Navigator Swing Strategy – 100% Cash
The Navigator Algorithm is approaching an extreme oversold position, but the indicators have yet to drive the Algo into a buy signal. Exogenous events, such as the Russian / Ukraine situation and Wednesday’s upcoming Fed meeting complicate any attempt to establish a short-term low.
Yet, the monthly options turn, along with the nominal 20-week cycle, counsel us to be on alert for a turn perhaps corresponding to the Fed’s Wednesday meeting and announcement, but from where? All major indices are now trading below their 200-day lines. And three of the four majors, except the S&P 500, are all trading below the October lows this morning.
Friday’s option expiration was brutal, as has been the case for monthly expirations this past year. More than 3.2 million LEAPS (Long Term Options) expired and exerted more downward pressure than usual.
There were signs of bottoming toward Friday’s close, with positive divergences on the 15-minute chart. And the stock futures markets were rallying at the open last night, but the rally fizzled when Europe opened. But since the options expiration long play has been the Monday/Tuesday following Friday monthly expiration, one needs to keep an open mind over the next few sessions.
The Fed meeting Wednesday complicates an early turn today or tomorrow a bit. In one sense, the market has done the Fed’s bidding for it based on their “Forward Guidance” plan. We have corrections greater than 10%. And the risks of a Russian invasion of Ukraine further inhibit aggressive Fed action. As of the 19th last week, the Fed Balance Sheet was still growing. Given the circumstances, I expect the Fed to stick to the last plan they announced rather than get more aggressive. Inflation expectations will tend to focus on supply chain issues that can eventually resolve. Demand will fall away quickly with current circumstances.
Of all the risks on the table, the Russian invasion of Ukraine likely disturbs the global order enough to scare investors the most. Can you even imagine a conflict with Russia with the goons in charge that helped us exit Afghanistan?
The markets are otherwise oversold by just about every measure and due for a bounce. The slope is approaching waterfall status. Fear gauges are high. The Weekly Expected Move and October low are at 4272 (the market makers got it wrong last week, so their calculations may prove wrong again). That is less than 50 points from where the futures are trading (4317) at this writing. The S&P 500 is well under its 200-day line (4325).
For day traders, overnight inventory is net short, and we will open with a true gap down, so Gap Rules apply. That leaves the potential for advanced traders to attempt an early fade. Highs of the first one-minute bar or crosses back up through the open after an opening drive lower are usually solid setups.
All traders should always note what type of fade (if any) the market delivers to gauge early strength or weakness. No fade higher indicates a lot of weakness. Should there be a full gap fill that manages to enter the range, price action above the settlement could bring in further short covering as “screens go green” around the world and everyone sees the same thing. Monitor for continuation.
A gap and go trending day scenario is tricky to predict premarket and often even once the session commences (gap rule #4). To that end, pick your starting location very carefully and know the ultimate target at the October-Weekly Expected Move low.
The Founders Group had a slight loss on Friday’s “day trade” but removed the long portion of the call spread, leaving us net short this morning. We will cover that position at the open and that should start us in the green for the week, which is the nice part of using spreads.
I am out this morning for a dental appointment but will be monitoring by phone. I will update you on any significant events.
A.F. Thornton