Archives 2022

I am out tomorrow, so I will only publish the key levels for day traders in the morning. As most of you know, I don’t typically trade on Friday and I have some family obligations in the morning. I will send any signals if required from my phone.

Today was inflation report (CPI) day. Of course, the number came in hot at 7.5% and likely understated. The market was already expecting a dismal report and rallied on the news. The Fed wasn’t happy with the market’s northern turn, as the 10-year treasury rate popped above 2%. One of the Fed governors (Bullard) was sent out on the talking circuit and rained on the stock market parade with hawkish comments. The algos kicked in, and the market steadily sold off its 80 point rally from the open.

Our cash (non-leveraged) accounts flat stopped this afternoon (meaning we stopped out of the 25% position we had taken in the SPY this morning at our cost with no loss), taking the non-leveraged strategy back to 100% cash. Our leveraged accounts, which had purchased SPY calls when the SPY was at 451.75 this morning, sold the WEM high at 457.50, which had been our target. Subscribers received live alerts.

We trade the leveraged accounts more tightly and actively due to the additional risk and volatility. As of now, the cash accounts are approximately 35% SPY and 35% QQQ, purchased at levels well below the current overnight prices. Leveraged accounts are back to 100% cash as well after three profitable round trips since the January 4th bottom. I will update performance figures over the weekend.

I have mentioned the importance of the 4500 level all week. All round index numbers (‘100 handles affectionately called “roundies”), as well as “half roundies” (the ’50 handles in between), are important. When you pull up some long-term chart data, you will observe that the market dances around the 50 (e.g., 4550) and 100 (e.g., 4500) handles as it progresses up and down. I also mentioned 4520 or so as crucial due to options open interest and the influence of 4500 nearby.

Naturally, we will find many options around these roundie and half-roundie levels, which is part of the dance. There were so many options in the case of 4500 (450 on the SPY), that I suspected the level (give or take 25 points) would continue to act like a magnet (and support) and it did, at least through today’s close.

When the market was some 80 points over the level yesterday and this morning, I was confident that the Weekly Expected Move at about 4570 would cap the gains. But I did not think that traders would draw the market all the way back down to 4500. They did, the catalyst being Fed Governor Bullard’s hawkish statements. Since most of the liquidity sat at the 4500 level, the market gravitated to the liquidity as is typical.

Unfortunately, the futures market is still steadily falling tonight as much as 40 additional points, approaching both the Navigator Algo sell trigger (4445) and the 200-day line (4433).

I will have the updated options gamma/strike price levels in the morning. If the 4500 level is still the dominant open interest gamma, the market may be pulled back up to that level as it was pulled down today. But now that we have breached the level south, it is likely to be significant resistance to higher prices.

The problem tonight is that Europe hasn’t even opened yet – just Asia. European traders could easily pile onto the downswing. The declines today convert both the monthly and weekly candles into red bear bars and put the S&P 500 well below the 21-day and 21-week means.

The lack of buyers/liquidity lately is concerning, to say the least. Also, the uptrend line for the recent rally is arguably broken at these levels – if they are maintained into tomorrow’s regular session.

Of course, what happens overnight does not necessarily carry into tomorrow’s day session, but the picture is not bright at this writing. Also, note that once we reentered the four-day balance range, the market went right to the bottom in the day session per “look above and fail” Balance Rules.

Having dropped below the zero gamma and volatility trigger levels, we can also expect additional index volatility and wider ranges tomorrow – potentially very wide with the negative gamma and a possible gap down. This means that market makers will exacerbate both rallies and declines because they will be selling declines and buying rallies to keep their portfolio deltas neutral. Moves in both directions go further and faster, driving up volatility.

When the market is above the triggers, market makers do the opposite – they buy dips and sell rallies leading to narrower ranges by slowing down and narrowing market moves. The positive gamma environment thereby tamps down the volatility.

If the current decline could be attributed solely to Fed Governor Bullard’s hawkish comments, the market might recover quickly tomorrow morning. Optimistically, a trading range could establish between 4450 and 4580. Only time will tell, but I would be more bullish if fear levels were higher.

We worked off quite a bit of fear in the recent “V” rally, so conditions are not ideal for a low. I am also concerned about low liquidity levels in the markets, and the continued decline in Junk Bonds, often a leading indicator for stocks. The correlation disconnect between the S&P 500 and Bitcoin is also interesting at this writing, as is the upswing in gold.

Even though buying liquidity is low, institutions sold today as reflected in significant volume distribution. And Apple per my morning comments? If it looks too good to be true, it probably is, but the stock is hanging in there tonight at 172.

Be on alert for a sell signal for cash accounts tomorrow. We are in a situation unlike any I have seen in the last 35 years. Inflation is the kryptonite that won’t let the Fed off the hook easy anymore. The inflation numbers have to be addressed and the Fed may induce a recession to put the icing on the cake.

In short, the Fed has stuck its foot into the abyss. The days of inflation being “transitory” that somehow magically fixes itself are over. Deferred pain is still pain, and sometimes it is worse than had we endured it contemporaneously with the Financial Crisis and the Pandemic. The pain promises to be severe now, whether for investors or the country at large.

Before this decline is over, I suspect we will wake up to a limit down morning. That is why we are holding such high cash positions. 100% is best for such a morning – as the opportunities in such circumstances will be terrific. That is if you have the cash available to deploy. Did I mention the Russia and China risks?

There have only been two 50% drawdowns in my 35-year career. If you bought the indexes at the bottom, you could sit on your hands for a long, long time. This market has the potential to deliver such an opportunity. If you are older, you definitely want to miss this downdraft. If you are younger, you want to buy as much as you can at the bottom, as the long-term probabilities are in your favor. Maybe learning Russian or Mandarin is not a bad idea either.

A. F. Thornton

As expected, the market (as measured by the S&P 500 March Futures Contract) found its footing just below the 4520 support I had identified pre-market, bottoming at 4516. Then, as expected, it rallied right up to the Weekly Expected Move high at 4570. It has been a game of ping pong from there.

In fact, the market looked good until Fed Governor Bullard came out with his view that the Fed board should aggressively raise rates 1% by July and then start reducing its balance sheet in the second quarter. Any such move would be significantly more aggressive than what the Fed has already announced.

Needless to say, the market puked on the news, perhaps as intended. One might expect that the Fed is looking for a declining stock market to help tamp inflation down, and the market’s turnaround north is not all too pleasing to them.

Depending on how the day goes, we may need to reassess our strategy. We redeployed cash only a few points off the morning low, so we are well-positioned to raise more cash if necessary, though I don’t want to give back our morning gains.

Leveraged accounts already took their profits when the SPY was at 457.50 and have returned to cash.

This is a day to stay attentive.

A.F. Thornton

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

CPI – 7.5%

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

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

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

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

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

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

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

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

Day Traders

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

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

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

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

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

A.F. Thornton

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

A.F. Thornton

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

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

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

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

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

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

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

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

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

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

Day Traders

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

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

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

A.F. Thornton

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

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

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

A.F. Thornton

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