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Navigator Algorithm Swing Strategy – 5% SPY and 5% QQQ Call Spreads

Who says you can’t predict the future? Let’s first review our Decennial Roadmap highlighted in the 2022 outlook video:

While it doesn’t exactly show an ominous January, it cautions that bearish pressure won’t abate until mid-year if the past years ending in “2” are any guide.

But it is the Hurst Cycles that have always been a critical component of timing corrections and bottoms. It is amazing how consistent these cycles have been over my career:

Interestingly, J.M. Hurst wrote his seminal book on stock market cycles in 1970. As recently illustrated, the 17-year trading range that developed in the inflationary processes of the 1970s sabotaged any so-called “buy and hold” strategy. Mr. Hurst discovered that predicting lows in that mostly 25% trading range was invaluable in a market where money managers had to “trade” to make money. After 17 years in a trading range, the public hated stocks.

I always laugh a bit when I remember that “Mutual Funds” used to be called “Unit Trusts.” They changed the name in the late 1970s because Unit Trusts had a bad record and a bad rap with investors. Never forget, success in life is marketing.

Back to the future, the NASDAQ 100 already tagged its Expected Move High for the week and is approaching its downtrend line, and the S&P 500 closed just below its Expected Move High yesterday. I am inclined to sell the final half of our positions this morning, given that the easy money off the lows is behind us.

If I am reluctant to take profits this morning (and I am not), the reversal theory seems to be moving towards consensus. I like to avoid “Groupthink” because it is typically wrong. So I want to keep an open mind as to more bullish outcomes.

As we welcome February, our Navigator Algorithm swing strategy $10,000 account finished January with a $4,900 gain, also a 49% return. Even a non-leveraged cash account was up $1,200 or 1.2%. The S&P 500 index, in its worst month since the China Virus crash in March 2020, finished down 5.5% on a closing basis. Peak to trough, the index lost almost 12% at the January 24th spike low.

Nevertheless, the easy money off the bottom is behind us now. Supporting a contrary view to rolling over again, yesterday’s price action and volume qualified as a follow-through day on the broad NASDAQ and the NYSE indices. Both indexes saw significant gains more than four days after their Monday spike lows on increased volume over the prior session. The S&P 500 rose significantly above the 200-day line, though the NASDAQ 100 has some work to do to accomplish the same. Also, we now have two strong bull bars nearly stacked on top of each other.

The last few day’s activities reflect institutional buying, not just short-covering. Without the participation of hedge and mutual funds, the rally attempt from the recent lows will fail.

The caveat to the caveat is that yesterday was month-end, in a particularly gruesome month. So the volume might also be reflective of money manager window dressing. Not every follow-through day leads to a bottom. But the follow-through day supports keeping an open mind to both bullish and bearish outcomes in the next few weeks.

In my experience, the Fed’s third rate hike is the one that usually destroys the market, and they have not even started the first one. This overvalued market may be more vulnerable to an earlier turn lower – so the three-hike rule may be inapplicable.

And what else might go wrong to wreck the economy and ease up on the Fed?

1. Stimulus has worn out,
2. Pending homes sales have declined,
3. Merchants are stockpiling and pre-ordering everything,
4. Retail sales are falling,
5. There is a major deceleration in govt spending,
6. The declining working age population will reduce productivity, and
7. There is no more tapping home equity via refinancing at a lower rate.

For now, let’s see how much the market struggles in the resistance zone, and we will go from there on the Navigator Swing Strategy. At the 4520 or so level, we have the daily and weekly 21-day lines, the 89-day line, the Weekly Expected Move high, the 50% retracement of the correction, etc.

At 4600 or so, we have the downtrend line, the middle of the weekly channel (usually resistance), and the .618 Fibonacci retracement. If the S&P 500 were to decisively clear 4520 for a few days, I might become a believer.

Later today, I will put out some commentary on how this correction developed beginning last May in the broad market and how it may have ended a week ago when the large-cap growth stocks finally caved. It has been a textbook correction in that sense thus far. We don’t know if it is over, but we will have a better idea in the next few weeks.

Not to beat the drum, but the market might be setting up a trading range. Markets don’t typically instantly shift from bull to bear. They usually transition in a topping process. The Russell 2000 is a great and recent example of this:

Day Traders

Overnight inventory is balanced. We are already above the NASDAQ 100 WEM high and rapidly approaching the 4520 S&P 500 Futures WEM high. While the indexes have conquered their steepest trendlines, the market may be starting to target the primary downtrend line drawn from the January 4th peak.

The resistance intersection above price, including the downsloping 21-day line, is considerable. The market typically rejects the first touch, and you can often short it.

Today could easily be an inside balance day with the past two-day range expansion. Watch for slower tempo and more two-sided trade if an inside day is at hand. It might be best to approach trade more responsively rather than initiate moves, at least until the picture is clear.

If the rally continues, it should take out yesterday’s high at 4514.50 on a fast tempo and hold it (find acceptance above). Target the moving averages mentioned in the commentary above in such a case.

Halfback at 4455 is the critical level for your bull/bear bias. The market should not breach the midpoint of yesterday’s session for the rally and tone to remain intact. There is significant potential for short-sellers to reemerge should this level be breached.

A.F. Thornton