Archives February 2022

The Founders Group has taken a swing buy, long call spread at S&P 500 Futures 4315.25. We are targeting 25% for the position. More on this signal later tonight.

S&P 500 Index Analysis – 9:15 AM EST

Our Morning Outlook for S&P 500 Index Day Traders considers potential negotiations underway in the Russia – Ukraine conflict. A few hours ago, the prospect of talks reversed the S&P 500 futures’ overnight losses into overnight gains. Rates are climbing this morning, but consensus has morphed again into a 25 basis point Fed rate hike instead of 50. At this writing, the S&P 500 and other index futures are positive and bullishly above yesterday’s high of 4290 (SPY 428.76).

Key Levels and Analysis

I would frame today’s bear/bull reference points as the Weekly Expected Move low (also the overnight low) at 4229 on the S&P 500 March Continuous Futures Contract (SPY 423) and the 5-EMA at 4300 (SPY 430.50). 4300 would be the first resistance, then 4350.

Below the 4229 WEM low, 4200 and 4155 are key support. Market makers and dealers should defend 4229 until today’s weekly expiration at the close.

While I am somewhat neutral this morning after yesterday’s momentous climb, a break of either the top or bottom references above would tip the scales to bullish or bearish as the case may be. If the market were to break down from here, the scant time spent and volume generated inside yesterday’s spike low is an air pocket should the S&P 500 index move lower.

On a related note, yesterday’s short-covering resulted in a “roll-down.” Traders closed puts greater than 4200 (SPY420) while open interest near 4000 (SPY 400) moved higher. Technically, this results in a slight increase in downside risk exposure. We don’t want to see any acceptance below the breakdown low at 4212.50.

I am amazed that our market proxy climbed out of a 127 point hole yesterday. The move back to and above the WEM low saved a few dealers and market makers from Armageddon.

Impact of Option Open Interest, Gamma and Delta

4300 Futures (430 SPY) is the Key Gamma Strike and Hedge Wall from an options perspective. While this level will be resistance, acceptance above would increase confidence that this rally is more than just technical short-covering.

S&P 500 Trendlines

A secondary downtrend line also provides resistance at 4300.

The fact that the market has rejected the range inside January’s spike low and initially found acceptance above it and the 4212.50 (SPY 421.35) breakdown level is bullish. Also, there are multiple positive divergences in strength, momentum, and breadth, qualifying yesterday’s recovery as a successful retest of January’s spike low, perhaps avoiding the need for a further retest of yesterday’s low.

Despite the rally, geopolitical and economic risks are no clearer today than yesterday. Demand for downside protection remains.

This demand leads to unstable markets – no different than what we’ve been experiencing. Volatility remains high, and my forecast of an eventual move to 4000, then 3600, and finally the long-term mean around 2400 to 2500 remains intact.

In the short-term, stability only comes with a concrete resolution of the unknowns, diminishing downside protection demand.

As to the open, overnight inventory is balanced, but a “true” gap this morning follows yesterday’s spike into the close. Both Gap and Spike rules apply.

We want the price to stay within or above the spike to keep the bulls in control. Acceptance below the spike low and back into yesterday’s range isn’t fatal but questions the reversal.

Always remember that how the market handles the gap fill is your first sentiment indicator.

Good Luck Today!

A.F. Thornton

The Fed would have needed to start raising interest rates until the invasion because inflation is out of control. But the Fed doesn’t want to raise rates. It should have started tightening almost a year ago, and it looked for any excuse to delay – a delay that has led to the current inflation crisis.

Now the Vladiator has given America’s Finest Central Bank a new excuse to do nothing about inflation, and doing nothing is what this Fed does best. Ostensibly, a potential continuation of easy money flow triggered a short-covering rally. No, it had nothing to do with Biden’s speech which came long after the market had started the short-covering rally.

All those weight loss commercials always show you the before and after pictures. That is the best way to start this dialogue. Let’s start with the before picture in this morning’s outlook:

The argument for Day Traders this morning – if it made sense to trade at all – was to buy the invasion news, as fear was historically high, including puts versus calls. Probably the only thing we missed was a preferred entry at 4050. The market never got below 4125. But a pivot always overrides a target.

There were so many puts that the gift of the gap down was too good to pass up. Suffice it to say, the mother of all short-covering rallies ensued. Here is the after:

The short-squeeze kicked in right at the open, and the market only stalled a few times, closing near the high and leaving a spike low on the charts. All of our levels held. As we pointed out, there was scant resistance up to 4300 on a pivot.

Day Traders following the plan laid out this morning made a lot of money. Swing Traders need to be patient. While the rally was impressive, it is primarily short-covering, not actual longer-term buying.

In other words, put selling accounted for the volume today. There was little to no call buying. To confirm a real turnaround, we need to see actual institutional buying and follow-through. We need greater call volume extending out to longer expirations. When that materializes, we will make our move for Swing Traders. The Navigator is close to a buy signal.

A similar spike low in January rolled over until the 5th day – and then followed through. We would look for the same behavior here. Until the next Fed meeting passes in Mid March, (negative) volatility will remain high.

I will update critical levels in the morning.

A.F. Thornton

Navigator Algorithm Status: 100% Cash and Hunting

Ben Franklin coined “Buy on the Canons and Sell on the Trumpets” over 100 years ago. The anecdotal evidence supports him even in modern times:

But this morning, we encounter a volatile and dangerous situation on top of an already highly complicated macro backdrop. Unless this resolves quickly, sanctions and skyrocketing energy prices likely will accelerate the arrival of a U.S. recession.

On the Hunt for a Swing Low

This morning, we are on the hunt for a tradable low, as we have been for the past few sessions. Preferably, that low sits around 4050, give or take. The target recognizes the considerable options open interest and Gamma around 4000 on the S&P 500. The forming S&P 500 Index channel also supports the target (see Navigator Chart above and SPX chart below). This invasion severely alters the global order in place since World War II. Did I not warn you about Fourth Turnings?

It paid to take a long trade on the above-referenced invasions, but this invasion is somewhat distinguishable. This time we have a super nuclear power attacking a country because it can – and for no other ostensibly legitimate reason. Russia is capitalizing on Western weakness, much like Hitler did with Great Britain in World War II.

On the one hand, the backdrop could ease pressures on the Fed to tighten monetary policy. But I honestly cannot quantify whether the current situation exacerbates or ameliorates inflation pressures. My instinct is that inflation will worsen short-term (e.g., $100 plus per barrel oil prices) and decline as a recession unfolds.

Ironically this is the type of environment where you’d expect Fed intervention not tightening. Because the Fed didn’t pull back on monetary policy when it could, it has little ammunition left.

Many individual stocks have already crashed as the bubble bursts. Our job is to find opportunities in the carnage.

We have terrific returns year-to-date in both the leveraged and non-leveraged accounts. It would be easy to blow it in this kind of volatility. But I am considering deploying at least some cash today so stay alert.

There were bullish divergences in the S&P 500 index, as far as breadth, momentum, and strength at yesterday’s close. We will see how it looks this morning. I am surprised the overnight action isn’t worse.

The bottom line is that we should favor longs over shorts. Buying puts as Putin invades Ukraine is like asking for a quick insurance policy on your house when the house is already burning.

As mentioned above, let’s also watch the trend channels to confirm a long entry. Here is the S&P 500 cash index:

The NASDAQ 100 is even better formed:

Weakness begets weakness. We can trace the current situation to our disastrous withdrawal from Afghanistan. China invading Taiwan in the coming months will be traced to our inability to discourage this invasion.

One distinction is that China cannot afford to lose us economically, so it is a different animal. Comparatively, Russia is an economic blip on the radar screen. But China has bought off most of our elites (traitors) anyway, so China will likely take Taiwan with a whimper. By the way, I wonder if Ukraine now has buyer’s remorse with the Biden family payoffs? Serves them right,

I hate to state the obvious, but to quote Steve Bannon at War Room, “elections have consequences, and stolen elections have major consequences.” The evidence continues to mount that the Biden regime stole the election through multiple means, the latest being a comprehensive and illegal national ballot harvesting scheme. We are now bearing the consequences of an unqualified, incompetent, and cognitively impaired President. We would be far better off if an adult were running our government rather than a cognitively impaired septuagenarian.

Regardless of my opinions, this meltdown can become systemic, i.e., forced liquidations due to hedge funds blowing up, etc. Stops are critical in this environment. There are always one or two funds that hit the pavement in these circumstances. I would proceed cautiously in the circumstances.

Day Traders

Today may not be the best day to trade, as you could get crushed in the volatility. If you must trade, keep your positions smaller rather than larger and widen your stops to handle the volatility. Gamma is extremely negative across all indices / ETFs, and the VIX is near 37. The market is pricing in a 2.32% daily move. Overhead resistance is light at 4200 and more substantial at 4300. Support is at 4064 and 4000.

The markets should bounce on a test of the 4000 – 4050 area due to the forming channel. Be mindful that my ultimate targets remain 3600 and then 2400 as outlined in my Weekly Forecast. I don’t mean to suggest we achieve the latter targets this week. I expect it to take a while. However, 3600 is a slight possibility in a complete meltdown/crash or systemic dislocation.

Assuming that the 4050ish bounce scenario unfolds, there won’t be a lot of resistance back to 4300. But any rally will be short-lived without a sustainable reduction of put positions. It is doubtful that will happen before the March 16th-18th Fed meeting.

I am considering long positions at the target on a confirmed price pivot to hold up to and then cover at the Daily 5-EMA.

We will be gapping down at the open, so Gap Rules are in play. Overnight inventory is 100% net short. Be mindful of the size of this gap down per the rules.

Remember that gap fills or lack thereof are the first clues to strength or weakness. There is potential for early trade to work the gap fade move given the context.

Consider buying the high of the first one-minute bar or buy a cross back up through the open if there is an opening drive lower that reverses. Odds are increased if the overnight low is not taken out first. Monitor for continuation with an ultimate target of overnight halfback at 4165 or so.

Any fade that is only partial or fails quickly may be a short signal on a cross back through the open. This sort of “go with” trade can be relatively difficult to pull off as per gap rule #4. Use caution and monitor very closely for continuation with the understanding that when markets are piling on (100% o/n inventory true gap on top of weak close), reversals can be unpredictable and swift.

The best scenario would be a gap fill and green candle on the day. One can wish?

A.F Thornton

A liquidity cascade and negative feedback loop can take the market significantly lower. I will do my best to explain it. It involves the influence of the options market, which has grown so large in the past few years that we have to consider it in our algorithms.

I discuss and identify the Weekly Expected Moves week to week respecting weekly options. And you see how influential they are most of the time. But options have an even more significant impact when considering Gamma and Delta hedging. Dealers on the other side of puts and calls have to hedge. At certain levels of Gamma and Delta, they have to hedge a lot and frequently.

When volatility is this high, it is nearly impossible for dealers to keep up. Accordingly, they step away from the market, and liquidity evaporates, making the problem worse.

We had the positive benefit of Gamma in the bull market phase. We would see tight, persistent rallies. These were positive Gamma squeezes. The more traders bought calls, the more the dealers had to hedge by buying the underlying stock or index or futures. The hedging created a positive feedback loop.

Now we are seeing the opposite. The more investors buy puts; the more dealers have to sell the underlying stock or index or sell futures. This hedging creates a negative Gamma squeeze with tight sell patterns.

ETFs and indexing, in general, are related problems. It does not matter how good your stock is; it suffers when investors dump ETFs and indexes. Options leverage only exaggerates the problem.

Most of the Gamma is sitting at 4000 on the S&P 500 index. As the market approaches that or other significant Gamma levels, dealers may have to unwind their positions as investors cover their puts, and the Gamma squeeze reverses to positive.

I will mention something one of my mentors once told me. The best investments sometimes make you sick to your stomach because the fear is high. We call it the puke point. As Russia makes its full-blown Ukraine invasion and given most of the other Fed risks are known, we may deploy some capital into the capitulation.

Fasten your seatbelts, and let’s see how it goes. It is going to be a long night.

A.F. Thornton

We have a full retest of the January low underway. Not only is the S&P 500 going to close on its low. It will close on or near its critical retest level just above 4200 – leaving us hanging. The NASDAQ 100 will close below its January low. One could suggest that where the NASDAQ 100 goes, the S&P 500 will follow.

The S&P 500 has been one-time-framing lower for five sessions in a row. The slow, consistent, and somewhat demolishing behavior reminds me of 2000 and 2007, but more on that later. I have watched the order book dry up several times today, meaning there is little or no liquidity, at least as it relates to the order book.

The U.S. Intelligence community has informed Ukraine that a full-scale invasion will be underway in 24 to 48 hours. A full-scale invasion could precipitate a full-on market crash into the 3600 level.

I will expand on all this tonight with a short video and discussion. The WEM low at 4229 did provide some brief support.

I am beyond thankful that our strategies are in cash. The Navigator Algorithm is an extraordinary tool.

A.F. Thornton