Morning Outlook - Update | Archimedes Methodologies

This morning, we discussed that the S&P 500 and NASDAQ 100 indexes would open with a true gap higher, one of many gaps we have seen over the last couple of weeks. You can review the definition of gaps and gap rules here. Gap Rule #4 is particularly applicable to the NASDAQ 100 index today. The NASDAQ opened with nearly a 100-point gap. Bullishly, the gap barely filled, and the index has been able to sustain itself above the gap after two tests. Nevertheless, the index has gone nowhere so far today, essentially digesting the overnight move.

If you click on the chart above to enlarge it, you will see that I simplified the chart, and only the Navigator Algorithm trigger line is visible. Even with the trigger line to guide you, look at each price bars’ range – double or more from yesterday. The pace was fast as well this morning. Cleary, the index currently has no direction as it “digests” the overnight move per Gap Rule #4. Moreover, market internals have been weak today, further suggesting choppy conditions. For example, the S&P 500 advance/decline line has been evenly split all day, with half the stocks advancing and half declining. Unless you trade a 1-minute chart with quick, shallow trades, you will have your head handed to you in a fast market such as we experienced this morning. Never trade chop!

Now, compare the chart from today with the chart from yesterday immediately above. Note the smaller, more orderly, and tradable bars. The only chop was mid-day during New York lunch, which is normal and why I never trade it. Last night, I demonstrated how I made $4,500 yesterday trading one E-mini Nasdaq 100 futures contract in the more favorable conditions.

Sometimes, you may initiate a trade or two before you realize you are in chop. Don’t sweat it – drop back and don’t fight it. Sometimes, you may get a nice afternoon drive that is smoother, even when the day starts with the chop. Here, it is not easy to forecast the afternoon drive’s direction as yet.

However, knowing the gap rules would have had you considering chop as a distinct possibility this morning. That gives you a nice edge over other traders. Moreover, you know that a short-term cycle should be peaking soon from yesterday’s cycle report. Also, you know that a major, intermediate top of the Nominal 18-Month cycle looms large. Finally, you are aware that the options market makers will fight like hell to push prices back below the Weekly Expected Move high before tomorrow’s weekly options expiration, or they will lose a fortune.

You may not have noticed, but volume has been rather pathetic of late. In lighter volume conditions, do you really want to contend with all the aforementioned headwinds? That is why the Founders Group used the emotion at the open to reduce our exposure further, leaving us with a 10% position in gold only. All of those wide bars and the fast pace this morning indicate a lot of emotional volatility. In my mind, this reflects the emotion of the moment and traders who are unsure as to how much longer they can sustain this rally.

The volatility can also be an early warning of a peak. At the very least, the wide, back and forth swings tell you that confidence in the direction of the next move is waning. We carry all of this information forward as market-generated information to add to our narrative.

Why push your luck on the long side today? Perhaps it would be better to step aside here, wait for a pullback on the minor cycle, and/or begin to hunt for a short position. I am not ready quite yet, but I am eyeing the out-of-the-money puts – to get my toe in the water for the 18-month cycle peak.

It is the timing and quality of your trades that count, not the quantity.

A.F. Thornton

Morning Outlook – Update

Morning Outlook – Update

AF Thornton

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Morning Outlook – Update

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