2022 | Archimedes Methodologies

Founder's Trading Journal

Afternoon Notes – 4/12/2022

Apr 12, 2022 AF Thornton 0 Comment

Let’s first knock out the inflation report, now that I have had a chance to dig into it.
The top line CPI number was horrific but in line with consensus expectations. The core numbers (the elements of inflation that are less volatile) came in a bit lower than consensus.
The CPI and PCE have slightly different baskets and methodologies derived from two different branches of government. The PCE has been more accurate and the Fed seems to prefer it.
And some simple math indicates real hourly wages are down again for March, with inflation this high. That makes 13 out of the last 15 months that real wages have fallen.
The fall in real wages coincides with the Biden regime taking office. I thought they cared about the working class?

The blue Put line rising all day indicates a lot of Put selling. Usually, this positively impacts the market as Dealers have to buy futures to hedge their portfolio deltas. But the market rolled over after the initial morning pop.
I don’t have to explain the morning rally, as it fizzled by the end of the day. But as indicated in the morning notes, short-covering likely drove the initial gains (short the rumor buy the news).
Nevertheless, the index should have continued to rise. Options activity does not always influence the market, but today’s aggressive Put selling often coincides with a short-term bottom.
So the market remains wandering in the desert between 4400 and 4500, and the influence of expiration this month looks neutral to slightly positive for prices.
So I will go out on a limb to suggest that the WEM low at 4400 will hold this week, and we could see the price pop back up to test the neckline of the topping pattern discussed this morning at 4475.
The next catalyst will be JP Morgan Chase’s earnings tomorrow morning. The forward guidance will be the most crucial driver, whatever the earnings may be.
I don’t think the crowd expects banks to do well with an inverted yield curve and a recession potentially ahead.
Sadly, the situation continues to deteriorate in Europe, with Russia sending warships toward Finland, another country that wants to join NATO with Austria. Both countries border Russia.
It reminds me of one of the most potent axioms I learned when I was younger – “What you Fear, you Create.” Putin should take a page from that book.
But I am frustrated by the lies and manipulation emanating from the information stream.
It is tough to discern truth from falsehoods, especially with the Biden regime.
But I give the left and the Biden regime credit for discipline, if nothing else. They repeat all the same talking points like a page out of the Stepford Wives (dating myself again).
Truly, if I hear another leftist repeat “Putin Price Hikes” again, I will throw something at the television. Are all these leftists on MSNBC and CNN robots?
They must believe we are stupid, and maybe we are. But it isn’t very respectful.
Did Joe forget we were all putting gas in our cars and buying groceries long before Russia invaded Ukraine? How about the price of houses, used cars, lumber, etc., long before Putin invaded his neighbor?
Nice try, Joe! Why don’t you let our oil and gas industry out of its handcuffs, and we will starve Putin of his primary income? The last time we did that, it bankrupted the Soviet Union.
If Russia does nuke us, I hope they start with Washington D.C. It may be our only chance to recover.

A.F. Thornton

Founder's Trading Journal

Morning Notes – 4/12/2022

Apr 12, 2022 AF Thornton 0 Comment

Good Morning:

At the moment, the simplicity of analyzing the broad market in the chart above, courtesy of Daneric Elliott Waves, cannot be understated.
Daneric makes the following excellent points, and I agree:

- This Wilshire 5000 Index weekly chart shows a solid five waves down and three waves corrective “up.” And prices rejected at a simple neckline of a simple head and shoulders broken pattern that had met its initial downside target.
- The market has a simple count, a simple look, and simple technicals; why try and out-think things at this stage?
- Even the simple technicals of a positive diverging RSI at the wave (1) low on a daily chart suggested prices would peak above the point of initial divergence (wave 4 of (1) down).
- And thus, it was fulfilled, but that fulfillment is over. There are no more bullish technicals to “scream” higher prices are coming.
- We made that case at the (1) low, and the price fulfilled those technicals in the rally that ensued. There is nothing technically or even sentiment-wise suggesting buying the overpriced market at this stage.
- I won’t say rallying up to new highs won’t happen. For sure, we have seen how the madness of crowds can linger on seemingly forever.
- While most of you know that I am not a big Elliott Wave fan because the waves are subject to so much interpretation in real-time, sometimes the strategy can be helpful when the count is clear. This may be one of those times.
- An alternate count could accommodate one more small bounce to get us through Easter.
- But if the overall wave (2) is complete, as suggested in the chart above, then wave (3) lower, and all its ugly, nasty subwaves may be in store for the market.
- And that is the true danger of betting on bear market “bounces.”
And bounce we should, as we closed yesterday near the WEM low at 4400.
But we are now in negative Gamma territory, with higher volatility, and we are midstream in at least one Head and Shoulders Top pattern that projects lower prices.
We will see how well the options market has priced the week ahead if it respects the WEM. Nobody wants Good Friday to turn into Black Friday, so one might hope that the WEM low at 4400 holds for the rest of the week.
As reliable as the WEM framework is each week (the probability is about 70% that the boundaries will contain the price action), don’t dismiss the other 30% of the time when the boundaries fail.
If the WEM low doesn’t hold, you will witness what it looks like when you are coming down from the nosebleed seats in a Primary (3) wave down.
The two leading indicators we have been following closely, Junk Bonds (JNK) and Transports (IYT), are now trading below their March lows, and the S&P 500 is likely to follow.
What buying there is has been concentrated on defensive names. Investors have been dumping tech and other growth stocks.
Recall from the Morning Notes that the market is not hedged like it was in March, and there is a notable air pocket between current levels and the March lows.
Anything is possible when you tag the WEM low on a Monday. Price even sliced through the 50-day line today like it wasn’t there.
Air pockets are the wake left after a rip-your-face-off short-covering rally one-time frames higher end over end and does not spend much time or experience volume at price.
Bank earnings are also on deck this week, starting with JP Morgan Chase on Wednesday and more banks on Thursday. Forward guidance will be critical.
I am asking myself, what will change this downward trajectory?
Support today lies at 4420, then 4400, with the next significant support down and through the air pocket to 4310. Look for resistance at 4450, then 4475.
With call buyers absent recently and put buyers finally showing up yesterday, volatility is rising, as it usually does in put-dominated markets.
The Expected Move today is plus or minus 56 points from the Open.
The March Consumer Price Index print came in a fraction higher than consensus at 8.5%. Don’t you love “transitory” inflation?
At this writing, the futures market is taking the CPI news positively, nipping overnight losses that reached down to 4382.
Dealers undoubtedly breathed a sigh of relief with the rally, as it negates their need to defend the 4400 WEM low.
So why the rally? Don’t forget that the White House tried to get ahead of the CPI report yesterday by preparing us for an alarming number. Perhaps the market took the brunt of the loss yesterday.
There could also be short-covering by traders who bet on an even higher number above consensus.
And, there is the WEM low where we should expect a bounce anyway.
These are complicated waters to navigate.
Always remember that returns are ultimately about flows – not narratives.
Until the market recovers the Volatility Trigger ( now 4475), put flows and high volatility will drive prices.
Subscriber Morning charts are up.

A.F. Thornton

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Founder's Trading Journal

Afternoon Notes – 4/11/2022

Apr 11, 2022 AF Thornton 0 Comment

Good Afternoon:

As it usually is on a True Gap, the first clue to the day was how the market managed the morning gap per Gap Rules.
After the price gapped down to our second support level at 4450, traders rejected every attempt to fill the Gap. The overhead spikes on the first few 5-minute candles look like cactus spines.
At that point, unable to fill the gap, you start the day with a clear, negative bias.
And since the next logical support below is the 50-day line (the only important moving average left standing), you can usually bet the market will find its way there, and it did.
So the market moved down just above the 50-day line and 4420 support and went sideways until the final hour of trading.
During the final hour, the market puked into the close, and our final support line at 4400, also the WEM Low.
It is never fun to start the week at the WEM low, but that is where we find ourselves in the shortened holiday week.
In normal circumstances, Dealers will defend the 4400 level for the rest of the week, but if they lose the battle, they will have to sell futures into the decline, exacerbating it.
Notably, Monthly Options Expiration is on Thursday this week due to the Friday holiday. We will evaluate the bias later in the week, but right now, it looks like 20% of the float expires.
Navigator Day Traders™ had two good trades today, one long and one short.
Now, let’s jump out of the day trading weeds, and see what today adds to the larger narrative.

As is evident in the two-hour chart above, today’s action breaks a head and shoulders topping pattern with a minimum measured move down to 4250.
We are once again trading below all the important moving averages on the monthly, weekly, and daily charts, including the 200-day line.
From an options perspective, we are now well below the Volatility Trigger, with increasing negative gamma along the way. This shifts the options bias negative with greater volatility (bigger bars and wider swings).
This time, the market is not hedged like it was in March. There were so many hedges on in March, that it created a lower boundary that caught the market. There are no similar hedges to catch the fall at this writing.
Investor sentiment is neutral – so it is not much help either way.
And when you look at volume on the daily chart, the green bars going up are a lot smaller than the red bars coming down. The relationship between the positive and negative volume indicates distribution and institutional selling.

So we carry forward in our narrative that this rally attempt has failed at the 62% retracement of the January to March decline – which is typicall where they fail. The intermediate downtrend has resumed and it will likely move down to retest the February/March lows. That paints the larger picture bearish. The rally higher likely had more to do with short-covering than enthusiastic investors.
We will expand further, but there is the possibility that the trendline coming from the March 2020 lows catches this fall, forming the right shoulder of another head and shoulders pattern, but this time a reversal to take the market higher.

So there is your hope for intermediate-term bulls. You gotta have hope, right?
For now, Navigator Swing Traders™ will remain in cash, and we will see if the opportunity presents itself on the green trendline in the chart above.

My advice to everyone is to buckle up. There is no precedence for our current situation, at least not in recent memory. Moreover, we are ostensibly in a Primary (3) wave down in Elliott Wave jargon, and those are the waves that try men’s souls. Wait, there still are men, aren’t there?

A.F. Thornton

Founder's Trading Journal

Morning Notes – 4/11/2022

Apr 11, 2022 AF Thornton 0 Comment

Good Morning:

We are opening on last week’s low, a True Gap down triggering Gap Rules this morning.
But it worsens as we are opening below the Volatility Trigger and the key conglomeration of levels around 4475 discussed in our recent writings. Slight negative gamma will lead to a downward bias.
We will take out the 5-month EMA, 21-Week EMA, 5, 21, and 200-day lines at the Open. See “Current Stock Market Thesis” and “Navigator Oracle April Market Letter.”
That is, in a word, “negative” to start the second week of April, normally the best month of the year,
There is hope, however, as the 50-day line sits around 4420. Also, the WEM low sits around 4400. Maybe those levels will catch the falling knife.
So let’s peg resistance at 4500 and 4520. I will call support at 4465, then 4450, then 4420, and ultimately the WEM low at 4400.
The WEM range for the week is 4400 to 4568. Today’s range should be at least plus or minus 38 points from the Open, and I could be light on that estimate as volatility looks higher on the SPY.
If we break the 4/6 low at 4444, then it is almost certain we will complete a measured move down to 4400. It is, indeed, early to hit that level on a Monday, but recall that this is a shortened 4-day week, with little to no trading on Good Friday.
No predictions – anything is possible – but I am setting my Sandbox and quartiles from 4400 to 4500 today.
Remember, we are still in sell signals on the Navigator Swing Trader. Swing Traders should be short or in cash. We have not issued any trades for now.

A.F. Thornton

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Founder's Trading Journal

Navigator Oracle™ April Market Letter

Apr 10, 2022 AF Thornton 0 Comment

The Navigator Oracle™ Monthly Market letter is our month-to-month price action perspective on the stock market. We trade market-generated information (MGI) as quantitative investors rather than opinion. Most opinions about financial markets, including ours, are educated guesswork and likely reflect our biases. In that sense, what is our opinion really worth? And does the market care what we think anyway?

There will be good arguments for the market to rise or fall on any given day – that is what makes it a market. Still, there is no harm in crafting a narrative to try and make sense of what the algorithms show us, as long as we don’t take ourselves too seriously or get married to any particular forecast.

The Narrative

We hear it every day on the news – and experience it in real-time. Inflation is out of control. We hear that a tight labor market is leading to wage inflation. Interest rates are exploding higher, and the yield curve has inverted. Energy and food prices are rising parabolically, and there seems no end in sight.

The Fed supposedly plans to bring on a recession and stock market crash to squelch the wealth effect and rein in demand. This is aimed at helping to suppress the inflation the Fed helped create. Investors fear that corporate earnings will decline. The Military-Industrial Complex tells us that Russia will nuke Ukraine, then us.

I get it, but why is the stock market rising in the face of all this terrible news? The market is only 5% off the all-time highs. Is it possible that things are not as bad as they seem? Will positive surprises on any of these fronts bring us to new highs? Is it that hard to kill the bull market?

Of course, nobody knows the answer to all of these questions. And yes, it is hard to kill a bull market. But more than likely, this latest rally is a bull trap.

Many investors don’t believe that the Fed will do what it says or cannot do what it says. After all, it is an election year, and Fed Chairman Powell would be tanking the economy right into the mid-term elections. That would not show much appreciation for his reappointment by the current President. He might even align himself with the Wokesters for all we know, and the inflation is a purposeful strategy to try to rescue our debt-ridden U.S. Government.

But I take Chairman Powell at his word. He has an ego and cares about his legacy, which is already bad enough and won’t improve if he fails to follow through on this inflation fight.

And like the transports last week, the stock market may be poised to roll over anyway. We get that from Dow Theory, now more than 100-years old. The transports are not confirming the rally and may lead the market lower. And that is somewhat surprising, considering that carriers have a lot of pricing power in the current circumstances.

And looking over at the credit markets, the picture is equally dismal. Junk Bonds, often a leading indicator for stocks, look a lot like the transports. They have rolled over again, failing to confirm the recent stock market rally and raising credit default concerns.

And the credit markets remind me that Paul Volcker had it easy compared to current Fed Chairman Powell in many ways. Volker “only” had to break the back of inflation but had a unipolar world order and the rise of Eurodollars to support him.

Today, Fed Chairman Powell is fighting climate Nazis who love higher energy prices and don’t care that they have risked our national security pursuing their dubious climate agenda. Powell is fighting a leftist regime that wants to surrender our sovereignty to a global government and leave us with no (or perhaps wide-open) borders. We are living in surreal times.

In the meantime, the Biden regime believes we can print money in perpetuity under their so-called “Modern Monetary Theory.” Doesn’t it seem like everything terrible for our country is good for them, their anti-American values, and their depopulation goals?

These American Marxists would destroy our country and reboot it in a Chinese, authoritarian model. As you can see from the chart above, U.S. Treasury Bond investors are voting with their feet, in the worst bond market collapse in U.S. history.

In fact, what could be better than starving half the world to depopulate? Maybe another Pandemic? How about a good cyber-attack? How is all of this working?

It is destroying our middle class. Without a serious U-turn, the rest of the country will soon look like Chicago, San Francisco, and Los Angeles. Those cities are showcases for leftist governments on steroids. Filth, homelessness, and rampant crime have replaced these modern cities. They have become the dystopian nightmares from a Back to the Future movie.

Yet, here we sit after a year of the regime controlling every branch of the American government. I have never seen our country deteriorate so fast in such a short period. And it is not all Democrats, as many corrupt Republicans are complicit in our decline. And when the United States fails, so does the rest of the world – hence Russia’s bold move into Ukraine. China now eyes Taiwan. North Korea has dibs on South Korea. The slide will catch up to the stock market, if not now, soon.

But even if the Fed dials back demand by raising interest rates, crashing the stock market, and causing a recession, does it help the inflation problem? Because much of this inflation is supply, not just demand-driven, it may take years to right the ship. We are transitioning to an entirely new model based on deglobalization, and it will be less efficient and more expensive.

Supply-related inflation is every bit as severe as too much demand from loose monetary policy. As one example, instead of Russia pipelining fuel to Europe, the U.S. now has to ship fuel to Europe across the pond. That takes more ships, trucks, security, and higher prices. Meanwhile, Russia now sends its supply to China and India, requiring more ships, trucks, and costs.

Similar problems arise with food, and some export countries want to hoard their supplies and keep them home. I hope our politicians will be smart enough to do the same for us. Wait, did you say China and Bill Gates are the largest owners of U.S. Farmland? I wish I were kidding.

Bill has some lab-grown meat and other experiments he wants to sell you. And as Bill is one of the chief proponents of depopulation, you shouldn’t worry?

And what about the Chinese-owned crops grown on their U.S. farms? The crops are not bound for America. There are 1 billion hungry mouths to feed in China. Should this be legal?

We have gone from the efficient “just in time” movement of goods to “just you wait.” Inefficiency costs a lot of money and leads to higher prices – plain and simple.

The coming deglobalization and decentralization will cost plenty on a global scale. As I said, this will take years to correct. Get used to the inflation, as it will be with us for some time.

The road ahead is tough and challenges the financial markets. As with most turbulent periods, there will be winners and losers. The math will either drive markets up, down, or sideways depending on the index weight of new leadership.

Sideways is what we experienced the last time we had rampant inflation and a slowing economy. See our Current Stock Market Thesis for the forecast.

But sideways means half the market is rising and the other half is falling. There is plenty of opportunity in such circumstances.

The Price Action - Market Generated Narrative

Charts are as close as we get to roadmaps in this endeavor. Study them carefully. We try to mark the most important points and levels. Nothing is more accurate than MGI to guide you.

Let’s start with the March positives from the monthly chart above. Keep in mind that monthly candles are a slow-moving train. In the monthly candle for March, we see the low and high coming in slightly higher than in February. Price is holding the 5-month line, and the candle recovered most of the February losses. The performance is impressive, to be sure. Cycle theorists now believe that the March low was also the 18-month cycle low.

I am showing the next short-term cycle low arriving around the May 2nd Fed meeting. Coincidence? Highly unlikely.

There have been buyers between the 21-month line (green) and the 5-month line (red) – leaving spike lows on the chart for February and March. In particular, buyers have been strong below 4375. However, we also know that most of these buyers covered short positions. That is not the same as long-term, institutional investing.

From the monthly and longer-term perspective, price is still in a long-term uptrend, holding in the upper half of the 2009 bull market channel and the upper half of the 100-year price channel. There are very few periods over the years of more than two or three successive down months – so a green candle for March is not an unusual pause after red candles for January and February.

But March had some negatives too. We are coming from nosebleed territory outside the 3-ATR K-bands and at the multi-timeframe intersection of channel tops. In similar cases, the price will dip below the K-Bands, and often rally back toward the 2-ATR K-band before it rolls over again. That process appears to be underway now and also explains (or causes) the rally.

We can draw a downtrend line from the January and March peaks. We can also calculate a Fibonacci target at 3500, a 1.618 projection of the current downtrend, and the middle of the 2009 bull channel. I am calling 3500 our first intermediate target if the downtrend continues. See our Current Stock Market Thesis for more details on this target.

The January and February monthly candles have a massive 500 point range due to the increased volatility. As I often preach, every candle is a trading range. We can use the February low around 4100 and the March high around 4600 as a default (wide-birth) breakout range. But you can twiddle many thumbs while the market runs around in a 500 point candle range, waiting for a breakout.

For now, it is easier to use the March candle to define the upside breakout because we don’t have too far to go to take out the March high at 4630. If we saw acceptance above 4630, the worst case is a test of the all-time-high and a trading range.

The best case would be a melt-up to new highs. I cannot eliminate that possibility, but it would not be my most probable forecast.

Getting down to the bottom of the range is a lot of points from here. Given that 4470 to 4500 is where so many key levels congregate, any acceptance below 4475 is somewhat ominous even before we get to the bottom of the two previous monthly candles and the 21-Month line just above 4100.

Also, since the February and March, candles have established a 500-point balance range; breaking the bottom projects an equal, 500-point measured move down from 4100. That also places a target at 3500. So the 3500 level target results from several traditional measures.

Conclusion

My takeaway from March is that we are still in a long-term uptrend, while the intermediate trend remains broken. Perhaps that is the chief distinction between a correction and a bear market. Until the long-term trend breaks, traders have merely wounded the bull market with a standard (and long overdue) correction.

A break above 4631 virtually assures a retest of the January high and likely new highs. New highs would be the most confounding path to Wall Street. I don’t expect new highs, but I cannot exclude extending the current rally.

We will drill down to the lower boundaries on the daily and weekly reports, but the more time the market spends below 4500, the more challenging it gets to hope for a test of the old highs. Break 4100 and 3500 is the next train station.

It is too early to make projections from the 3500 target if price gets there. The level may form the bottom of a new trading range, and we will start back up again.

Stay flexible.

A.F. Thornton

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Latest Stock Market Forecast

Current Stock Market Thesis

Apr 10, 2022 AF Thornton 0 Comment

The BluPrint Stock Market Thesis is published for educational purposes only. Always consult a professional before making your investment decisions. Because our thesis does not change frequently, it would become repetitive if we published it in every issue of the Navigator Oracle™. Instead, it is always available for reference by tapping “Current Stock Market Thesis” under the “Categories” side menu to your right. Our daily, weekly, and monthly publications highlight relevant issues related to the forecast.

Updated April 10, 2022

Since the last update in early March, our thesis has not changed. If anything, the market continues to affirm our theory of the case. Nevertheless, we keep an open mind about other possibilities. Even if a bear market is imminent, and we believe it is already underway, past markets have melted up right before capitulating.

Old-timers often talk about the “choppy top of the bull.” The old saying recognizes that bull market tops are often choppy and confusing before the final rollover. Given that the same information is readily available to everyone simultaneously, the chop is another way that markets can frustrate and wear out both bulls and bears before the market finally rolls over.

As a side note, the Navigator Algorithm™ dashboard has a readout for “Kill Zone” when the algorithm detects chop. The algorithm will detect the chop signature before it is evident on your chart.

Of course, I was trying to have a little fun when designing the dashboard, but the fact that chop is a kill zone is also true. The 2000 market top in the Dow and S&P 500 was a frustrating chop zone for a year before the market rolled over. I was there and experienced it first hand.

I am trying to convey that it never pays to hang your hat on any particular scenario. Always stay flexible and keep an open mind. Whatever your thesis may be at the moment, always know where your current view would be proved wrong. Keep running if-then scenarios in your mind at all times. Read on, but with perspective and a flexible mind.

Background and Context

Our current thesis is that the U.S. stock market (we use the S&P 500 cash index as our proxy) has started a generational correction that will end at its long-term mean. The mean is roughly the halfpoint in its 100-year channel – currently 2500. The level is near the 2018 lows, but slightly above the Covid-19 crash low at 2100. Of course, the mean rises over time, so time and price are both elements of the downside target.

As of April 10, 2022, the S&P 500 cash index had peaked at 4818 on January 4, 2022. More importantly, the peak level was an intersection of a multi-timeframe channel tops, more than three standard deviations above the S&P 500’s long-term mean.

We believe that this is where the bear market began for our core market index. It started back in November 2021 for the NASDAQ 100 and even earlier for some of the other key indices. Our thesis would be negated if the index found acceptance at new all-time highs.

The stock market has tagged the 100-year top channel line only three times: 1929, 2000, and the recent January peak. We believe that declining from this location distinguishes the road ahead from the typical bull market – BTFD – correction complacency. Recency bias can be fatal as a bear market unfolds.

If the past is prologue, this will not be a buy-and-hold market. Rallies and declines will occur swiftly, and both traders and investors must apply appropriate tactics to produce consistent profits and protect capital. Long-term investors approaching retirement must be extra vigilant in protecting their investments from devastating losses on the runway ahead.

From a technical perspective, tagging the 100-year channel top is a “three-sigma” event, driven by unusually accommodative Fed policy leading to excess speculation. The last two touches culminated in bear markets with declines exceeding 50%. BluPrint’s working thesis calls for similar corrective processes in the coming weeks and months.

The S&P 500 index has weathered the storm remarkably well at this writing. However, the broader U.S. stock market has corrected significantly. Investors must remember that liquidity problems typically unfold as highly leveraged markets unwind.

Margin calls and other deleveraging events force investors to sell their more liquid, S&P 500 quality names to satisfy their obligations. Eventually, the best and most famous names in the bull run catch up to the collapse, if for no other reason than investors sell them to meet margin calls.

Potential Bear Market catalysts include high inflation, a related reversal in accommodative Fed policies, an inverted yield curve and risk of Fed policy errors (inducing a recession), and rising global tensions, including the Russia – Ukraine conflict. The entire world is experiencing secular upheaval, challenging the existing international order. The disruptions are characteristic of “Fourth Turnings, ” which we have previously discussed on these pages.

Projected Path and Targets

The stock market can travel along several different paths to correct its excesses. It can crash, zig-zag, move sideways, or combine all three. Crashes are low probability events – more often associated with unknown and unexpected circumstances.

The market is more likely to establish one or more trading ranges as it works its way to the mean. The mean can rise while the market moves sideways until the mean and price meet. The process can take a long time, even years.

Looking back over my 35 years of trading in this business, it becomes clear that markets often stall in the face of longer-term exogenous events or changes. Trading ranges reflect these periods of hesitancy and indecision.

If there is anything I could convey to new traders and investors, it would be to recondition your default market mindset to “sideways.” We tend to have a natural bias to look for the markets to trend higher or lower. Yet, markets spend much of their time rangebound in chop. Your bias should be that the market will go sideways until proven otherwise. Your job is to find the top and bottom of that range.

The Dow Jones Industrial Average chart above highlights the various corrective paths the index has taken across its long-term channel over the past 100 years. Of particular interest is the Dow Jones Industrial Average behavior from 1966 to 1984. That segment of the long-term chart is magnified below and documents the index’s regressive price behavior in the last U.S. inflationary spiral:

If I were to call the road ahead of us, it would look like the 1965 to 1984 period in the Dow chart above. The four-year cycle would loop up to 1000 and then back down to 500. That is a 50% trading range. “Buy and Hold” fell on deaf ears as an investment concept. Stocks and bonds were highly correlated (like now) in the up and down cycle. Even a balanced 60/40 stock/bond strategy performed poorly.

But, what was actually happening when you look at the longer-term chart above? The market was slowly moving sideways into the channel support line. When it reached the line, that was the end of the trading range. Of course, this is clear in 20/20 hindsight. When caught in the middle of an 18-year trading range, it would not be easy to see.

From our current nose-bleed levels, I would not be surprised to see a 20% – 30% trading range established until we move into the center of the 100-year channel. Hopefully, we don’t need to visit the bottom channel support line.

Conclusion

Whether investing or trading in the financial markets, context is critical. Indeed, nobody has a crystal ball. Variables and conditions change.

Because bear markets occur infrequently, professionals don’t get a lot of practice with them. If you need help managing your funds, finding a professional with some gray hair who has experienced a bear market would be wise. Don’t be afraid to ask tough questions. And unless you are very young, don’t allow anyone to convince you that you cannot time the market, so you need to stay put and be slaughtered.

Our Navigator Swing Trader™ strategy is well-suited to retirement accounts and will help you avoid significant downdrafts. At only $99 monthly, it will pay for itself in droves in the coming markets.

It is important to stay in touch with your professionals. We will continue to move forward based on the bear market thesis until the price action guides us in a different direction. That means we are willing to invest long or short in the market as we traverse the shorter-term waves ahead.

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Founder's Trading Journal

Morning Notes – 4/8/2022

Apr 8, 2022 AF Thornton 0 Comment

Good Morning:
The stock market continues to perform impressively, given all that is on the table – wars, inflation, famine, higher interest rates, etc.
It makes you wonder if all of those negatives will be served. Part of me thinks that we would be lower but for the dealers defending the 4450 WEM low before expiration today. Another part of me wonders if things are really as bad as they seem.
The fundamentals seem worse now than at the 2/24 invasion low, but the market has not revisited the same, lower level. Either there are non-believers that the Fed will do what it says, or things will not get as bad as forecasted. They never do, but they are never as good either.
Volatility is still forecast to be high today, about 45 points plus or minus today’s open. Dealers may have a shorting bias to hedge today, especially on the NASDAQ 100.
Support is at 4500, then 4475. Resistance is at 4520, then 4550.
Quarterly earnings announcements should heat up in the next few weeks, but the forward forecasts will be the real tell.
One could reasonably conclude that this is still a pullback in a new bull trend. The market is holding the 21-day and week lines and the 200-day line. And 4500 is the key bull/bear line in the sand and volatility trigger.
If we hold the 4500 level into mid-day, then the Vanna fuel builds, and we could see a reasonably strong move higher into the close, with 4550 a good target.
Subscriber Charts and Key Levels are posted.
The Navigator Swing Strategy remains in cash, but stay alert for a buy signal.
I am off today to celebrate 63 years on the planet in spite of five heart attacks, a bout with Covid, two near-death experiences, etc. Kind of like the market surviving wars, inflation, famine, higher interest rates, etc.

Have a good day and a great weekend.

A.F. Thornton

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Morning Notes – 4/7/2022

Apr 7, 2022 AF Thornton 0 Comment

Good Morning:

Yesterday’s publication of the March Fed Minutes was a lot to swallow. Over $90 billion a month in balance sheet reductions plus more interest rate increases.
If the market holds, it is partially because over $1 trillion naturally comes off the balance sheet over the next 24 months through bonds and notes maturing. They do not have to sell into the market.
The news, however, kept the market below the key 4500 threshold, which puts the market back into higher volatility and negative gamma. I am expecting a 50 point plus or minus range from the open today.
The 4575 area is home to the 21-day line, the 200-day line, and the 21-week line. The WEM low sits at 4450, which we tagged yesterday, but the market bounced there. The S&P 500 Futures are at 4460 at this writing.
There are many technical reasons, then, for the market to turn here and close back above 4575.
That puts significant resistance now at 4500-4520, with WEM support at 4450. 4450 should hold as the WEM low, at least for the week.
At this point, it is just as easy for markets to shift lower and tag 4400 as it is for them to rip back up into the 4550 area.
Markets have built up just enough implied volatility to add some Vanna fuel. If the market can retake 4500, that fuel likely leads to a pretty sharp snapback as volatility selling slips markets higher.
Risk remains high while the S&P is below 4500, and that same Vanna fuel can work to the downside.
If the market can rally in the face of all the negatives, do not ignore it. Let the price action take us where it wants to go. MGI always takes precedence over opinion.
Subscriber charts are posted.

A.F. Thornton

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Morning Notes – 4/6/2024

Apr 6, 2022 AF Thornton 0 Comment

All was going well in yesterday’s morning trading, but just as the S&P 500 Index pulled into the 4600 level, Fed Governor Lael Brainard sparked a big sell-off in stocks.
Review yesterday’s Morning Notes, as I warned this might occur.
This led to a high-speed test of the 4550 area, and the price bounced there at first.
However, the markets pushed lower into the close, with the S&P closing at 4525 (-1.25%), exceeding our downside and volatility estimates.
The Fed comments also sent yields surging, with the 10-year U.S Treasury breaking above 2.5%.
Mortgage rates also surged above 5% for the first time in years.
There seems to be a pattern here. Every time the market looks like it will rally up near the old highs or even to new highs, one or more Fed governors come out to talk it down.
We used to talk about the Fed “put” to save the market; now, we need to talk about the Fed “call” to send it down.
Overnight, the sell-off continued, and we are now trading at 4475, well below the 4500 Volatility Trigger, and practically on top of the 21-day line.
The 21-day line or mean has always been a great buy point when a new rally gets underway. We will see how this holds up in the current market. Don’t anticipate the buy; look for a true pivot and be careful going long here.
Indeed, support lies at the 21-day line or 4475, then 4450. Resistance lies at 4500 and then 4520.
Recall that under the Volatility Trigger, Dealers start selling into declines – making them worse.
Today, we have another Fed Governor and Treasury Secretary, Janet Yellen, on tap to speak.
Again, I plan to keep a light schedule this week, taking some time off to celebrate another year on this crazy planet. It gets crazier each year.
The fundamental backdrop is as bad as I can recall in my career, but the market keeps shrugging it off.
Partly, this is because the Fed has yet to act on its balance sheet or even higher rates.
There are a lot of disbelievers out there, betting that the Fed will never do what it says because it would trigger a recession, already likely based on the inverted yield curve and consumer confidence.
I take the Fed at their word. Chairman Powell does not want the legacy of the highest inflation in a generation due to bad Fed policies.
Fed minutes from the last meeting come out today. The market may wait until then to take its direction. I expect the minutes to reflect an agressive tightening bias. I don’t think there will be too many surprises.

Have a great trading day.

A.F. Thornton

Founder's Trading Journal

Morning Notes – 4/5/2022

Apr 5, 2022 AF Thornton 0 Comment

Good Morning:

The stock market keeps rising, seemingly in defiance of inflation, rising interest rates, inverted yield curves, the war in Ukraine, potential food shortages, and just about all calamities that should shake it to its knees.
And it is being led by the usual suspects, the FAANGMAN+T stocks in the NASDAQ 100.
So I thought comparing this same period in 2009 might be helpful to keep our feet on the ground.
As you will see from the side-by-side comparison above, the 2009 price chart is eerily similar to the current chart, literally down to the date.
But, as Paul Harvey used to say (that will date me), now for the rest of the story.

In 2009, the NASDAQ 100 and the rest of the stock market lost half of their value after the Spring 2009 rally.
The moral of the story is not to get too comfortable.
The Navigator Algorithm closed out its latest swing trading buy signal last week. But given the steep rally, we may see a second buy signal form. It hasn’t happened yet, but it is in the realm of possibilities.
In the meantime, the fundamental negatives keep piling on while the market sails on by.
I see muted volatility again today, with an open to close implied move of 0.65% or about 30 points from the open.
Resistance is at 4600, with support at 4550 and 4500.
Supportive interest finally filled the 4550 area yesterday and helped fill the void I mentioned.
Risk remains “on” based on moves in single stocks and volatility. Bulls retain the edge as long as the S&P remains above 4500.
The bullish tilt remains only as long as the market holds the 4500 Vol Trigger level. The 4600 Call Wall remains at the top of our range until/unless that strike rolls higher.
The “all-clear” or “risk-on” signal is coming more by attrition (expiration) than anything else. Neither put nor call demand is prevalent, and a lot of the speculation is in individual stock names.
Last Wednesday, the Fed reported an additional $45 billion added to the balance sheet, hardly a sign of Quantitative Tightening.
I can’t wait for the next report, but if you want to know why the market keeps going up, the explanation is that the Fed, despite its rhetoric, has done minimal tightening.
But the Fed governors are on the speaking circuit today, so watch out.
Also, we need to see the short-term trendline from 4/3 hold on the hourly charts for the bulls to remain in control. 4560 or so is the level that holds both the trendline and the 5-day EMA, also a key line on the chart.
Key A.M. Trade Levels and Charts are posted.

I keep threatening to take a few days off, and my birthday is Friday, so I plan to be out Thursday and Friday. So only key levels will be published on those days.

Have a great day ahead.

A.F. Thornton

Archives 2022

Afternoon Notes – 4/12/2022

Morning Notes – 4/12/2022

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Afternoon Notes – 4/11/2022

Morning Notes – 4/11/2022

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Navigator Oracle™ April Market Letter

The Narrative

The Price Action - Market Generated Narrative

Conclusion

Current Stock Market Thesis

Updated April 10, 2022

Background and Context

Projected Path and Targets

Conclusion

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Morning Notes – 4/8/2022

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Morning Notes – 4/7/2022

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Morning Notes – 4/6/2024

Morning Notes – 4/5/2022

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