton