2022 | Archimedes Methodologies

Founder's Trading Journal

Morning Notes – 5/11/2022

May 11, 2022 AF Thornton 0 Comment

Good Morning:

The top line and core inflation numbers came in at 8.3% and 6.2% for April, slightly higher than Wall Street’s consensus expectations.
The market tamped down a pre-market rally on the heels of the report.
So nothing has changed much from yesterday. Support is strong at 4000, and then the overnight low around 3950. Resistance is firm at 4100.
Of course, if the market spends much time below 4000, it becomes resistance.
We expect another 100 point range from the open today – meaning 50 points plus or minus the Open.
The WEM low around 3985 will be a magnet until the close (weekly expiration) tomorrow. But there is little (if any) support below 4000 from the options market and a spike or capitulation is possible if prices start to find acceptance below this important level.
Look to 3950 as the line in the sand. Otherwise, a short-covering rally remains a distinct possibility as the day gets underway.
I will have more to say later today, as I have a chance to take a deep dive into the inflation statistics.

A.F. Thornton

Founder's Trading Journal

Morning Notes – 5/10/2022

May 10, 2022 AF Thornton 0 Comment

Good Morning:

The centerpiece of one of Bill Clinton’s Presidential campaigns was the mantra, “it’s the economy, stupid.”
Now, the mantra should be, “it’s the liquidity, stupid.”
We are so easily distracted. Sure, the Fed is doing its thing, making the headlines. But the reality is that they have barely raised rates, and their balance sheet still grew in April.
But here is what is happening – liquidity is evaporating.
The impact on interest rates and nearly everything else is simple. If you want to sell, discount it. If you have to sell, watch out.
Let’s start with the Japanese Yen, previously a somewhat stable currency and haven. Remember the carry trade?

There is no doubt that there are bodies buried under that Yen slide. It is only a matter of time before the bodies float to the surface.
Moreover, Japan may be showing us our roadmap to U.S. sovereign debt perils, not to mention the results of putting an artificial cap on interest rates. Japan is in a doom loop. But for the grace of God, there go we.
And don’t forget that Japan is the single most significant buyer and holder of U.S. Government debt in the world. At least they “were.” Recently, Japan has been a net seller of U.S. Treasuries as their problems continue to mount. How does the story end?
And so, it is no wonder that the U.S. is experiencing spiraling interest rates. Fewer and fewer are buying what we are selling. Why would they?

Look, would you buy our debt? Our country looks like a debt-ridden disaster run by woke, senile octogenarians talking up nuclear war as if it were child’s play. “A Nuclear Strike Might Not Prompt the Reaction You Expect.”
Seriously? And the fact that our government will steal the money if a country doesn’t embrace the “Great Reset” agenda doesn’t help with the sales pitch.
When I was a kid, we took nuclear war so seriously that we used to have to hide under our desks in school as part of periodic atomic drills. I remember the air raid siren tests every Saturday at noon in Tucson, Arizona, where I grew up.
Of course, they also used to show us propaganda films of the former Soviet Union where all the houses and cars looked alike. Have you ever tried to find your rental car in a parking lot without the key fab?
But I digress – the real problem is that there are fewer and fewer buyers for U.S. debt at home and abroad. The banks are full and foreign buyers are few. Rates have to go up to attract the few buyers left at the table.
I shudder to think what U.S. pension funds look like right now with their failed 60/40 “balanced” portfolios. Unfunded pension liabilities are sure to surface as a problem sooner or later.
And without the “War” in Ukraine conveniently scaring the world and driving some funds to seek safety, would U.S. dollars and debt be attractive at all?
Do you see how that works? War is good! In every other Fourth Turning, war distracts everyone from the real problems at hand.
If you think about it, we are only a few nukes away from lower interest rates, depopulation, and the “New World Order.” The Great Reset crowd must be salivating.
I don’t want to go there, but when the U.S. Treasuries don’t sell, even with higher rates, Bernie Madoff, the Federal Reserve is the only buyer left. How does that work, exactly?
Never forget that rational humans value a return “of” their capital more than a return on it.
Back in the 90s, we used to talk about the “triple merit” bull market. The falling interest rates, oil prices, and the U.S. dollar worked together like a fine symphony driving higher equity prices.
So what do we call this bear? How about the “Triple Demerit Bear Market” – a rising dollar, oil prices, and interest rates.
The bottom line is this: if it isn’t liquid, you will have a hard time selling it. Remember the FAANG stocks? The ‘N” stood for Netflix.

And while I would like to believe that a 20% correction is enough in the S&P 500 Index, the evidence would suggest that the selling is just getting started. We have only begun to see retail mutual fund and ETF outflows in the past few weeks.
Sell when you can – not when you have to?
When I owned a bank and trust company back in the 1990s, I had the best stock market indicator in the world. The customers would buy at the top and sell at the bottom. It was an uncanny view into the real world of retail investing and the best market indicator I ever possessed.
And that brings us to this morning. Likely, today will manifest in a turnaround Tuesday. We are coming off the Weekly Expected Move low at 3985 on the S&P 500 Index. There is significant support at 4000, pessimism is reaching for the stars, and the street is extremely short. We are likely close to another rip-your-face-off short-covering rally.
If we are lucky enough to get it, use the opportunity to cull your holdings. We have a rough ride ahead of us.
If history is a guide, most bear markets retrace the final leg of the bull. In our case, it would be the entire stock market rally from the March 2020 lows. My ultimate target continues to be 2500 – close to the March 2020 lows and the price I peg to be the middle of the 100-year channel by the time we arrive there. Call it regression to the long-term mean. See the current BluPrint Thesis for a more detailed discussion.

This is the 100-Year chart of the Dow Jones Industrial Average showing the market's current location three standard deviations above the long-term mean (middle of the price channel). The market has achieved these levels only three times in history: 1929, 2000, and now. The prior two cases did not end well. The market fell from the channel top to the bottom in a 90% crash to resolve the 1929 overvaluation. From the top in 2000, the stock market dropped over 50% twice over a lost decade to resolve the overvaluation.

Our European friends mounted a rescue operation overnight. They tested new lows, but moved back into range. We are slated to open in the upper third of yesterday’s range.
At this writing, we may see a True Gap at the open. If so, Gap Rules will be in play. Remember that whether or not the gap fills is your first sentiment indicator today.
There is a lot of blue sky below 4000 on the S&P 500 Index. We would need parachutes to ride prices lower from there.
For now, I believe that the level will hold, and we should see some short-covering get underway as we approach the mid-week inflation reports.
Did you hear me? Take advantage of any rallies to cull your holdings. Don’t be the last one to turn the lights out.

A.F. Thornton

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Morning Notes – 5/9/2022

May 9, 2022 AF Thornton 0 Comment

Good Morning:

We come into this inflation reporting week on decidedly negative terms.
The tech wreck continues with the NASDAQ 100 and the S&P 500 both at new lows and opening down 2% and 1.5% respectively.
The S&P 500 has strong support at 4000, which has been my lower boundary call for a while.
The market could briefly overshoot the level, as the WEM takes us as low as 3985 this week. But I would be looking to work a bounce from there. Unless we are in an all-out crash, it does not make a lot of sense to short here.
We will have a True Gap down at this writing, so Gap Rules are on the table this morning. Focus especially on rules 2 and 4. But even if we open back inside the range, the key is to find acceptance there. Otherwise, the market will expand the lower range.
Overnight inventory is net short, so profit-taking should mark the open and boost prices. However, having come back up to the midpoint of the overnight range, the profit-taking may be well finished. If not, and as always, how the market handles the gap fill is your first sentiment indicator.
Be sure to mark the open, as it is a key component of working the Gap Rules.
Also be sure to review the BluQuant Oracle™ from yesterday for the weekly picture.
Your job is to make money – so focus on that today and leave the news off.
There is a significant chance for a tradable short-covering rally from here – so stay alert. It would more likely coincide with Wednesday’s consumer price data, but there are always insiders who already know the results.
Overnight traders may simply have run the stops under recent lows – just to bring it back up into range. Also note my comments in the weekly review about the 4100 level and its importance.
So I will peg support today at 4000, then 3985, with the overnight low at 4031 as the gateway to lower prices. Resistance is now at 4065, then 4100.
Recall that we are in extreme negative Gamma. And while that tips the bias to the bear side, gains as well as losses are exaggerated. So once you pick a direction, let it run. Obviously, as short-covering rally has the greatest potential.
A lot of folks are talking about a crash today. I don’t see it, and the market is too short to accommodate it without a significant catalyst.
That doesn’t mean you have to be the first in. Wait for a true, confirmed pivot.

A.F. Thornton

Founder's Trading Journal

BluQuant Oracle Weekly – 5/9/2022

May 8, 2022 AF Thornton 0 Comment

Last week saw another bear candle that closed on its low, just above the February low.
When viewed from the January 3rd peak, the weekly candle dipped into new low territory but snapped back and closed inside the 9-month range.
For the most part, last week became a trading range week, with the S&P 500 closing almost unchanged.
Once again, volume increased over the previous week. The higher volume failed to drive prices significantly lower, so the result is more like stalling action, a slight positive over the prior week.
It is an excellent time to mention the range bottom and line in the sand at 4100. We predicted this level back in 2010 as the price likely to coincide with a significant top. It is the 4.236 Fibonacci extension of the 2009 bear market low.
It is not surprising that the level provides support, but the market looks even more bearish below it. That hasn’t happened yet.
We have the inflation reports coming up mid-week and monthly options expiration a week later. Both of these events are likely to bring us a bounce from highly oversold levels accompanied by the record and negative investor sentiment.
The VIX and Dow Transports are not supporting the current lows in the Dow or S&P 500, creating a divergence, another slight positive. The momentum on the hourly charts has been rising on the last three swing lows, another slight positive.
Another reason to look for a reversal back up soon is the market dipping into its nominal 80-day cycle low. The variance for the trough is roughly two weeks. Since we cannot get more specific, note the cycle bounce due in late May to early June.
Bears want a decisive break below the February 24 low which is the neckline of the double top bear flag, and a measured move down towards 3600 based on the height of the 9-month trading range.
The bulls hope that the sell-off in the last five weeks was simply a sell vacuum to test the February low.
Mission accomplished if it was a vacuum test. The market could find its rebound low this week.
Bulls see a wedge bull flag (Jan 24, Feb 24, and May 2) and want a reversal higher from a lower low trend reversal and the wedge pattern. Count me in this camp.
However, the selloff from March 29 has been extreme. The bulls will need at least a micro double bottom or a strong reversal bar before the bull crowd would be willing to buy aggressively.
The reality is that traders need more information, therefore more candles. The S&P 500 index may have to go sideways for another week or two before traders decide whether it will break below the 9-month trading range low or reverse higher.
If you think about it, the S&P 500 Index has been dancing around 4,400 for 9-months. That price might well form the middle of the new trading range. (See our “Current Stock Market Thesis“”) harping on this point since February. Since the top of the range is about 400 points higher, the bottom could be 400 points lower. That is below the February low and around the 4,000 significant round number (the approximate WEM low this week).
Since our formal Sandbox is the WEM range between 3986 and 4254, I am not concerned about anything outside the range. I am primarily concerned with what we encounter inside that vast volatility range expected in the week ahead.
I have, once again, overlayed the 2000-2003 bear market on the chart above. Current prices have been uncannily tracking the old bear.
And that bear would see a trip down to the 4000ish area, where we encounter the largest concentration of Gamma and outstanding options.
The Gamma and prominent positions can provide significant support for a reversal.
Given the cycle trough, seasonality, overly bearish sentiment, oversold levels, developing positive divergences, and 2000-2003 bear market tracking, I will be looking for long positions at or around 3800-4000, but looking and buying are not the same.
I need confirmation of a turn – but that is where I will be looking for it.
Interest rates continue their climb, pushing the 10-year up to 3.22%.
Remember my prediction in the 2022 outlook in January?
I predicted these levels based on the head and shoulders reversal pattern.
Here we are, but even these rates should retrace a bit soon.
The rising rates are at the root of all of this trouble.

We published the chart above on January 22nd of this year as part of our 2022 outlook. It is even hard for me to accept that my prediction came true. What an unbelievable reversal of fortunes.

And here we are at this writing, with the yield tonight at 3.22%, just below the 3.25% prediction from January. How is that “transitory” inflation working out for everyone now? What a bill of good our government has handled all of us.

Conclusion

Until rates peak and the US Dollar stops rising – all doubts about the stock market must be resolved bearishly. It is an unusual time. It is rare for stocks and bonds to fall together. One usually offsets the other.

Imagine the carnage in pension funds all over the country tonight, and the increase in unfunded liabilities when a balanced investment strategy fails as is happening now. As I keep saying, it is only a matter of time before the bodies start floating to the surface.

Nevertheless, the street once again is lopsidedly short and we will continue to see rip-your-face-off short covering rallies in between the slow and methodical bear drips. A rally as such is due very soon. I would not try to short here, and I would be very attentive at the WEM lows this week around 3986.

A.F. Thornton

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Unrelenting

May 6, 2022 AF Thornton 0 Comment

Unrelenting – Nomura Securities (Charlie McElligott)

Charlie McElligott at Nomura discusses what he calls a “Full Capitulation Gong Show” as “Liquidations Ripple Through The Market” amid an “Outrageous Selloff.” Let’s just say he isn’t bullish and raises a lot of good points, including how the market broke yesterday (5/4/2022).

Founder's Trading Journal

Morning Notes – May 6, 2022

May 6, 2022 AF Thornton 0 Comment

A more detailed version of these notes, together with supporting charts and any plans for trading the Open, are sent to subscribers at 9:00 AM EST., about 30-minutes before the market opens. You can subscribe by selecting the link at the end of this post.

Good Morning:

Even as bearish as I am, yesterday’s reversal was stunning, mainly attributable to Fed jawboning and negative Gamma.
But there is not much good news lately either.
The Fed sent its troops out to talk the market back down because it had rallied so hard after the Fed rate increase announcement.
The Fed Governors are also out today – so day-trading will be treacherous. I would not recommend it.
Since the options market has mispriced the volatility for two days in a row, I am unsure how valuable my range estimates are this morning.
The Gamma adjusted range is about 44 points plus or minus the open for a total 88 point range.
Not adjusted for Gamma, the range is forecast to be 75 points plus or minus yesterday’s close for 150 points.
So far, the market does not seem happy about the April Employment Report that came out pre-market, but I have not had time to analyze it.
Unless something in the market breaks – and the possibilities are endless – there is a lot of support between 4000 to 4100.
Significant resistance remains at 4200.
4300 opens the door to a bullish bias. Below 4300, the sellers are in control.
The bond market has practically crashed – and I am waiting for the bodies to float to the surface.
On a positive note, the S&P Futures held yesterday’s low overnight, so sellers could not gain more traction.
We will be opening towards the bottom of yesterday’s range.
Spike Rules are applicable at the open today, so make sure you are familiar with their application.
With more Fed Governor jawboning and the weekly options expiration, I do not think it advisable to trade today. Take the weekend to get some perspective.
There is an adage – “don’t fight the Fed.”

A.F. Thornton

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Morning Notes – 5/5/2022

May 5, 2022 AF Thornton 0 Comment

A more detailed version of these notes, together with supporting charts and any plans for trading the Open, are sent to subscribers at 9:00 AM EST., about 30-minutes before the market opens. You can subscribe by selecting the link at the end of this post.

Good Morning:

Be sure to review the Monthly Oracle just published to catch up on the big picture.
The short-covering rally came in right on cue yesterday, and the Founder’s Group scalped a nice long trade from 4150 up to 4250, for almost 100 points.
We only wish we had done more, and waited to sell at 4300. But we sold at the WEM high (4250) and the proverbial hogs sometimes get slaughtered.
The Navigator Algorithm rolled into a buy signal on multiple time frames as anticipated Tuesday and yesterday. Unfortunately, the Algorithm isn’t smart enough to communicate where the signal will take us. The short-covering rally yesterday may be all we get.
I won’t bring the Navigator Swing Strategy into the buy until we get a successful back test of the trigger line, so stay tuned.
Today’s playground is about 90 points between 4225 and 4315.
Both the 21-day line and the flip to positive delta are at 4300, so that will be key resistance. Acceptance and a couple of successive closes above 4300 would signal a potential move to the top of the trading range at 4600.
Market makers and Dealers will be fighting to bring the market back down to the WEM high at 4250 before tomorrow’s close – so keep that in mind for the next few sessions.
For the moment, the market is relatively neutral unless follow-through buying ensues, resulting in a few closes above 4300.
Trading between now and Friday’s close is likely to be choppy and unrewarding. I know I am reticent to give back any of my profits yesterday and will likely not trade for the rest of the week.
There is strong support now at 4200, and also 4000 at the extreme. Put protection is back to being moderately priced, so we will see if traders and institutions are more inclined to use the short-covering rally to sell current positions and buy more protection, or follow-through with some bargain hunting.
I continue to view the current environment as treacherous, and one of the most challenging in a generation. It is not a great time to be wildcatting – so be careful.

A.F. Thornton

Founder's Trading Journal

The BluQuant Oracle™

May 4, 2022 AF Thornton 0 Comment

Monthly Forecast - May 3, 2022

It is helpful to visit the monthly charts at the beginning of a new month. While they are too slow to trade, the charts give us much-needed perspective.

There is an old saying about the stock market – “when in doubt step out,” Of course, a variant on that phrase might be “when in doubt get out.”

Nevertheless, let’s take the opportunity to step out and get some perspective on where we find ourselves and where this stock market may be headed.

The discussion below will highlight that the market has taken out some key levels. But with the 21-month line still intact, we don’t have an official bear market in the S&P 500 index yet. But many underlying sectors, such as technology, are already there. Perhaps this is nothing more than a nasty correction from the S&P 500 index perspective, and the party is still on. But I seriously doubt it.

After reviewing the charts and highlights below, you will know where to find your seats if the bear progresses. If you are still in the market, make no mistake – you are in the nosebleed section. Rallies should be used to cull your holdings.

I will discuss where supply and demand lie and where the downside targets should take us below.

In the meantime, it is important to note that bear markets behave opposite to bull markets. We will likely encounter slow, methodical declines, interrupted by brief, sharp, rip-your-face-off short-covering rallies.

When this correction or the bear is close to the bottom, we should see a waterfall decline and spike lows to give us advance clues. We have seen some of that this past week, but no real fireworks.

In addition to discussing the price analysis below, which leans bearish, there is nothing else in our arsenal that indicates the market will find an important low here. I am only expecting a short-covering bounce, and lower prices are still possible in the midst of today’s announcement and Fed theater.

The market may dip initially on the announcement, before commencing a short-covering rally perhaps from 4000 if temporary lower prices manifest.

Our algorithms are neutral (with a green arrow on the weekly time frame and one close to painting in the daily time frame), but market internals are still weak. The main positive is the negative sentiment, especially among retail traders. The retail crowd tends to be wrong at the turns but the smart money is back to bullish.

The cycles and sentiment support a bounce, but not “THE” low. It likely will take very extreme readings to bring us to the ultimate bottom in these challenging circumstances.

And don’t forget to review the Thesis, especially the Dow Chart from the 1970s. A trading range would throw both bulls and bears into a tizzy, which is why I call them “kill zones.”

The Naked Price Action

We begin the analysis with a blank slate – focusing first on the price action alone.
The April monthly candle closed on its low (negative), with less volume than March (less negative).
The low coincides with the February and March lows, leaving us with three monthly price bars in a row that are roughly the same size.
The price action represents a trading range with a slight downward slope, which will be more evident in lower time frames.
The April candle fell short of the top of the March candle when the price rallied, so that is a subtle sign of weakness.
But the price dipped slightly below the February / March lows today (May 3rd) and returned back into the range, a subtle sign of strength.
If the price breaks the February/March lows decisively in May, various mathematical projections to lower prices come into play, as would be the case if price decisively breaks the January and February highs.
Whichever way it breaks, the measured move is double the range. Keep that projection in your narrative.
Trading ranges become self-reinforcing over time, so keep that concept in your narrative as well. Range bound prices also indicate confusion over the market’s next direction.
Though the range is wide at approximately 15%, the price action reflects bulls and bears are relatively balanced over the past few months.
In one sense, it is amazing that the market has held its ground in light of current events.

The Sequential Algorithms

As we delve deeper into the analysis, we next add some sequential counting algorithms to our previously blank slate. The counts were developed many years ago by behavior analyst Tom DeMark, and they appear on the chart immediately above.
I won’t bore you with the details, but a nine-count generally is a time to pay attention as a price reversal may be imminent.
Two in a row is even more consequential.
Notably, there were two nine counts in a row preceding the January peak.
There was a nine-count at the bottom of the 2008-2009 bear that led to the reversal.
A nine or 13-count is not required for a reversal, but we pay attention when the counts are present.
Of course, a monthly chart is a slow-moving train, so it is best to view it for a 30,000-foot perspective. You could lose a lot of money or miss a lot of gains waiting for signals at the monthly level.

Adding the Key Moving Averages

Now, we want to add the key moving averages relevant to the monthly time frame. For now, the 5 (red), 21 (green), 50 (blue) and 89 (cyan) lines are the most consequential. They are drawn on the chart immediately above.
In a corrective mode, sellers are favored when the price drops below the 5-month line (red) and will tend to sell any attempts to reconnect to the line.
The 21-month line (green) becomes the threshold between minor corrections and more consequential bear markets. The 21 tends to cradle the rally legs from the middle of the longer-term price channel. We will look more closely at the channels below.
In this case, the bull market advance from the 2009 lows is the first, relevant, and longer-term price channel.
As is the case in almost every time frame, the 21-month line represents the mean of prices in for this channel.
Selling accelerates below the line. And in this case, the 89-month line is the dynamic, lower channel line for the 2009 bull market.
Of course, you could draw straight trend or channel lines representing the top, middle, and bottom of the 2009 bull market and I will do so below.
But I like to think of the related moving averages as the dynamic and more responsive way to draw the top, middle, and bottom trend/channel lines.
Summarizing, the 21 represents the middle or mean of the 2009 bull market and the 89 should form the lower boundary. The 5 cradles the shortest-term rallies during the bull run, which are more discernible on the lower time frames. A break of the 5 is always the first clue to shifting sands.
At this juncture then, the 5 is broken which sent us to the 21. The April price candle closed on the 21. If the 21 breaks, the price next travels to the 89.
If the 89 breaks, and such occasions are exceedingly rare, then the market is clearly in the throws of a serious bear, and the longer-term, 100-year channel is in play.
In this case, 2500 represents the mean of the 100-year channel, and would likely be the next stop. The level is associated with the March 2020 Covid-19 lows. The level is also consistent with stripping off the last rally leg in the bull market, a common occurrence in a bear market.
If you look to the extreme left of the chart above, you will see the that the 2008-2009 bear broke the 89, and bottomed significantly below the line.
In other words, when the price reached the 89 in the 2008-2009 bear, it was only one-third of the way to the ultimate low reached in March 2009.

The 100-year Price Channel

Have you ever been to a park or hiking trail? They start you out with a map “You are Here.”
Similarly, I pulled the 100-year chart from our Current Stock Market Thesis, and marked our current location on that map.
We keep track of these longer-term charts for perspective. Our location is sobering by any measure.
The stock market, if nothing else, is an exercise in mean-reversion, manifested in fractals of multiple time frames.
In the stock market, we travel in percentages rather than miles. And it is not a place where you want to earn frequent flyer rewards.
A trip from the top of the 100-year channel to the middle is roughly 50%. To the bottom, it is 75%.
The ultimate number depends on how fast we drive. 1929 was a Ferrari crash. The decline was fast and steep at 90%.
In the 2000 case, the market took the scenic route for nearly nine years. It stayed in the upper half of the channel, and tagged the middle twice with 50% declines – the 2000-2003 and 2008-2009 bears. Both bears were part of the process to correct the 2000 top.
How will the market resolve our current location on this map?
Let’s take a closer look.

Currently, the market is holding the 21 and hasn’t even violated the 2009 bull channel.
The market could still take another trip up to the top. It is not easy to kill a bull market, as even the Federal Reserve is learning.
And I am surprised there has not been a retest of the all-time January highs. It is unusual for the market to roll over into a severe bear market without at least one attempt at the old highs.
But this is an unusual time, to be sure.
We will monitor these levels closely in the weeks ahead.

Timing the Lows and The Flows

Now that we have looked at price, let’s take a quick look at time.
The market responds to fund flow cycles in multiple time frames. The projected cycle lows act as magnets, pulling prices down into their troughs.
While cycle peaks vary widely, the troughs tend to arrive on discernible, symmetrical rhythms , with slight variances.
Each larger cycle includes smaller cycles bottoming simultaneously. The more cycles that are bottoming, the deeper the trough and the more important the low.
The cycles tending to make the most significant corrections in our windshield are the Nominal 54, 18, and 9-month cycles.
The market is currently correcting the 9-month now, and it is due to bottom between late May and June.
Sometimes the bottoms arrive early, sometimes late. But it is helpful to know when the cycle lows are in the neighborhood, such as they are now.
Bottoming is a process that can take several weeks – e.g., an initial low and then a retest a few weeks later.
With the Fed announcement tomorrow (May 5th) and monthly options expiration on May 20th, there are plenty of motivations to pivot from a nominal 9-month trough that is forming an intermediate low.
So the future troughs are somewhat predictable. And that is how we know that the nominal nine-month cycle trough is due any time now or into early June. A granular look at the cycles coming into this period appears in the chart below, partially sourced from Steve Miller at AskSlim.com.

The other helpful information to be gleaned from the cycles is that the upcoming September cycle is far more critical than the one bottoming now.
Absent a news event; the cycles would tell us that the selling pressure should let up now and through July/August after the market establishes the low in this current trough.
That doesn’t mean that the market is going to new highs and possibly supports moving to the top of the trading range – supporting my “kill-zone” hypothesis.
But wherever the market finds the low now, and that could still be at lower prices, the cruelest decline in this bear is likely to manifest later in the year.
And can’t you see it? Another crazy election, global conflicts, challenges to the dollar, a potential recession, etc.

It was all Predicatable from the 2009 Low

Another critical piece in my methodology is to examine my original projections from 2010. They give us a good idea of where the market will encounter support and resistance along its path in the bull.
In other words, we projected the potential 2008-2009 bear market recovery long before it happened, once we believed that the bear market low had been confirmed, about a year after it occurred.
You are looking at the lines drawn from that work in the chart above.
While I keep a lot of this work proprietary, you should glean from this chart that we encountered the final line in the sequence in January, even overshooting it slightly. This line should be the top of the 2009 bull market, all else being equal.
In other words, we had every reason to expect January to be the top and a top of some significance.
I have created lines between the lines, guiding us to support and resistance as this market slips and slides up and down. The lines are very effective, in order of their magnitude / significance.
And there are helpful lines above these if the market were to enter a blow-off stage higher, as it did in 1929.

Supply and Demand

I am also following some additional supply and demand lines as can be seen in the chart above. Some of the lines are repeated from the channel analysis. Carry these lines forward in your narrative.
For now, stay focused on the Primary Supply line coming down from the January peak. The line should act as resistance. If price is accepted above the line, another trip to the top of the range is the minimum target, and new highs are possible.
If that were to occur, the S&P 500 index would remind me of 1994, where the bear was stealth and under the surface, but the index itself never reflected the full extent of the damage.
Think about it, while the leading sectors from the Covid lows have been battered, it had not been a synchronous decline.
Energy, Materials, and Industrials have offset losses in Technology, Communications, Financials, and Consumer Discretionary.

Putting it All Together

Putting it all together, with all of the information covered, I came up with the chart immediately above to monitor the market as it progresses.
The blue checks are the most critical support levels based on my current analysis.

Overlaying the 2000-2003 Bear

If we can stipulate that lightning never strikes the same place twice, let’s overlay the 2000-2003 bear market (in yellow drawn to scale) for fun and perspective.
Were history to repeat ( and it’s doubtful it would repeat quite the same), we would clearly be early in the bear, with lots of zigs and zags ahead.
But knowing that market history has a tendency to rhyme, let’s keep an eye on this potential roadmap for additional perspective.
The 2000-2003 bear is somewhat comparable to the current environment – where the Fed stepped in to prick the dot-com bubble. Of course, the 9/11 tragedy enhanced the bear in its later stages.
Now, lets do the same overlay, but this time with the 2008-2009 bear.

Overlaying the 2008-2009 Bear

The 2008-2009 bear was more of the Ferrari prototype. It went down further and faster in less time than the 2000-2003 bear.
The Financial Crisis bear market was possibly more news and event-driven as the Lehman collapse moved into full gear. And the entire global financial system sat on the brink of disaster.
We currently have aspects of 1929 (World Wars and Weimar Republic inflation), 2000-2003 (bubble), and 2008-2009 (potential financial crisis associated with Deglobalization and bipolar currency resets). And whether the current situation is related or unrelated to the past, we have both an overvalued market and global events that are festering. As such, speed and scale are difficult to predict.
But at least we know from our regression analysis that a likely landing spot is the middle of the 100-year price channel, currently 2500 on the S&P 500 index.
And as mentioned above, that would also make sense, as a bear market typically retraces the final bull rally.
So the entire rally from the March 2020 low is the poker chip on the table if you are a buy-and-hold investor. But if you have cash, a retest of that low might bring us to the final chapter in this bear.

Conclusion - Buy on the Canons and Sell on the Trumpets

Ben Franklin said it long before Warren Buffet. You buy when there is blood in the streets. This market is running out of artificial sweetener.

So It is helpful to visit the monthly charts at the beginning of a new month. While the monthly time frame is too slow to trade, it gives us much-needed perspective.

Our discussion highlights that the market has taken out some key levels, but with the 21-month line still intact, we are not yet in scary territory. Perhaps this is nothing more than a nasty correction, and the party is still on.Perhaps the true damage in this market, like 1994, will remain stealth.

But I seriously doubt it. The bond market is screaming warning signals at the top of its lungs, and global unrest continues to rise.

Sure, some of the generals have fallen, but certainly not all of them. And I continue to expect something to break, with all the damage to bonds and currencies – e.g. the Japanese Yen. I expect to wake up one morning soon, as the first bodies float to the surface.

But at least now if the bear progresses, you know where your seats are in the stadium. Per the 100-year channel this market remains in the nosebleed section and the game is likely only in the second quarter. But we can now find the exits, identify supply and demand, and establish reliable downside targets.

In the meantime, bear markets behave opposite to bulls. You have already experienced this. We encounter slow, methodical declines, interrupted by brief, sharp, rip-your-face-off short-covering rallies.

When the bear is close to the bottom, we may see a waterfall decline and spike lows to give us advance clues. But remember, nobody rings a bell – so stay tuned to these pages, or you will miss the cue.

In addition to price analysis, nothing else in our arsenal indicates that the market will find a critical low here. Our algorithms are neutral (with a green buy alert on the daily chart). Market internals are still weak.

The main positive is the negative sentiment, especially among retail traders. The retail crowd tends to be wrong at the turns, and the smart money is back to bullish.

As we observed, the cycles and sentiment support a bounce, but not “THE” low. It likely will take very extreme readings to bring us to the ultimate bottom in the weeks ahead. We want to see fireworks and panic before jumping back in with both feet.

At this order of magnitude, buying with a long-view has to be scary. You should be nauseous, with a pit in your stomach, when you pull the buy trigger. Otherwise, it isn’t likely to be a good entry point.

And don’t forget to review our Current Market Thesis, especially the Dow Chart from the 1970s. A trading range would throw both bulls and bears into a tizzy. That is why I call trading ranges “kill zones.”

A.F. Thornton

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Founder's Trading Journal

Morning Notes – 5/4/2022

May 4, 2022 AF Thornton 0 Comment

A more detailed version of these notes, together with supporting charts and any plans for trading the Open, are sent to subscribers at 9:00 AM EST., about 30-minutes before the market opens. You can subscribe by selecting the link at the end of this post.

Good Morning:

Well. Fed day has arrived. The Fed is expected to catch up to the bond market and raise interest rates by 1/2 of 1% (otherwise referenced as 50 basis points).
It will be the first raise of such magnitude since the 2000 stock market peak, an admission that the Fed is behind the curve – way behind.
The hike is baked into the cake, so the market should be poised for a relief rally, maybe back to the 21 or 50-day lines on short-covering, at least initially.
Maybe this time investors will take the opportunity to buy protection when it is cheap over the next few sessions, instead of when it is too late as we saw over the past week.
If there is a variable today, it will be the forward guidance on balance sheet reduction and future rate hikes.
The NASDAQ 100 is already throwing a divergent buy pattern and we have a green algorithm buy alert signal arrow on the S&P 500 Index weekly chart – positives to be sure.
If a rally ensues, what does that mean?
If you are a bull, you point to the decimation in the broad market over the past year – popular names from the last bull phase that are down 50, 60, and in some cases 90% – think Peloton (PLTN), Zoom (ZM), and the zippy ARKK funds.
Then you point out that the generals are the last to go, and at least three of them went – Facebook, Amazon, and Netflix.
But since the stock market is no longer connected to fundamentals, and has become an instrument of Fed Monetary Policy, it is much tougher to call a bottom. But I will go out on a limb and suggest that we may have a tradable low.
Still, as you will glean from our monthly letter to be published in a few hours, the stock market has not exited the nosebleed seats. That is a huge and unsustainable disconnect from the decimation in bonds.
So I do not believe that this will be “THE” low – just “A” low.
Topping is a process in the initial stages. It takes a while and the market throws a lot of decoys along the way.
But for the moment, futures were quiet overnight, and are up slightly to 4185. I expect a calm session today until the 2 pm EST FOMC events commence.
Following that, I see key resistance at 4200-4210 (SPY 420 equivalent) with 4284 as the next resistance point.
Support shows at 4125, then 4110 (SPY 410)
Assuming Powell does not spark any more fear than already present in markets, a relief rally will function to provide some breathing room.
The flip line to positive Gamma is now 4300. It might take a few days to get there, but that is my line in the sand between the usual short-covering rally and, perhaps, some real institutional buying.
Ultimately, if the market fails to recover 4300, there is a higher likelihood of a reversal back down to test recent lows, perhaps into the May 20th monthly and June quarterly options expiration.
If Powell does drive stocks lower, even temporarily, I would expect a rather quick test of 4000-4050 for now.
Let’s see how it goes. But If all goes according to plan, the Founders Group will pick up a long swing trade in the S&P 500 Index this afternoon.

A.F. Thornton

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Founder's Trading Journal

Morning Notes – 5/3/2022

May 3, 2022 AF Thornton 0 Comment

A more detailed version of these notes, together with supporting charts and any plans for trading the Open, are sent to subscribers at 9:00 AM EST., about 30-minutes before the market opens. You can subscribe by selecting the link at the end of this post.

Good Morning:

The stock market kindly followed yesterday’s forecast, finding support at 4050 and rallying into the close.
The short-covering rally recovered all of the morning losses.
The recovery was impressive, and the case for 4000 or so to serve as the lower boundary of a new trading range grew stronger.
Futures are at 4150 this morning after overnight highs of 4175. Our volatility estimates align with the last several sessions at 1.2%, or about 52 points plus or minus the open.
Today, resistance will come in at 4200 to 4210 (SPY 420 equivalent), then 4250 if that level doesn’t hold.
Support should start at 4110 (SPY 410 equivalent). If that level doesn’t hold, the next critical support is yesterday’s low at 4051 and our previously identified 4000 lower boundary.
Remember that 4000 is the option strike with the most open interest. Typically, the market will encounter significant support at any such strike price when coming from above it.
I would give a slight edge to a rally out of tomorrow’s Fed announcement, but probably not more than 5%.
The same fuel as February is not present – but there is some fuel in the larger “short-covering” sense.
We still need to get past the monthly options expiration on May 20th to have an all-clear signal.
A sharp 5% rally could place prices back above 4400 and into positive Gamma territory.
And if investors are willing to start taking on risk again, perhaps one could say that with a lot of jawboning and a few measly rate hikes, the market already did the Fed’s job for them.
In that vein, the Fed is catching up to the market, not leading it.
For example, mortgage and 10-year treasury rates have doubled to 5% and 3%, respectively, in a very short period.
And to this point, the Fed has only raised short-term rates by one-quarter of 1%.
And I have NEVER seen the Fed tighten after a calendar quarter of negative growth, a bear market, and an ensuing recession.
The Fed will tighten tomorrow for credibility purposes and catch up to the bond market. But they will not need to do much more from here.
And if the Fed chooses to continue persistent tightening after this meeting (at least to the extent they previously indicated) it could lead to an all-out economic disaster.
One hopes that the Fed will respond flexibly to conditions as they develop, rather than stick to a rote or deterministic schedule.
In the meantime, the stock market likely moves into a holding pattern until tomorrow’s announcement.
It is too early to predict anything beyond a 5% rally on the bullish side. And it is never a good idea to marry any prediction up or down. Successful traders always keep an open mind.
But should this bear be comparable to 2000 or even 2008, the market did not start the most significant decline in the series until late summer.
In those challenging bears, the market was choppy and volatile between now and then – with 10% to 15% swings in asymmetrical trading ranges.
But the 50% decline that ultimately took out the analogous lower boundary (4000) did not end until the following March, at least in the 2008-2009 case. (See chart above).
So you can see why, from the first day of this bear back in early January, I have persistently argued to be on alert for a trading range, and perhaps one that will last a long time.
As they say, those who do not study history are doomed to repeat it.
I study history to the proverbial tick.
So the bottom line is – I give a slight edge to a 5% short-covering rally from tomorrow afternoon’s Fed announcement. Otherwise, the price will continue to work down to about 3500, which is the 1.618% extension of the current range.
Either way, we will be ready.

A.F. Thornton

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Archives 2022

Morning Notes – 5/11/2022

Morning Notes – 5/10/2022

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Morning Notes – 5/9/2022

BluQuant Oracle Weekly – 5/9/2022

Conclusion

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Unrelenting

Morning Notes – May 6, 2022

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Morning Notes – 5/5/2022

The BluQuant Oracle™

Monthly Forecast - May 3, 2022

The Naked Price Action

The Sequential Algorithms

Adding the Key Moving Averages

The 100-year Price Channel

Timing the Lows and The Flows

It was all Predicatable from the 2009 Low

Supply and Demand

Putting it All Together

Overlaying the 2000-2003 Bear

Overlaying the 2008-2009 Bear

Conclusion - Buy on the Canons and Sell on the Trumpets

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Morning Notes – 5/4/2022

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Morning Notes – 5/3/2022

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