All posts by AF Thornton

S&P 500 Futures (4298.50) / NASDAQ 100 Futures (13905)

We are taking the Navigator Swing Strategy to 20% invested, half in the NASDAQ 100 and a half in the S&P 500. You can use calls, ETFs, futures, or whatever works for you.

Since the buy signal is intraday, it could be negated by the close, but the context is very positive. Anyway, let’s take it a day at a time.

A.F. Thornton

The 10-Day Put/Call Ratio just climbed above 1.0 for the first time since March 2020. The ratio shows extreme fear (bullish) and raises the risk of a short-covering rally that could bring us to the bottom of this first corrective leg.

So far, the market is finding support on the Weekly Expected Move low at 4277 but resistance at the hourly mean around 4322.

I am already long some SPY calls at 4281 that I will hold for a swing trade and a couple of futures contracts at 4299 with 5 point stops. I want to accumulate the calls slowly as we might still see a flush today. Let’s see how it goes, it could be a long day.

We have breached yesterday’s regular session low, and a full retest of Monday’s low at 4212.75 on the futures appears to be underway. But the put/call ratio is over 1.0 – so watch for the flush. Given the volatility, I will be considering a couple of long calls into the flush, likely with 10 point stops. I will keep you posted.

Navigator Algorithm – 100% Cash – Looking to Deploy a Buy Signal.

It is about 8:30 AM EST. I have to mention the time because it looks like they are trying to start a pre-market rally as I write this, on the heels of reported personal spending down, an inflated GDP report, and personal income up less than expected. Get used to it – the bad news is now good news for the market. It takes pressure to raise rates off the Fed.

It is Friday, and weekly options expire at the close. At this writing, we were at the WEM low at about 4277 or so. The market has managed to hold the level all week. As I always mention, market makers stand to lose billions if the market closes below the WEM low today.

That weighs in favor of a successful retest of Monday’s low at 4212.75 if traders must test it or we need to flush the stops below it today. The WEM low can be the magnet to draw the market back up before the close. It doesn’t always work, as we saw last week. When the context is proper (and it is today), buying into a flush is the penultimate low-risk trade.

Remember, this business is all about the risk to stop. If you buy into a flush below the logical point for a stop, you define a slight loss if the market fails to recover. Context is important when you do this, and the context here is good.

I am observing interest rates. Short-term rates are rising faster than long-term rates, as you can see on the chart of 13-week rates below:

The yield curve is flattening. An inverted yield curve (short rates higher than long rates) presages a recession. We have already seen an inverted Eurodollar curve.

There are a lot of shorts sitting at the lows of the last few sessions. Each low has been higher than the previous low in the day sessions. These shorts have bad location and are likely to run for cover today if the market stays above yesterday’s regular session low (4298.75) once again by the close. The market could likely defy the recent pattern of morning rallies followed by afternoon declines today, so be careful. It would be best if you were not short here anyway. The market tends to fool the most people it can.

On the other hand, if the shorts make money today, they will stay the course. But as I pointed out last night, there are signs that the decline is losing power. I am at the point where I believe that this first corrective phase has run its course. So I am uninterested in shorting and would favor longs if the Navigator Algorithm is inclined to deliver the buy on a daily chart pivot. I made respectable gains between Monday and Wednesday going long.

Day Traders

Like yesterday, there is nothing to glean about the open from our overnight cousins. The overnight high (4361 or so) is close to halfback and would be my bull/bear bias threshold today. With such volatile markets, I usually take a broader view of where bulls or bears take control.

If the market spends much time below 4361 or drops below yesterday’s regular session low at 4298.75, then a full retest of Monday’s spike low at 4212.75 is possible. I am of the mind that this bear flag will fail to deliver such an opportunity, and the market may very well rally from the open, spook the shorts, and not look back for a while.

But the beauty of what we do is that we know what to watch. We don’t have to be married to any particular scenario. Hard as it is, we should not have a strong opinion anyway. Open mind traders are the most successful traders. I like to start with my “theory of the case.” I guess it is the lawyer within me. I am willing to alter my theory with more evidence. This business is about probabilities – not certainties.

Watch the NASDAQ 100 for relative strength this morning. It might give us an early clue to the bottom. Apple blew the socks off their earnings report last night. If Apple does not follow through with gains today, that is a negative signpost overall.

Monday’s swing low at 4212.75 is the most critical level on the charts right now. As long as the market doesn’t materially breach that level, assume that the market is continuing to hammer out a bottom.

A.F. Thornton

The market closed sandwiched between the 5-EMA and the Weekly Expected Move low, as you can see from the S&P 500 Index Futures chart with 24-hour daily candles immediately below. The four-day consolidation looks like a triangle bear flag for one last downthrust or fifth wave. We closed in the middle of today’s 24-hour candle. Typically, this indicates that the bulls and bears had equal power today.

However, we closed near the bar’s low if only the regular day session is included, indicating that the bears still had an edge (see the SPY chart below).

But there are signs of life. Each low in the regular session since Monday is higher than the previous low, as seen in the SPY chart above. Many sentiment measures are now at bearish extremes – which is bullish.

The American Association of Individual Investors’ bearish sentiment is as high as the China Virus crash, as reflected in the red histogram bars in the chart below. The bears have increased each day for the last four sessions – a bullish sign. I have recently discussed other sentiment measures, also at levels generally associated with an intermediate low.

Tomorrow is the 5th day out from Monday’s low – where a retest usually turns. And while the price pattern looks like a bear flag to go lower, I have seen many a bear flag fail at similar junctures, giving us a rip-your-face-off rally late on a Friday afternoon. The rally ensues because the bears keep loading up on puts near the lows of the last few sessions, betting that the market will go lower.

As we saw almost two weeks ago, when the market fails to deliver new lows by Friday afternoon, it can be like a match thrown on gasoline. The shorts all head for the exits at once near the close, buying to cover their poorly located positions and giving us one of those rips higher. Remember, all intermediate turns start with short-covering.

Another sign that we are getting close to a trough – new lows did not expand as much as they did in Monday’s spike low, even though we had a new closing low on the cash index today. That is a positive divergence, indicating that some buyers have arrived. You see the same positive divergence across all the major indexes in the chart below.

After the close, Apple reported positive earnings and guidance and popped higher. Given its cap weighting in both the S&P 500 and Nasdaq 100 – as goes Apple, so goes the market.

In short, the bottoming process is underway, at least short-term. The Navigator Algorithm is on a buy alert, and a buy signal could be close at hand.

Let’s see what tomorrow brings.

A.F. Thornton

Thus far, market internals have been somewhat mixed, and we seem to be muddling around in what likely is a 4th wave consolidation and triangle. The market continues to ping-pong between the falling 5-day EMA and the Weekly Expected Move low. While we reached the 200-day line yesterday, we stalled at the short-term downtrend line this morning, so the line is above us today.

Here is a close-up view:

We have dropped back through the open, another slight negative. But the preliminary 4th Quarter GDP number came out strong at 6.5, at least that is the “headline number.” But the devil is in the details, as the fine print indicates a massive inventory buildup, no doubt over supply chain concerns. Will the consumers now show up?

Stay tuned.

A.F. Thornton

Navigator Algorithm – 100% Cash – Gamma Rising

Today is day four out from Monday’s spike low, and the retest is underway. Last night’s range was considerable once again. Day five is usually when an initial retest is complete – successful or not. We have a spike low candle on Monday and Tuesday, with a spike high candle reacting to yesterday’s Fed meeting.

Notably, each regular session candle has a higher low on the cash index, a subtle but positive clue that the market is trying to bottom here. To students of Elliott Wave (that rearview mirror trading strategy I am so fond of), it appears that we are in that 4th wave triangle morphing into the 5th before we have a solid low in place, at least for this first wave down.

But what if this is a bear market? If this were the 2007-2008 bear, where is our current location?

Let’s say that it is a bit sobering to locate ourselves in a 50% decline that would not end until March 2023. Of course, lightning never strikes twice, hopefully.

So what did the Fed say that was so disappointing yesterday? Nothing that I can detect. They said what you or I would say. I heard that they are sticking to the plan they had already laid out. No more bond purchases (QE) after March. Three rate hikes for the year are to begin in March. And they laid out some rules for reducing their balance sheet later this year.

The Q&A in the follow-up conference seemed to trip the market up. One could interpret Chairman Powell’s comments as allowing for more than the three rate hikes initially communicated. But I could also argue that his language allowed for fewer than three. The market puked until the Q&A ended.

Realistically, I heard Chairman Powell say that they will speed up or slow down their tightening policies based on the incoming data and forecast. He also said they would be as transparent as possible – no surprises. What else would anyone expect the Fed to do? Perhaps the market has just lost confidence in their “incoming data and forecast” or the Fed itself.

I am unsure what the market wanted to hear, and I suspect it would sell off anyway. It could not penetrate the five and 200-day lines from below yesterday – perhaps the best explanation of the reversal.

If the Fed was too dovish, the market would be worried about inflation. Too hawkish? The market worries about a recession. All I can say is that there typically is a retest, especially after a 10% decline. Until that clears, it is not safe to take an intermediate long position. It is arguably too late to short, so patience is a key now. We need a price pivot to clear the air.

What I did do last night was travel through several hundred key stocks, and most of them are on or approaching key support levels after respectable (though perhaps just the first phase) declines. For this and all the other reasons laid out in these pages, this leads me to believe that we will bounce out of here in the next few sessions.

The Weekly Expected Move and October low (4263.25 or so) provided support again in the overnight session. The S&P 500 didn’t reach Monday’s spike low as yet, and it may not. Some retests come in short of the initial low. Some run the stops below it. The market bounced out of the Asian malaise when Europe opened last night, and the futures market hasn’t looked back thus far this morning.

Notably, the Navigator Algo has switched from “Trend Reversal Imminent” to “Gamma Rising” as it potentially transitions into a buy signal.

Day Traders

Each low since Monday has been higher than the previous day’s low in the regular session. While we did not hold the critical bull/bear threshold by yesterday’s close, I would now use yesterday’s low as the key threshold for today’s session. If we break the pattern of higher lows, then getting more bearish is justified.

We will open inside yesterday’s range with overnight inventory that is relatively balanced. If any, there is little guidance on how to trade the open. However, I am well aware that there are still a lot of shorts out there that could easily panic and buy.

Target the top of the single prints at 4381 first and monitor for continuation on a long trade. Strong market internals can help confirm long trades. Remember that single prints tend to act like gaps where there is a void of price action. Mark the open, and favor longs above it as long as screens stay green and internals stay positive. Remember that closing above yesterday’s high at 4446.85 (also the 200-day line) is the key to a pivot.

Given the shift in monetary policy that pricked the market bubble, I need more than usual confirmation of a low and turn than I would look for in a normal market correction. It would be best if you did the same.

Remember that the market usually takes an initial direction and tests either the overnight high (4385) or the overnight low (4263.25) to find the path of least resistance. With the sizeable overnight range, the halfback at 4326 might also open the door to lower prices. If the market breaches yesterday’s low at 4294.25, target the Weekly Expected Move and overnight low at 4263.25. From there, target Monday’s spike low at 4212.75.

A.F. Thornton

It would appear that the Founders Group took our profits at the “tippy-top” (as Alexandria Ocasio Cortez would say) of the post-Fed announcement rally. After the news conference, a retest of Monday’s low was already underway.

Retests usually come on the fifth trading day after the low, so this downdraft started a bit early. Perhaps this is more bearish. Only time will tell.

And there is no guarantee that the retest will be successful. We should be looking for positive divergences on the retest, even if it goes to a lower price. It is time to get out your notes for a bottoming process.

I did not detect anything unusual or unexpected from the Fed. Perhaps it was this statement by Chairman Powell:

“I think there’s quite a bit of room to raise interest rates without threatening the labor market.”

I will further dissect the announcement and news conference tonight. There is no valid pivot with the market failing to hold and close above yesterday’s high. The Navigator Algorithm is in its “Trend Reversal Imminent” mode but has yet to issue the buy signal. The candle for the day looks nearly as hostile as Monday’s candle looked positive.

If it comes in right on cue, the Nominal 20-Week Hurst Cycle bottom is forecast to occur mid-February. But it can bottom a week on either side of the projected date.

Stay tuned as it is about to get interesting. If we put in new lows, the new low will typically need a retest as well.

A.F. Thornton

There were no surprises in the Fed announcement. They plan to stay the course announced at the last meeting and reflected in the minutes. The Founders Group sold our remaining call debit spreads on the Fed announcement, exiting at 4444 on the index for 151 points per contract. We purchased these in the Monday downburst at 4293.

Both the Founders Group and the Navigator Algorithm are now 100% cash. I am still anticipating a retest or attempted retest of Monday’s low. Whether or not that occurs, we need to see a follow-through rally with institutional buying to confirm that Monday’s low is solid.

My overall concern is that we have pricked the market bubble, and a secular bear market could be underway.

I will keep you posted.

A.F. Thornton

The Fed will be able to rely on rising energy prices to help cool the demand side of inflation, with considerably higher prices at the pump.

Having said that, rising oil prices are a material contributor to inflation. While the Russia/Ukraine situation may also be a contributing cause, a peak in oil prices may be an early indication that inflation is peaking as well.

A.F. Thornton