Navigator Oracle - 3-6-2022 | Archimedes Methodologies

Issue Number 0974 - 03/06/2022

The Navigator Oracle™ is BluPrint Quantitative Strategies’ signature publication. The weekly forecast is available Monday mornings free and can be sent directly to your email if you register. Subscribers receive the Oracle on Sunday morning, along with essential updates during the week and live access to swing trading signals initiated by the BluPrint Founders Group.

Introduction

Welcome to March 2022. Our core market thesis is now available here. Because the thesis changes infrequently, we now leave it as a reference on the right side menu. If you are new to these pages, start with the thesis to put context to these forecasts. If the hypothesis were to change materially, we would publish an update.

The week started with the Navigator Algorithm taking us back to cash on a stop after slight gains on our last entry. Index prices likely reflect the geopolitical situation getting worse before it gets better. Our year-to-date returns are phenomenal without a single losing round trip.

The Ukraine conflict inherently feeds an unhealthy dynamic: slower growth and higher inflation. The Fed will tighten financial conditions – the extent to which remains an open question until mid-month. Chairman Powell wisely telegraphed flexibility in his latest testimony to Congress. But how exactly does the Fed drive inflation from 7% to 2% when oil is over $120 (+22% last week alone) and 10yr real rates are down 92bps (down another 33bps this past week)?

It is difficult to see how higher interest rates would solve inflation. Parabolic oil prices are a self-inflicted wound that could be solved overnight by the Biden Regime reversing its hostile energy prices. Supply challenges still seem to me to be the inflation catalysts rather than demand. Why exactly would anyone try to slow a recovering economy anyway?

It is mind-boggling that we are attempting to solve the oil problem by negotiating deals with Iran and Venezuela for oil. Is this commie appreciation week? Our current regime seems to have more in common with Cuba, Nicaragua, Venezuela, and Iran than makes me comfortable.

It is not unlike rewarding Putin by continuing to purchase Russian oil. I am starting to wonder if these people are purposely trying to enrich our adversaries, leave our borders open for their mercenaries, and hasten our demise.

Whether demand wanes or inflation pressures squeeze margins, the events at hand can negatively impact company earnings. P/E multiples are likely to contract – as they harken from the 87th percentile of modern ranges.

From a technical perspective, whether or not a long-term bear market is underway, the 2/24 Ukraine invasion low successfully retested the January swing low. And the invasion low has been secure for eight trading sessions, while the S&P 500 Index continues to consolidate.

With the Globex futures market back to the bottom of range tonight, the chances of the consolidation resolving in another leg up could be diminishing. We will see what the morning brings, but it is not easy to call.

The market (at least as measured by the S&P 500 Index) has held up remarkably well in the circumstances. It has only been down 10% from its peak on a closing basis. I have seen 10% corrections manifest over a lot fewer adverse events than are on the table now.

What I believe is happening is that the market is differentiating as time goes on. Russia’s assets are down deeply and close neighbors are under heavy pressure. European assets are through the lows of last week in many cases. The US, Japan, and others have priced in some risk premium, but meaningfully less.

The underlying trajectory of growth remains firm, as we saw last week in the ISM report and payrolls. Underlying corporate fundamentals also remain healthy, including very significant return–of–capital through buybacks.

And then there are those record flows into stocks the past few weeks from institutions, corporate buybacks and retail investors. After all, what is the meaningful return alternative? And with over $1 trillion in Put Options (our Put Wall) sitting around 4200, the street is majorly hedged.

With the backdrop of extreme bearish sentiment and the bullish divergences on the 2/24 low, there is an argument for another leg up, even if the market rolls over again afterward.

However, I won’t exclude a panic spike low, but that likely requires a new, unforeseen catalyst. With both oil (130 per barrel tonight) and wheat parabolic, the market might always find a new reason to go down.

This week, inflation figures will come out on Thursday and be the last reports before the mid-month Fed meeting. Consensus expects consumer inflation to come in at 7.9% – wow. Oil alone (as it permeates the economy) could further impact the CPI over consensus estimates. I hope the numbers come in at or below the consensus, but I have my doubts.

If we are starting another leg down, breaking the consolidation projects targets at the 2/24 invasion low near 4100. But the WEM low and options Put Wall at 4200 should catch the fall.

As always, keep an open mind to all possibilities. Positive S&P 500 sectors are moving higher, while others are correcting. That is what gives us the sideways consolidation. There is no symphony of higher and lower price action as yet. It comes down to sector weighting or synchronous price action for a higher or lower leg.

I would bet on higher prices if we were still clearly in a bull market or otherwise normal conditions. But it is more difficult to be confident in such turbulent conditions. As one of my mentors, Al Brooks points out, traders always buy the first correction of a tight bull channel, and attempt a new high before the market rolls over again. We shall see.

Navigator™ Algorithm - Current System Status

The Navigator Swing Trade Algorithm chart appears at the top of this writing, and the market has fallen below the Algo trigger line tonight. Even before that, the Algo had flipped back to a sell signal on the hourly chart. The overall reading is mixed to bearish just like the market, as indicated by the “kill zone” label. Nobody can say I don’t have a sense of humor if I can teach a computer to give us that reading.

Weekly Range

Volatility remains high, and the market continues to trade below Gamma and Delta Neutral, as well as the Volatility Trigger. That means that negative gamma will exacerbate both rallies and declines, and ranges will be wider than average. The Weekly Expected Move Range is 4205 to 4453 on the SPX cash index, roughly 250 points.

S&P 500 Index Health Checklist

✓ Trend

As was the case last week, the S&P 500 Index trend is mixed. The short-term trend remains bearish. The Primary Downtrend Line remains intact.

Yet the longer-term trend is still bullish as the price remains above the Primary Uptrend Line. It is also possible that a bullish falling wedge may be forming on the daily chart.

✓ Chart Patterns

Last week, we pointed out that the market had reversed from an “h” pattern and an even more rare “piercing pattern,” both of which resulted in bullish price action. New, discernable patterns this week are scarce.

You can always consider the consolidation area a rectangle, but it has a bit of a slant. For sure, it is a balance area, and Balance Rules should continue to be applicable. Also, the bottom of the consolidation is a 50% retracement of the first leg up. The market could pivot and put in a second up leg equal to the first in a classic ABC pattern.

An ABC up leg is a bullish data point, but it is pure speculation. There is little to add to the positive chart patterns that brought us out of the 2/24 low.

If you are an Elliott Wave fan, the current wave count is courtesy of Daneric’s Elliott Wave.

The wave count is bearish. It contemplates a (iii) of a [iii] of a (3) down, the most extended wave in the sequence. If the interpretation is correct, we need to put our big boy pants on for the next leg. Even the WEM Low and Put Wall won’t matter if the market launches a “3” wave down.

Of course, it wouldn’t be Elliott Wave without an alternate count:

That has always been my problem with Elliott Wave. I can’t trade it might be this, or it might be that. It is like driving with my rear view mirror.

✓ Moving Averages

The moving averages slope down and remain stacked negatively, which is bearish. The market could not hold the 5-day line this past week to stay bullish. More importantly, it rejected the 21-day line (daily mean) on the rally attempt from the 2/24 low.

The price remains below the 200-day line and the 21-week average (weekly mean). The position of the moving averages remains bearish, and the averages will provide overhead resistance to any rally attempt. A solid move above the 21-day line would convince me of a trend change, even if it is short-lived.

✓ Sentiment

Sentiment supports a rally – even if it is a bear market or short-covering rally. There are many measures I could quote to confirm this, but one of the best remains the CNN Fear/Greed Index:

The indicator dropped to 17 from 19 last week. The extremely bearish level and many other fear indicators are approaching extreme panic depths. Maybe that is what we need, severe panic and a spike low to end this corrective phase. I thought we already had that as of the 2/24 low. We will find out soon.

✓ Breadth

As pointed out last week, the correction at hand started almost a year ago in the broad market, using measures such as the Russell 2000 or NYSE index. The large-cap stocks, represented in the Nasdaq 100 and S&P 500 Indexes, are the last to correct and may still be correcting.

I still find this chart favorable. On rallies, the IWM tries hard to stick its hands up to say, “buy me.” But liquidity will matter if we see leverage unwinding, and the smaller stocks generally will decline more in a panic. Of course, in a panic, institutional investors could be forced to sell their S&P 500 names too. This is precisely because they ARE liquid.

The NYSE has clear, positive breadth divergences at the 2/24 low. There were fewer net new lows than January, and the number of stocks below their 50 and 200-day lines contracted between the January and 2/24 low. But there is not much improvement in the current rally attempt. Percentage indicators look pathetic across the board on the bounce.

The S&P 500 index still does not enjoy the same positive divergences as the NYSE. We will need to keep a close eye on these differences. For now, this chart is not convincing me that the market has bottomed and the correction is over.

✓ Volume

As pointed out last week, the positive volume divergence confirms the 2/24 retest low. Spike volume is often associated with intermediate lows, and the January low was no exception. On the piercing low retest, volume was spiking but significantly lower than the spike volume on the January low. The behavior is a positive divergence and supported the successful retest.

There is no doubt that the 2/24 low was important and led to a two-day, 6% rally. In a bear market, there will be multiple, similar lows. While I am still open to another up leg, the volume increasing on recent bear bars (distribution) is unhelpful, as you can see in the chart above.

Friday’s market and volume profile in the chart below shows both the point of control and value area gapping significantly lower. The gap remained unfilled at the close. There is a lot of volume in the balance area, as seen on the 20-day composite histogram in gray/white on the right side of the chart.

The price action also reflects that the market balanced off the 2/24 low. Neither bulls nor bears have been in control. As previously discussed, we need a catalyst to tip the balance.

Since the news can hardly be worse, perhaps the mid-week CPI report could move the needle. Or maybe the market will simply bide its time until the mid-month Fed meeting.

✓ Momentum

I left the chart from last week in this week’s update. The chart shows that the positive momentum divergence supported the 2/24 low like the volume divergence. But the divergences don’t forecast the quality or extent of any rally that follows. So 2/24 might turn out to be “a tradeable low” but not “the” low.

✓ Options Market Influences

Uncertainties concerning geopolitics and monetary policy prompted traders to hedge underlying equity exposure with puts (i.e., bets that may rise in value if markets trade lower).

When the masses reach for protection in one direction, the behavior has significant, measurable implications. To hedge long customer puts (i.e., a negative delta, positive gamma trade that may have its gains multiplied with downside movement), counterparties short futures and stock.

If volatility rises or the underlying trades lower, these puts can increase in value, and more hedges may be added, further pressuring markets. However, hedging can support rally attempts if markets rise and volatility falls.

SpotGamma.com reports that after the indexes established their last significant low on 2/24, prices continued higher and put options solicited less active hedging. At the same time, participants sold calls.

This particular call activity can add resistance; dealers long those calls tend toward selling the underlying index into strength and buying into weakness.

If the market advances, the area above $4,400.00 on the SPX remains strong resistance. Because of negative gamma and high implied volatility, the downside remains vulnerable to sharp “steps” lower.

Conclusions

On balance, the market technicals have deteriorated somewhat since last week. Volatility remains high, as do downside risks. Any follow-through rally has a lot of overhead resistance to work through, including crucial moving averages up to options gamma resistance above 4400.

The S&P 500 is stuck in a high volatility, low return trading range. My plan for the week is to buy dips and sell rips. If I had to put tactical locations behind that statement: buyer below 4200, seller above 4400.

Sector-wise, my bias is still towards commodities and the beneficiaries of higher rates. No junk bonds. I want to keep my eye on the reopening trades (AWAY and JETS).

These are unsettling times, and I am here to help you navigate the market in the weeks ahead. Subscribers can stay current by reading the Founders Morning and Afternoon Notes and following lerts for timely trades, updated trading levels, and impactful news. The Notes are raw because they are my actual trading notes – so be prepared. It is a bit like a peek into my diary.

A.F. Thornton

Navigator Oracle – 3-6-2022