Archives February 2022

The market (as represented by the S&P 500 index) is trading in a range between its 21 and 5-day lines. We only had a partial gap-fill (better than nothing), as seen in the 5-minute regular session chart above. The 21 is an intersection of the weekly and daily lines – a bit more formidable resistance. As expected, the WEM High is acting as a magnet as Market Makers defend the price.

If the market could take the WEM High out decisively, it would force Market Makers to buy futures to defend their positions. In furtherance of this possibility, the market is holding the overnight low, and the put/call ratio is high (bullish). Also, in similar downdrafts and gaps, the S&P 500 A/D line will usually pin at -400. It has managed to rise this morning.

My observation is that the market does not want to drop any further than the morning gap for now. But there is a math problem with the NASDAQ 100 pulling the S&P 500 down, while institutions are accumulating positions from less famous names that started their corrections in the middle of last year, names that in some cases are down more than 50%. Money managers might steer clear of the popular big-cap growth stocks until Amazon reports tonight, and the picture is clearer.

A.F. Thornton

We are taking a 5% position in SPY at the money calls, March monthly expiration at SPY 451.50 with at 2 point stop.

A.F. Thornton

I am concerned that the Weekly Expected Move high around 4521 will complicate trades for the next few days.

Market Makers got a gift from the Facebook motivated decline this morning. The market is back in the WEM range and below the forecast WEM high for the week. Market Makers may sell 4521 to keep prices below the level into Friday’s close.

Be careful.

Facebook’s report after the bell disappointed and is now about 35% off its peak. They lost subscribers for the first time. Maybe politics and censorship are finally coming home to roost, as has been the case at Twitter. The market will tell us whether this is a buying opportunity or not. A lot of the recent market gains are still associated with short-covering.

Today will be all about how much traction sellers get from this Facebook-driven gap down and what sectors will rise or drop in sympathy. I am not inclined to get too bearish yet, at least until the Navigator delivers a sell signal.

Day Traders

I am looking for about a 30 point range above or below the open, and my volatility forecast is still relatively low for the day. Support is about 4500 or so, and the most I see on the upside is about 4563.

I am concerned that the Weekly Expected Move low around 4521 will complicate trades this morning. Market Makers have a gift from Facebook to deal with their deltas at or below the WEM high. It could be a magnet now until tomorrow’s expiration at the close.

Both Gap and Spike Rules apply again this morning on overnight inventory that is net short. The gap is down, not up as yesterday. As with all gaps, the focus is on whether or not there is any countertrend fade. Watch NYSE tick closely as it can be an excellent first clue.

A failure of ticks to get positive is usually a sign that a fade will either not materialize or be weak and partial. A total gap-fill to yesterday’s low sets up a potential short point. Traders should monitor for continuation and see if it’s a true rejection or just a pause before finding acceptance within range.

Should we fill the gap and find acceptance within range, monitor for continuation and recognize the overhead resistance and difficulty in the climb higher.

We have more downside than upside signposts. The overnight low is now through Monday’s entire spike and has traded below its base. We were watching this spike yesterday when prices held well above it.  

Sellers in the NASDAQ 100 are certainly more prevalent, motivated by the dismal results from Facebook. NASDAQ futures are off double what the S&P’s are currently. Carry this forward in your narratives.

A.F. Thornton

As predicted, the market moved into the downtrend line after a gap fill following the open. The downtrend line is falling, so by the time we got there, it was slightly below 8600. All in all, it was a good session, with the S&P 500 closing above the key 21-day and 21-week lines.

But the momentum on the 15-minute chart was negatively diverging as the market wedged into the down trendline – and we had a sell signal on the day trading version of the Navigator algorithm. Mindful that we had come far from the recent low and into some formidable resistance, some profit-taking would have been in order tomorrow.

And then Meta (Facebook) reported right after the close. They missed their numbers. It is not a good time to disappoint when the crowd is in a bad mood. S&P Futures subsequently erased all of today’s gains, falling below the key 21 (mean) lines:

What happens after hours does not necessarily carry into tomorrow’s regular session. But if Alphabet (Google) sent us up today, Meta (Facebook) can undoubtedly point us in the other direction. A lot depends on their forward guidance in the conference call later today.

We were looking for the bears this morning, let’s see if they come out of hibernation.

Stay tuned.

A.F. Thornton

It’s official; the U.S. National Debt hit the $30 trillion mark yesterday. But we will worry about that another day. As for today, we want to make hay while the sun still shines.

From feast to famine, volatility has slowed to a crawl today. Broad market internals are negative – so large-cap tech is carrying the day. I am not surprised after Google brought good news to the street last night.

Impressively, the S&P 500 conquered its 21-day and 21-week lines intraday. We will see if the lines can hold into the close. If so, the index appears to be heading for our second target, the downtrend line from the early January high. The line, and a few other hurdles, sits around 4600.

Wouldn’t it fool the most people if the market moved out to new highs from here? While it is too early to call for new highs or even the old highs, any such move would be cruel and unusual punishment for the crowd – who somewhat justifiably expect another down leg.

If the market were to maintain its bullish stance, it would likely be because inflation is a probability but not a certainty in the long term. Macroeconomics is mostly voodoo. The economy can be an incredibly complex and unpredictable system. Traders are likely more worried about the Fed making another policy mistake than they are about inflation. Russia and China are also on their minds.

As Vitaliy Katsenelson recently observed, Japan is the most indebted developed nation globally (its debt-to-GDP exceeds 260%, while ours is 130% or so). Its population is shrinking. Its debt per capita is going up at a much faster rate than the absolute level of debt. Anyone would have thought that Japan was one lightning strike away from a disastrous conflagration.

But Japanese interest rates are lower than ours. The country is mired in a deflationary environment that has lasted for decades. While cultural differences may contribute to Japan’s woes, it illustrates the problematic and humbling exercise of long-term inflation and deflation forecasting.

We don’t know what we don’t know. For now, and as we get closer to Friday’s close, the Weekly Expected Move High at 4521 could draw us back down from current levels. But for today, the tape is slow, but the weather is still bullish.

A.F. Thornton

Navigator Algorithms – Buy Signal 4299 – Cash Accounts 100% Long/Leveraged Accounts 100% Cash

YTD- S&P 500 -4.9% -Navigator S&P 500 Index Cash Accounts +5.8% – Leveraged Accounts +49%

We had made so much money so quickly from our Friday entry point (almost 50%) that I took profits at about S&P 500 4515 at the open yesterday on leveraged accounts. I advised cash accounts to stay put. I was a little early on the leverage account exit, but being late can be unforgiving in this endeavor. The market has now hit the Weekly Expected Move high and is in the reversal/resistance zone we discussed lately.

In theory, we should be looking for another entry point to go long on a dip for the leveraged accounts. As I mentioned yesterday, the groupthink about another leg down might be getting too popular for comfort. The forecast could be correct, but the price action has yet to confirm.

You can consult every algorithm and indicator in the world, but the best vote about what this market will do is the price action itself. In other words, if it is raining and the weather forecast calls for sunshine, at some point, you better put on your raincoat.

So, where are the bears? The market surged into the final hour and closed slightly above yesterday’s morning exit price. After the close, Advanced Micro Devices and Alphabet (Google) surged on strong earnings results, while PayPal plunged on a miss. The positive tech earnings have the futures market green this morning, with tech boosting the rally. Meta Platforms (Facebook), Qualcomm, and Spotify will report after the close today.

We now have three solid bull bars behind us, plus a follow-through day, all in an environment with a remarkable spike in bears on the AAII sentiment survey putting it in the bottom 1% of historical readings. However, that’s not the only bearish survey as the AIM Model bulls are now below 5%. After other weeks in the bottom 1% of historical readings, the S&P 500’s forward returns were well above average.

Also bolstering the negative sentiment, small options traders bought a record number of put options and spent a record amount for the privilege of protecting their portfolios last week. As a percentage of all volume, hedging activity was high last week. Historically, that has preceded a bounce with good consistency. We saw this in the put/call ratio spike discussed last week.

So let’s see how it goes in the resistance zone today. I will let the price action guide us.

Day Traders

The market will open with a large gap on yesterday’s spike, so both spike and gap rules apply. With overnight inventory 100% long on top of the spike, an early fade and profit-taking are likely.

The solid overnight activity has the market opening above the 21-day (mean). Conquering the 21 is noteworthy if the line is sustainably retaken. A weaker market would have immediately rejected there.

The downside fade target is yesterday’s high at 4541.75, but be on the lookout for only a partial fill (gap rule #2).

As to Spike Rules, we are opening above the spike, which is the most bullish outcome. If there is selling into the spike, the price could move to the base at 4515.25. How prices act within the spike will tell you a lot about the power of the bears today should they show up.

The action above the overnight high at 4580 has potential for further gains. But this could be tricky with the resistance above and the structure below.

A.F. Thornton

Navigator Swing Strategy – Back to 100% Cash

I am out for the rest of the day, but all the indexes just popped out of their triangles and hit the WEM weekly targets, when the large-cap growth stocks finally kicked into the rally. Otherwise, the broad market was doing well today.

The NASDAQ 100 is negatively diverging from the S&P 500 today, perhaps a bad omen or more evidence of a leadership change. The more value-style leaning Dow Industrials have been performing better than the S&P 500, and the Dow index may be the lone index to close above its 21-day line.

After today’s close, Alphabet (GOOGL), Advanced Micro Devices (AMD), and PayPal (PYPL) report earnings. Starbucks (SBUX) also announces results. Alphabet will certainly have some influence on the indices tomorrow.

Let’s see how it goes and I will drop a note later tonight.

A.F. Thornton