Archives February 2022

Leveraged Swing Trading accounts have taken a 10% position in March 22 Expiration SPY calls at the 450 strike price.

CPI – 7.5%

Inflation posted a 7.5% headline number. The market has reacted negatively thus far. I will update everyone later this morning after I analyze the data.

The market gapped open yesterday and pinned just above the Weekly Expected Move hIgh to close at 4580. It was an impressive run and confirmed our recent buys. The market cleared a lot of important resistance and closed above both the mean and the downtrend line, leaving an island reversal on the charts. Also, the 5-EMA crossed up and through the mean (21), which can be a powerful confirmation of the uptrend. Of course, one day doesn’t make or break a trend.

By expiration tomorrow (Friday), 4500 may yet be a magnet to pull the market south, but it should also act as support. And a gap-fill to 4521 (now happening) was not unexpected before we progressed further. Finally, the Weekly Expected Move high at 4570 can be its own obstacle and could stunt any further rallying before tomorrow’s weekly options expiration. Also, there will be trapped and poorly positioned longs above current overnight levels. This creates an overhead supply near yesterday’s close at 4580.

It’s all about the inflation report today, which not surprisingly includes a new calculation method. Only this time, it is not easy to determine if it will overstate or understate the number, which came in at 7.5% and above expectations. After release, it will take an hour to digest the report on the new formula. If it is 7.5% on the new formula, what was it under the old formula? The 10-year U.S. Treasury yield has broken up and through 2% on the news.

While many traders watch the CPI closely, it should not have much short-term impact due to the change in options hedging positions. We saw a clear increase in gamma at the 460SPY/4600SPX strike yesterday (also the 50-day line) which we think further “boxes in” the price action in the 4520 to 4600 area.

Also, head and shoulders reversal patterns are all over the markets with the necklines at yesterday’s close. Sometimes they work as expected and sometimes not. But Apple looks to have a classic, almost unbelievable pattern that actually projects a new all-time high. If there is one company that might achieve new highs in this environment, Apple would be it. But somehow, the chart pattern looks too easy to be real:

Apple’s vulnerability to rates and its cap weighting in the indexes is a good proxy to watch today.

We took some money off the table yesterday, rolling the Navigator Swing Cash accounts back to 75% invested. We also took another handsome, short-term profit on the Leveraged Strategy. Again, we may buy the dip this morning so stay alert.

Day Traders

Volatility projections dropped sharply in half from yesterday, with a .67% move today projected and marked on the 15-minute S&P 500 chart above. We are testing the lower point at this writing. Significant support is at 4521 (also the Volatility Trigger, 21 and 5-day lines) with resistance remaining at 4600 and 4620 (SPY 460 equivalent).

As long as the S&P holds the 4521 area, it is more likely than not that markets will continue pushing higher. Our base assumption for today is that as “event volatility” around the CPI number burns off, positive Vanna flows kick in along with the gamma hedging into the 4600 area. This would signal a continued rotation in options positions to higher strikes, dragging the markets up.

Also, based on today’s volatility estimate, it would likely take multiple sessions to initiate a major selloff, likely initiated from a close below the volatility trigger and 4500.

We are opening with a gap down inside yesterday’s gap up. Nevertheless, Gap rules apply. The extremes of the gap can be used as key levels for potential responsive trade.

Any acceptance below 4521 and/or 4500 could put the rally/recovery into question as we would then return to the four-day balance area we just cleared.

A.F. Thornton

We sold our SPY and QQQ calls at the open for leveraged accounts, putting them back 100% cash. We cut cash accounts to 75% from 100% invested, with half still in each of the S&P 500 Index (SPY) and NASDAQ 100 Index (QQQ). The SPY price was 455.75, and the QQQ price was 364.48 when we sold.

A.F. Thornton

It is nice to save some time in the wee hours of the morning when I write these outlooks. You can often tell I am still half asleep from the typos, which I dutifully correct later when I am wide awake. Today, we will save some time because all you need to do is follow yesterday’s outlook with only a few minor adjustments. And don’t forget to watch the Weekly Forecast Video for even more detail.

From the perspective of the various index futures contracts with overnight data, the market is still balancing inside of Friday’s price action. For our core S&P 500 index, the price action is framed by Friday’s high and low, 4532.50 and 4438.50, respectively. Perhaps more meaningfully, the price action is bound by the converging 21-day line (green) on top and the 200-day line (magenta) coming up underneath:

So today’s advisory is almost a repeat of Monday, except perhaps now we can use Monday’s narrower price action as boundaries for today’s direction clues. Yesterday’s price action traded between 4514.50 and 4462.75. You could even start with the more limited overnight range between 4463.25 and 4496.50.

Thus is the confounding nature of a narrowing triangle and a stock market where neither the bulls nor bears have control at the moment. Seemingly, the market is balancing into the next big monthly inflation report set for Thursday and expected to exceed 7% as with last month. Triangles are tricky, though. Sometimes they break one way and then head in the opposite direction. Sometimes they break only to widen the triangle and lead nowhere at all. I am not fond of them.

What worries me the most right now is that I will wake up to Russia invading Ukraine one morning, and the response will light the fire to burn down the stock market. After all, every other Fourth Turning has ended up in a war.

If you have long-term “buy and hold” positions, it would be wise to buy portfolio insurance. Consider even some inexpensive, out-of-the-money put options. Insurance is critical if you own any FAANGMAN+T stocks, as many do.

The breakup of FAANGMAN+T, like the Dot Com bubble or even the Nifty Fifty of the late 1960s, is every bit the challenge to the S&P 500 Index that it was to prop it up in the final days of 2021.

There is buying in broad and international markets, even yesterday. The broad U.S. stock market was positive yesterday even though some of the major indexes, including the S&P 500 and the NASDAQ 100, were negative. And it makes sense as valuations are now more reasonable in many U.S. names that have dropped in half since the middle of last year. Take even the international markets for another example of more reasonable valuations. Look at how overvalued the U.S. stock market compared to its global cousins:

Both Emerging (Red) and Developed (Blue) market stocks have P/E ratios considerably lower than the U.S. based on a 10-year average. If you were a money manager charged with being fully invested, you would have to consider some international exposure at the moment, in addition to more defensive “value” stocks in the U.S.

For the moment, triangle patterns are challenging to call. With the overall pessimistic crowd, I still believe breaking to the upside for another rally leg is the scenario that will trip the most people up. That is what the market tends to do. One could also argue that the market has already baked higher inflation and five rate hikes into the cake. But the reality is that triangles are a 50/50 bet. Your guess is as good as mine.

Day Traders

While markets were somewhat quiet yesterday, the volatility potential remains high, primarily due to significant put positions. It will take actual buying (calls or stock) to pull markets up out of their negative gamma position. Implied volatility indicates about an 80 point S&P 500 index range possible from the opening price. The volatility trigger remains just above the 4500 strike wall at 4530.

There are no directional clues for the open. Let the market settle in. The overnight range is a potential breakout setup. Yesterday’s low (also the overnight low) at 4463 is a setup for a downside breakout. Consider it a possible long signal if the breakout fails. On acceptance, target 4442.50 first.

Look for internals to confirm any directional moves. Yesterday, markets broke overnight highs and lows just to bounce to the opposite end of the range.

A.F. Thornton

So far, we have an inside day with traders testing both ends of the overnight range. The predicted chop is ruling the day. Traders initially took the market above the overnight high, but the resistance just above 4500 was too much, and the market turned back down to test the overnight low, which is holding so far.

This behavior leaves a triangle on the daily chart right in what would be a “4” position in Elliott Wave terms. Triangles at “4” waves are textbook Elliott, assuming we can break to the upside.

As I often note, Elliott Wave always looks good in 20/20 hindsight. I have not found it helpful in predicting the future. For now, note the observation in your narrative.

A.F. Thornton

We have picked up two at the money call positions, one in the SPY and one in the QQQ for February Monthly Expiration. Details to follow.

Navigator Algorithm – Buy Signal 2/4/22 / Cash Accounts – 50% SPY and 50% QQQ +5.25 % YTD / Leveraged Accounts -100% Cash +47.8% YTD

With the Consumer Price Index set to report on Thursday, expect some chop at the beginning of the week. The consensus is that inflation will come in around 7.3%.

Of course, since we can’t trust the government with any statistic these days, the headline number might understate the inflation rate until the market digests the details, just like last Friday’s bogus employment number. A legitimate drop in inflation (coming in below consensus) is unexpected and would boost buying. The market may significantly move in both directions until the picture is clear.

As pointed out in the Sunday night video, the context in cycles and sentiment allows for further rallying in the market. Mid-term election year seasonality also supports the rally after some chop:

The basic strategy is to work this next rally leg seemingly underway and see where it takes us. The Weekly Expected Move on the S&P 500 Futures gives us about a 200 point range from 4385 to 4586. We are using a break of Friday’s range (4438.50 to 4532.50) as our first directional clue, applying Balance Rules to the range.

As discussed in last night’s video, I am mindful of our elevated location along the 100-year market path and the downside inherent in this multi-timeframe channel top.

You should be aware of the risks too. Do not navigate this market without downside protection.

Here are the critical swing trade levels for this week:

Day Traders

I am anticipating another day of elevated volatility. Futures are flat to Friday’s close, near 4490. I will mark 59 points in each direction from the regular session open as my day range. Material resistance is at 4520, followed by 4554. Significant support lies at 4444 and 4390.

Today’s data points remain pretty similar to last week – but the contango in Vix futures may continue to act as a drag on market makers buying S&P futures. There is not a lot between 4500 and 4600 to drive prices in either direction. Past 4600, and positive gamma kicks in (supporting the market). Below 4500, traders are still likely to favor selling rallies rather than buying dips.

Overnight inventory is balanced and contained in Friday’s value area, and a triangle may be forming on the daily chart in what would potentially be an Elliott Wave “4” position. If so, the pattern would imply one more thrust higher. I am not an Elliott Wave fan, so I note the data point in my narrative.

The market is in a short-term balance for now. The extremes of the overnight range (4471.25-4507.75) may start to tip the scales one way or the other, with the caveat that doing so doesn’t get you out of the larger balance range discussed above (4438.50 to 4532.50). Today’s better play may be to wait for a move outside of the overnight range. Both the S&P 500 and NASDAQ 100 futures have poor highs from Friday, which means they will be easier to break than the lows.

Stay alert to all of your moving averages in the neighborhood. A lot depends on staying alive above the 5-day line and retaking the 21-day line. Support is at the 200-day line.

Be sure to review the Sunday night video at the top of the blog for context.

Good luck today and the rest of this week.

A.F. Thornton

[Corrected and Updated]

I wish I had coined the term for the week, but the honor goes to Mish Shedlock over at Mish Talk, a great blog if you have never encountered it. FAANG Roulette is the best description of the week. Of course, FAANG refers to Facebook (now Meta), Apple, Amazon, Netflix, and Google. Lately, we have expanded the acronym to FANGMAN+T. That allows us to add Microsoft, Nvidia, and Tesla. I cannot recall too many weeks with the kind of volatility we just experienced. It isn’t over yet, as the market is trading at new lows after the release of the monthly payroll report.

In this week that was Google took us to the moon, Facebook burned up on reentry, and Amazon … I am not sure what Amazon did yet except destroy a few Market Makers. The crowd shorted too much into yesterday’s close, and they appeared to be wrong as the S&P 500 recovered most of its 100 point loss right after the bell on what supposedly was a blowout earnings report. 

This morning, it would appear that the crowd missed something in the fine print – or they are just sour regardless. The S&P 500 Futures have given up the post-close gains and are trading at new lows at this writing, or at least they are running the stops under yesterday’s low.

It reminds me that bull markets always end on blowout earnings, a subtle point seemingly missed by the crowd. In any event, there must have been something in the small print, as the overnight futures are back down to testing yesterday’s low, having both breached the low and come back up inside range at this 4:00 am PST writing.

So our day will be framed by the overnight low and the Weekly Expected Move High at 4521. I need to write an entire article about the daily and weekly expected moves, as they affect the markets with uncanny accuracy. 

By Wednesday, any reasonable person would have doubted that the Weekly Expected Move high could draw the market back down by today. But it did with help from the volatility at hand. No matter, though. I am relatively sure that some Market Makers have been battered this week anyway, trying to keep their portfolio deltas neutral with so much activity after regular trading hours.

I will cover most of what you need to know in the new Sunday night video. I can already see that the expected move (and volatility) is poised to widen even more next week.

Also, our foray into the market for leveraged accounts stopped out yesterday. As low as we were, the market went still lower into the close. Cash accounts should still be maintaining existing positions. We don’t have a swing sell signal yet.

The January payroll numbers hit this morning, and new jobs exceeded expectations by a lot at 427,000. I guess you cannot stay home forever – especially when the government isn’t subsidizing you. The unemployment rate dropped to 3.9%. This is all interesting, as the White House prepared everyone for a bad report. Some reverse psychology, perhaps?

Anyway, we are in the new phase where good news is bad and vice versa. Good economic news, and even terrific economic news, likely means more inflation pressure and a less friendly Fed.

Day Traders

At this writing, futures have broken lower (as low as 4437), which shifts the daily expected move range to a high 1.92% at about 87 points. Mark the high and low by adding and subtracting 80 points from the regular session open. I see significant resistance at 4525 and 4556. Support is at 4450, then 4397.

Risk remains high as long as markets are below 4525, with the potential for a sharp upside move into 4600. Puts being covered and a sharp reduction in implied volatility potentially poses a violent rally. The above resistance levels are insignificant if markets can break the volatility trigger at 4525 and move higher. Of course, this would also require a breakthrough in the WEM high ay 4521, which is more possible than usual with the volatility.

On the other hand, the put strikes below to have a fair amount of gamma. These prominent put positions suggest that a violation of the levels will quickly induce volatility if markets decline below those levels.

Good luck today. I will update everything in the Sunday night video.

A.F. Thornton