Archives February 2022

It was a simple plan. Act like Russia would invade Ukraine even though you knew they wouldn’t. Hit the Country with more fear (having practiced so much with the China Virus). Then act like your deft diplomatic experience saved the day! That ought to boost dismal approval ratings, Sayeth the Raven. But once you lose the nation’s confidence, it is hard to get it back.

The latest news is that Russia is pulling back from Ukraine, having achieved its goals of preventing the West from planting NATO and its missiles in its backyard. We did something similar with Cuba so many years ago – which is why I have had difficulty seeing the problem with Russia’s requests. With the West so focused on wokeism and other nonsense, all it took was a good bluff with a weak U.S. President for Putin to succeed. Perhaps a bloody conflict has been avoided. We will see what happens. For now, watch the lamestream media confuse who was the better diplomat, Putin or Biden?

Meanwhile, back at the market, I have been advising daytraders to keep position size small (and by all means always use stops) until the VIX volatility index gets back to a reasonable level. Yesterday was an excellent example of the importance of the concepts. Ukraine’s President Zalensky sarcastically stated that Russia would invade today. The correct context was lost in translation. The Dow lost 500 points in the next few minutes and never fully recovered on the day.

Interestingly, the major indices held well above the January lows in a good test run of difficult circumstances. The indices have turned around considerably overnight on news that Russia may be withdrawing troops. Oil prices have sharply reversed this morning, down 3%. The S&P 500 will open with a large gap higher, above both its five and 200-day lines. We shall see if the market can hold these gains, as the gains will be attributable to short-covering again.

But the minute we see oil prices reverse lower and global tensions calm, interest rates jump again, and we are back to the inflation problem. So there will be no rest for the weary in the circumstances. The January PPI (Producer Price Index) comes out later today. We shall see how wholesale inflation is measuring up as it leads to consumer inflation.

I remain open to a potential swing trade for cash and leveraged accounts. I like the potential “h” reversal pattern in the SPY and QQQ. I am also pondering Bitcoin’s better performance than (and decoupling from the S&P 500). Is this a leading indicator for “risk-on” assets? It was on the way down. Let’s see what the day brings.

Day Traders

As was the case a few days ago, resistance remains at 4500 and 4520. Support lies at 4450 and 4400. Recall that we are approaching monthly options expiration on Friday, which has pulled the market down into some of its deepest troughs over the last year. But it may be different this time.

As we approach Friday, the trading range should tighten around the 4500 area. An extended rally fueled by declining implied volatility and put decay could push markets back up into the 4520-4550 area by Thursday, which is back to where I noted heavy resistance last week.

Today, it appears that 25% of SPY/SPX/QQQ negative gamma pressure will expire Friday, which should remove some net negative gamma by Monday. As this is a heavy put expiration, the decay, and closing of these puts could keep a tailwind for markets through Friday at the expense of some “lower bound” support (currently at 4370) into month-end. This lower bound idea is that, essentially, markets are now too well-hedged to have a material decline.

Mark all your key levels, including the abovementioned ones, the overnight high and low (4468 and 4381.75), the overnight halfback at 4424.50, and yesterday’s high at 4420. Don’t forget to mark the regular session open.

Have a keen awareness of critical moving averages nearby, including the five and 200-day lines near 4450 and the 21-day line (mean) around 4500. The influence of these lines can supersede other levels.

Also, note the ‘h’ reversal patterns on the daily SPY and QQQ. These patterns look bearish and often fool inexperienced traders. The pattern can be bullish as the retest of the recent low approaches.

The market will open with a large, true gap higher on inventory that is almost 100% net long with many shorts that could undoubtedly hit the panic button and buy. Gap Rules apply – especially numbers two and four.

But I have highlighted the area that the market will open into, and there is quite a bit of resistance to overcome, including the downtrend/supply line from February 10th. Recall that we broke this line once and failed.

Use any gap fill, and the extent of the filling, as your initial sentiment indicator. Assume sellers remain in control if the gap fills and there is acceptance within yesterday’s range. If the market punches through the aforementioned resistance zone, target 4500. If it fails, target 4400 but monitor for continuation after each support level is breached or not.

With the overnight high pushing the endpoint of single prints, you can use the level (4468) as a potential long trigger. If the gap fills and there is acceptance within yesterday’s range, this is not a meaningful reversal.

A.F. Thornton

Happy Valentines Day. The market was down again this morning but has recovered on news that Putin is still willing to talk solutions to the Ukraine problem. I had some technical issues with the video last night, so it will be out later today. But let’s face it – you already know the issues.

Our 7.5% inflation rate is now the same as Mexico’s. Under the old formula, it is nearly 14%. So interest rates have risen, and the Fed will begin to catch up with them in their March meeting. The bond market has already set them. Whether rates continue to rise depends on future economic data and geopolitical risks – e.g., Russia invading Ukraine. Anybody who says they know what will happen is a fool. All of this will be data (and news) driven.

A large inflation component, Oil prices are approaching $100 per barrel. In part, higher prices are due to the Biden administration’s ill-conceived policies. But there is also a component of geopolitical risk in the price. How do I know that? Contango.

No, contango is not a new kind of dance. It means I can buy oil futures for year-end in the $80 per barrel range even though the price is close to $100 now. Normally, future prices are higher than current prices. So the market sees a short-term rather than long-term oil price risk.

The stock market is coming off a multi-timeframe channel top, including the 100-year channel. It overshot the mean to the upside with the friendliest Fed policy fuel ever conceived. The market has been waiting for a catalyst to start the ball rolling in the other direction. Now the market needs to snap back like a rubber band.

The market is likely beginning its journey to the middle of the 100-year channel, and we hope it doesn’t overshoot it like 1929. Certainly, the market could crash into the middle of the channel (unlikely). It can move sideways over several years (likely). Price could ride the top of the channel for longer (unlikely). In rare cases, the market can form an even higher channel (very unlikely).

Today, the middle of the 100-year channel is roughly 2200 on the S&P 500. The middle of the 2009 bull market channel is 3500. These numbers will rise over time, but the market will eventually work its way somewhere in between those levels. This is all normal.

I will continue to post the chart below as examples of the different ways the stock market has resolved this rubber band snap back concept in the past:

And here is the current picture on close-up:

That’s it. You have everything you need except a travel guide if you understand the analysis above. I will be your travel guide with the help of the algorithms I have developed over the past 35 years.

Already this morning, Putin has agreed to more talks, and the stock market has snapped back from overnight losses (see heatmap chart below). But short-term interest rates jumped on the news that war might not be available to tamp down interest rates. Get used to the volatility.

We are 100% cash for now in our intermediate and long-term strategies. We will continue to look for a new entry point if the strategies can endure the current volatility. I prefer to keep the round trips minimal in those strategies, if possible in the current environment.

Day Traders

Always mark the previous week and month’s open, high, and low on your screens. Mark the overnight high and low as well. These are inflection points. Price is not always near these levels, but they are important when nearby. For example, Friday saw the price drop below the weekly and monthly open to turn both candles red.

Overnight inventory is net short which may boost the open. I see major resistance today at 4397, 4410, and then 4500. Major support lies at 4344 and 4300.

Monitor geopolitical events carefully and use stops. Remember that Bad-Cop Fed Governor Bullard is already out with more hawkish comments on Fed tightening pre-market. European Central Bank President Lagarde speaks starting at 11:15 am EST. Also, the monthly options expiration is Friday, which has generally resulted in a dip over the last year. I will have more analysis on expiration as we get closer.

There are a lot of puts in the market, and the put/call ratio ended Friday’s session elevated. At current implied volatility (IV) levels, incrementally large moves are required for puts to payoff. This may deter put buyers and may incentivize put sellers to step up. Long puts closed could lead to positive delta hedging, which would support the market.

Current high IV is linked with large IV swings (vol of vol), which in turn can lead to rapid, amplified hedge adjustments (IV down = buy hedges, IV up = sell hedge). In other words, we do not need a change in large put positions but just a repricing of put positions to initiate large hedging flows.

If IV declines and the market does start to rally, use a break of the overnight high at 4428 as your first hurdle, then the 200-day line at 4450, then the 21-day line at 4500. As always, monitor for acceptance. If the puts run for cover, the move could be quick and decisive. The S&P 500 would require a few closes above the 21-day line and Friday’s high at 4520 to start a new leg higher.

Moving south, taking out the overnight spike low at 4354 gets the ball rolling for a test of the rising trendlines, Weekly Expected Move low, and January lows, as pointed out last night. For now, my best judgment is that it would take something the market does not know to drive below the January low today. This morning, Putin’s agreement to further talks could easily reverse, and all bets would be off. Here is the updated daily chart:

Here are my key levels. Everything I monitor is on the chart, but I emphasize following the roadmap and numbers outlined in the paragraphs above.

Good luck today!

A.F. Thornton

I cannot remember observing such panic in the press or financial markets as has been building this weekend. Notably, the put/call ratio finished high on Friday. But I don’t need any fear gauges to sense that panic is in the air over the Fed and Ukraine.

Oil is approaching $100 a barrel because of the tensions in Ukraine. Interest rates have already spiked because the Fed needs to raise them. If Russia were to invade Ukraine, it would put the Fed rate increases on hold anyway.

I will have a video out in a few hours, but in the meantime, here are a few thoughts and my current Day Trading Screen:

I will republish the screen with key levels tomorrow morning and detailed options information, including the Gamma Flip level and the Volatility Trigger.

We have the Weekly Expected Move and January lows plus two important uptrend lines, all in the same region to support the market. I don’t expect the market to punch through the area except in a full-on panic and Ukraine invasion. Then, and only then, would I target a C-wave move (equal to the first down leg) that would temporarily take the market to the 4000 region.

Week after week, we observe how powerful the Weekly Expected Moves are on both ends of the range. These critical levels limit most weekly rallies and declines. Look no further than last week, when the WEM low stopped the slide despite the Friday panic. And even in the early week rally, the WEM high stopped the advance (see below).

In the famous movie line, Gordon Gecko emphatically stated that “Greed is Good.” He had it dead wrong respecting the stock market. “Fear” is good for the market, and there is plenty of it to go around right now. This moment could morph into that “sold the rumor – buy the news” opportunity.

We sold the rumor, and our strategies are 100% cash. We have had exceptional gains for the year so far. But cash is trash in a low-interest rate, inflationary environment. We will patiently await the right moment to redeploy some of our cash.

There are powerful short-covering rallies when fear has run its course, even in a bear market.

A.F. Thornton

Here is the week in review, with all of Friday’s critical levels drawn in. The market closed on the low today and below the critical 200-day line – a bearish outcome. The weekly and monthly candles are now bear bars and red.

We finally found support at the second support level mentioned this morning, 4404, near the Weekly Expected Move low. Bulls should be thankful for market makers, as there was a lot of blue sky below 4400 without them.

We know the market is overvalued and correcting. As such, it is also vulnerable to bad news. How a market reacts to news can be an indicator in and of itself. It is close to a bottom when the indexes stop going down on negative news. As the market keeps puking, we are not yet close to THE bottom.

The news would include Fed Governor Bullards comments yesterday, which were not well-received by the market or his colleagues:

“Federal Reserve officials, both privately and publicly, are pushing back against calls by St. Louis Fed President Jim Bullard Thursday for super-sized rate hikes and instead suggesting the central bank is likely to embark initially on a more measured path.” Source: Bloomberg.

And in the tradition of “Wag the Dog,” today, the Biden administration gave us another dose of fear porn about Russia invading Ukraine, which was not well-received by the markets or the Kremlin:

“The White House hysteria is more revealing than ever. The Anglo-Saxons need a war. At any cost. Provocations, disinformation, and threats are favorite methods of solving their own problems,” she wrote in a post on her Telegram channel. “Road roller of the American military-political machine is ready to go through people’s lives. The whole world is watching how militarism, imperial ambitions denounce themselves. And a propaganda brigade chaired by Bloomberg serving all this.” Source: Kremlin.

The market catches all the terrible news but ignores the pushback.

I will endeavor to put out the weekend video tomorrow. It will be necessary and positive for traders to breathe and digest all of this over the weekend.

While stocks may be tumbling, 2022 inflows into stocks – both institutional and retail – are soaring. According to EPFR data compiled by Bank of America, cumulative equity flows YTD in 2022 had hit a record $153bn, exceeding the pace of early-2021 (when the year started with $151bn in inflows, ahead of a record year of more than $1tn inflows). Who says it is lonely at the top? Somebody has to turn the lights off.

And to cap this otherwise dismal week, we got the sad January Consumer Confidence Report from the University of Michigan:

The monthly chart reminded me of the declining trend in President Biden’s approval ratings. There is an astounding correlation. But perhaps the report will help comfort the Fed that the economy will slow of its own accord. Unhappy and pessimistic consumers don’t spend much money. And they have less to spend with 7.5% (likely closer to 14%) inflation. Consumer spending is 75% of the economy.

A.F. Thornton

Supposedly a “bloody, Russian invasion of Ukraine is imminent. The Fed has called a previously unscheduled closed-door meeting for Monday. The initial fear was that the Fed would call for an emergency rate hike. But the meeting could also relate to the Russia / Ukraine situation.

Both Gold and Oil are spiking on the invasion fears, with oil approaching $95 per barrel.

In less than 24 hours, the S&P 500 has moved from the Weekly Expected Move High to Low:

One hopes that the WEM Low is enough to hold the market. It sliced through all other important support levels. Otherwise, lookout below.

A.F. Thornton

I have notified subscribers in non-leveraged accounts to liquidate remaining positions and return to cash when the QQQ was 357.75, and the SPY was 449 50 for a very nice profit. All strategies are now 100% cash.

It will be challenging to take more swing positions until the volatility decreases. We will be limiting ourselves to day trading in the short term.

Listening to the Sunday video this weekend will be critical to understanding this market and what risks manifest.

With direction somewhat uncertain, and risks very high, it is prudent to step back and take another look at the big picture.

A.F. Thornton

The market has recovered the overnight losses and will open back inside yesterday’s range. Overnight inventory is 100% net short, so some profit-taking at the open may boost prices a bit and may even be underway pre-market.

While the overall bias is bearish below our key 21-day and week lines, the overnight low held within the recent balance area low, and I would use Balance Rules if we revisit the lower level today. Note the high volume node around 4475 overnight as possible support before the balance area low at 4450.

With the overnight low around 4454. and the bottom end of balance at 4450, any test and failure is the absolute line in the sand to stay bullish today. Remember that 4500 is now likely to be resistant per our recent options gamma and open interest discussions. Also, note that 4500 is the high volume node on the 20-day cumulative volume profile to the right in the chart above. If the market miraculously moves north of that level, then target halfback and the volatility trigger at 4530-35 and monitor for acceptance.

Remember that the monthly candle turns green above 4492, and the weekly candle turns green above 4497. Those are key areas to mark on your screens.

Volatility is higher today, with the Expected Move projected at about 45 points on either side of yesterday’s close (4504.08). The implied volatility range (4459 – 4549) is interesting since we already breached the lower level at the 4454 overnight low.

Options-driven resistance lies at 4500 as recently discussed, then 4530. Options support is at 4464, then 4404. As it is weekly expiration today, 20% of SPX and QQQ gamma expires. That could pin the market around 4500, give or take 10 points, as this substantial volume of options either expire or roll.

Significant put positions were added to the S&P 500 and QQQ yesterday, but new calls are still light. So flows will be influenced mainly around buying puts (driving prices lower) and selling puts (driving prices higher).

The fact that overnight follow-through has been negated and futures are trading positive now is an important piece of market-generated information to bring into today’s session. Short-covering could easily kick in if we don’t get a decisive break near the open. But in any rally, the top of the balance range at the 4530-35 target may prove formidable.

Cash accounts should stay tuned for any alerts, as we nearly tested the Navigator sell trigger overnight.

A.F. Thornton

I am out tomorrow, so I will only publish the key levels for day traders in the morning. As most of you know, I don’t typically trade on Friday and I have some family obligations in the morning. I will send any signals if required from my phone.

Today was inflation report (CPI) day. Of course, the number came in hot at 7.5% and likely understated. The market was already expecting a dismal report and rallied on the news. The Fed wasn’t happy with the market’s northern turn, as the 10-year treasury rate popped above 2%. One of the Fed governors (Bullard) was sent out on the talking circuit and rained on the stock market parade with hawkish comments. The algos kicked in, and the market steadily sold off its 80 point rally from the open.

Our cash (non-leveraged) accounts flat stopped this afternoon (meaning we stopped out of the 25% position we had taken in the SPY this morning at our cost with no loss), taking the non-leveraged strategy back to 100% cash. Our leveraged accounts, which had purchased SPY calls when the SPY was at 451.75 this morning, sold the WEM high at 457.50, which had been our target. Subscribers received live alerts.

We trade the leveraged accounts more tightly and actively due to the additional risk and volatility. As of now, the cash accounts are approximately 35% SPY and 35% QQQ, purchased at levels well below the current overnight prices. Leveraged accounts are back to 100% cash as well after three profitable round trips since the January 4th bottom. I will update performance figures over the weekend.

I have mentioned the importance of the 4500 level all week. All round index numbers (‘100 handles affectionately called “roundies”), as well as “half roundies” (the ’50 handles in between), are important. When you pull up some long-term chart data, you will observe that the market dances around the 50 (e.g., 4550) and 100 (e.g., 4500) handles as it progresses up and down. I also mentioned 4520 or so as crucial due to options open interest and the influence of 4500 nearby.

Naturally, we will find many options around these roundie and half-roundie levels, which is part of the dance. There were so many options in the case of 4500 (450 on the SPY), that I suspected the level (give or take 25 points) would continue to act like a magnet (and support) and it did, at least through today’s close.

When the market was some 80 points over the level yesterday and this morning, I was confident that the Weekly Expected Move at about 4570 would cap the gains. But I did not think that traders would draw the market all the way back down to 4500. They did, the catalyst being Fed Governor Bullard’s hawkish statements. Since most of the liquidity sat at the 4500 level, the market gravitated to the liquidity as is typical.

Unfortunately, the futures market is still steadily falling tonight as much as 40 additional points, approaching both the Navigator Algo sell trigger (4445) and the 200-day line (4433).

I will have the updated options gamma/strike price levels in the morning. If the 4500 level is still the dominant open interest gamma, the market may be pulled back up to that level as it was pulled down today. But now that we have breached the level south, it is likely to be significant resistance to higher prices.

The problem tonight is that Europe hasn’t even opened yet – just Asia. European traders could easily pile onto the downswing. The declines today convert both the monthly and weekly candles into red bear bars and put the S&P 500 well below the 21-day and 21-week means.

The lack of buyers/liquidity lately is concerning, to say the least. Also, the uptrend line for the recent rally is arguably broken at these levels – if they are maintained into tomorrow’s regular session.

Of course, what happens overnight does not necessarily carry into tomorrow’s day session, but the picture is not bright at this writing. Also, note that once we reentered the four-day balance range, the market went right to the bottom in the day session per “look above and fail” Balance Rules.

Having dropped below the zero gamma and volatility trigger levels, we can also expect additional index volatility and wider ranges tomorrow – potentially very wide with the negative gamma and a possible gap down. This means that market makers will exacerbate both rallies and declines because they will be selling declines and buying rallies to keep their portfolio deltas neutral. Moves in both directions go further and faster, driving up volatility.

When the market is above the triggers, market makers do the opposite – they buy dips and sell rallies leading to narrower ranges by slowing down and narrowing market moves. The positive gamma environment thereby tamps down the volatility.

If the current decline could be attributed solely to Fed Governor Bullard’s hawkish comments, the market might recover quickly tomorrow morning. Optimistically, a trading range could establish between 4450 and 4580. Only time will tell, but I would be more bullish if fear levels were higher.

We worked off quite a bit of fear in the recent “V” rally, so conditions are not ideal for a low. I am also concerned about low liquidity levels in the markets, and the continued decline in Junk Bonds, often a leading indicator for stocks. The correlation disconnect between the S&P 500 and Bitcoin is also interesting at this writing, as is the upswing in gold.

Even though buying liquidity is low, institutions sold today as reflected in significant volume distribution. And Apple per my morning comments? If it looks too good to be true, it probably is, but the stock is hanging in there tonight at 172.

Be on alert for a sell signal for cash accounts tomorrow. We are in a situation unlike any I have seen in the last 35 years. Inflation is the kryptonite that won’t let the Fed off the hook easy anymore. The inflation numbers have to be addressed and the Fed may induce a recession to put the icing on the cake.

In short, the Fed has stuck its foot into the abyss. The days of inflation being “transitory” that somehow magically fixes itself are over. Deferred pain is still pain, and sometimes it is worse than had we endured it contemporaneously with the Financial Crisis and the Pandemic. The pain promises to be severe now, whether for investors or the country at large.

Before this decline is over, I suspect we will wake up to a limit down morning. That is why we are holding such high cash positions. 100% is best for such a morning – as the opportunities in such circumstances will be terrific. That is if you have the cash available to deploy. Did I mention the Russia and China risks?

There have only been two 50% drawdowns in my 35-year career. If you bought the indexes at the bottom, you could sit on your hands for a long, long time. This market has the potential to deliver such an opportunity. If you are older, you definitely want to miss this downdraft. If you are younger, you want to buy as much as you can at the bottom, as the long-term probabilities are in your favor. Maybe learning Russian or Mandarin is not a bad idea either.

A. F. Thornton

As expected, the market (as measured by the S&P 500 March Futures Contract) found its footing just below the 4520 support I had identified pre-market, bottoming at 4516. Then, as expected, it rallied right up to the Weekly Expected Move high at 4570. It has been a game of ping pong from there.

In fact, the market looked good until Fed Governor Bullard came out with his view that the Fed board should aggressively raise rates 1% by July and then start reducing its balance sheet in the second quarter. Any such move would be significantly more aggressive than what the Fed has already announced.

Needless to say, the market puked on the news, perhaps as intended. One might expect that the Fed is looking for a declining stock market to help tamp inflation down, and the market’s turnaround north is not all too pleasing to them.

Depending on how the day goes, we may need to reassess our strategy. We redeployed cash only a few points off the morning low, so we are well-positioned to raise more cash if necessary, though I don’t want to give back our morning gains.

Leveraged accounts already took their profits when the SPY was at 457.50 and have returned to cash.

This is a day to stay attentive.

A.F. Thornton

[Corrected} Cash Accounts have reinvested 25% of their cash position in the SPY at 451.75.