All posts by AF Thornton

Navigator Algorithms – 100% Cash – On Preliminary Buy Signal

It is Fed day today, with the announcement slated for 2 pm EST. As you can see from the chart below, we are coming right into the nominal 20-week cycle low. Coincidence? Hardly. The cycles are certainly influenced by these meetings, along with quarterly earnings.

It was Microsoft’s turn to report last night. The initial market reaction was negative. But then management’s forward guidance was positive in the follow-up conference call. So both Microsoft and the futures market pivoted higher on the news.

And in an encouraging turn of events overnight, the S&P 500 Index Futures have broken above yesterday’s high, which would give us an actual pivot higher on the chart. As the price sits on the five and 200-day lines, there is some work left to do. Nevertheless, if the cash market follows through this morning, we have a short-term bottom in place.

I believe that the market will retest the low out a week or so. This morning’s pivot, along with a slight easing in 10-year Treasury Rates, indicates to me that the market is expecting the Fed to stay the course outlined in their last meeting. If so, the Fed will have tapered their Quantitative Easing program and are likely to start their first rate hike in March.

This so-called “Forward Guidance” has achieved the intended effect of taking the froth off the stock markets. From its December intraday peak to Monday’s low, the S&P 500 Index Futures had dropped -12.3%. The NASDAQ 100, which peaked in November, was down -18.3%. The Russell 2000 Small-Cap index futures have dropped almost 22% from the November peak.

The correcting stock markets impact the “wealth effect,” which will help ease the demand side of the inflation equation. Along with less deficit spending and the end of most Covid stimulus programs, the demand side of the equation could ease us into a recession if the Fed overreacts. Either way, demand will wane.

The supply side of the inflation equation is more complicated. The first best step would be to follow Great Britain and Ireland’s lead and abandon all the Covid mandates and policies. We can live with Covid, especially once the medical establishment restores the inexpensive, early treatments that Big Pharma sabotaged. Lawmakers must address Big Pharma’s regulatory capture at every level of our government health care system, and lawmakers must root the corruption out.

The vaccine mandates have wrecked and distorted the labor markets from top to bottom. At least one-third of the labor market will never get the experimental “vaccines.” These folks have exited the workforce or changed jobs, creating many of the labor shortages we are experiencing. Having left the workforce in many cases, these workers are not reflected in the monthly employment numbers.

The most crucial point is that the economy can resolve the supply side of the equation independent of Fed policy over time. The demand side of the equation is already tapering under the reverse wealth effect and inflation-driven price hikes.

Day Traders

We will open on a small true gap higher (always measured from yesterday’s high, not the close or settlement) after making overnight lows more than 100 points from the current price. Today’s open is the mirror image of yesterday. Gap rules are in play.

Yesterday’s high (4402.75 on the futures) is the only level that matters in terms of bull/bear sentiment today. Today will be more important than most in terms of whether or not there is a gap fill and/or subsequent acceptance within a lower range.

While there is sufficient shock and awe to this open, it is not unwise to trade later rather than earlier today, with the Fed announcement coming at 2 pm ET. Trade is likely to slow down as we get closer to that hour.

Substantial, one-sided moves in the market signify that traders may still be overly short. As always, focus on the gap fill as your first sentiment measure. This morning, the “ruling reason” is determining whether sellers see these higher prices as a gift or a curse.

Any failure to gap-fill or very tentative and slow tempo selling should be considered a buying opportunity. A reliable way to find a suitable location is to connect the highs from the high of the day should there be an early drive lower. Buy a confirmed break of the line.

While I’ve not listed any lower key Levels, traders should monitor yesterday’s Value Area High at 4340. Value was overlapping to higher yesterday. If traders have to cover more shorts, the price will not find acceptance anywhere inside yesterday’s Value Area.

A.F. Thornton

The Founders Group is closing our morning SPY Call Debit Spread trade for a nice gain. We entered at the Weekly Expected Move low at 427.25 and we are out for 10 points at 437.37.

We are still holding two long SPY Call Debit Spreads from yesterday. We don’t have a swing buy signal on the Navigator Algo quite yet.

A.F. Thornton

Every bubble and mania has its rock star. Perhaps Bitcoin will fit the bill for this era. I love the technology, and I am sure Central Banks worldwide will eventually enjoy it for their currencies. But I never drank the Bitcoin Kool-Aid as a hedge or long-term investment.

Not that gold has been a rock star in the wake of the recent inflation spike. Perhaps that is further evidence that inflation will be short-lived. But gold is slowly rising – and the Russia / Ukraine situation may have as much to do with it as inflation. The Gold ETF (GLD) had the highest inflows in its history on Friday – nearly $1.5 billion. The fund started in 2004.

Thus far, Bitcoin has dropped in half from its peak and is more correlated to the stock market and “risk-on” assets than “risk-off.” Maybe the adage that the more things change, the more they stay the same still applies.

As always, my preference is to hold the real gold rather than a fund. Someday, there will be an accounting for “paper” gold that may show some shenanigans. In other words, there might be more contracts than gold to back them up. Only time will tell.

A.F. Thornton

Since we lost the equality of an ABC corrective pattern at yesterday’s low, we have to consider an impulse pattern down, usually consisting of three drives. And if this is a bear, this is just the first leg down of a larger three drives. Here is the potential path:

It is going to be a long year…

A.F. Thornton

Dumb Money Confidence is very pessimistic and Smart Money Confidence is optimistic. This suggests we are closer to a trough than a peak.

Confirmation from AAII:

Stay tuned – the nominal 20-week cycle is trying to bottom.

A.F. Thornton

We are bouncing off the Weekly Expected Move low, and the Founders Group is adding a couple more February monthly expiration call debit spreads for a trade.

This is a high-risk trade, as the tape is still decidedly negative.

A.F. Thornton

We opened with 1500+ downticks and 458 decliners out of the S&P 500. We are first testing the overnight futures low at 4319. We will see how it goes from there. Commodities, Gold, and Treasuries are the only green on my screen thus far.

A.F. Thornton

Navigator Algorithm – 100% Cash – On Buy Alert

The markets will open down 2% this morning, but with yesterday under our belt, that is just a blip on the radar screen – no problem right? We have our big boy pants on now.

But in reality, price is retracing about half of yesterday’s spike low, so still in the realm of recovery. And I suspect there are a lot of shorts still out there hoping for a crash that will run for the hills on any strength today. Again, patience is a virtue for a good swing trade. We will see what the Navigator Algo telegraphs.

For day traders, I would focus on the spike base at 4346. There is potential for more short covering should prices get above it and find acceptance there.

Should sellers maintain control this morning, traders should note halfback at 4311.50 and the Volume POC / WEM low at 4275 or so, both of which would be downside targets short of yesterday’s low at 4212.75.

Yesterday’s sellers broke the October low and breezed right past the 10% correction before reversing course on the “mystery put seller” and closing well above both levels. The significant spike left at the end of the session puts spike rules into play this morning. With the current 70 handle gap down, the most bearish outcome of the spike would be to open below it, which appears unlikely at this writing.

Although we are opening within range, we closed at the highs yesterday on emotional buying. To open this far away from that settlement would imply that there will be some disappointed longs at the open who are suffering from poor location.

Wherever we go from here, we will probably retest yesterday’s low in a few days to shake out any weak hands left in the market. Typically we would rally a bit further first, perhaps to test the 200-day line from underneath. I am betting traders will extend the rally to the WEM high at 4489 before rolling over into a 5th wave down.

Russia / Ukraine is still the wildcard. We will hear from the Fed tomorrow. Perhaps the market will bide its time and do nothing until we hear from them.

A.F. Thornton

I think it was clear from my commentary today that I was on high alert for a turn. The post mortem is that there was still a hangover from Friday’s options expiration at the open today. The number of LEAP options (Long-Term Equity) expiring was the second-highest in history on Friday.

I won’t bore you with the technicals, but there was still delta hedging in the futures market at the open today. As there was no attempt to fade the gap higher, it was clear that sellers were firmly in control of the tape. Market Makers were still selling futures to neutralize their portfolio deltas from Friday.

After plunging more than 4%, stocks staged a furious rally, the likes of which have been seen only on a handful of occasions, before closing green. Putting today’s historic reversal in context, this was only the sixth time since 1988 that the Nasdaq reversed a 4%+ intraday drop to close higher. The other days were 10/28/97, 10/26/00, 7/15/02, 10/10/08, and 11/13/08. As for the S&P, this was the biggest intraday comeback since November 2008, when the US was in the middle of the biggest financial crisis in recent history.

The Founders Group covered the short position from Friday when the market was down about 3%. Simultaneously, I sent out an alert to subscribers that it was advisable to close any short positions.

As soon as the European markets closed mid-morning, some of the more aggressive sectors, such as the IWM (small company stocks) and the DIA (Dow Industrials), began to show relative strength into the final stages of the plunge. Then there was a divergence on the advance/decline line and downticks by about noon EST. This behavior typically leads a low – so the Founders Group picked up a couple of call debit spreads.

Then a colossal put seller (betting the market was bottoming) came into the market and triggered the short-covering rally (see the blue line in the chart from SpotGamma below). Was it the Fed Plunge Protection team? We will never know for sure, but I suspect it was.

The Founders Group then picked up a futures contract on the first slight dip after the low, but a bit higher than we paid for the calls. I closed out the futures contract right before the close and am still holding the call debit spreads overnight. I put out the trades to subscribers from my phone – though the communication was a bit unpolished. The new phone app will be available to subscribers starting Monday from Pro Trading Room.

As to swing trades, the Navigator Algo flashed an “E” exhaustion signal, along with a “Trend Reversal Imminent” signal on the system panel (see below). These signals eventually led to a preliminary buy signal and green arrow at the close. But I would like to see some follow-through (and perhaps an upward break of the Algo line) before issuing a Navigator Algo swing buy. I was encouraged by many good setups as I scanned through the major stocks and sectors tonight.

I have a couple of short videos coming out tomorrow with additional detail. Here are the sectors today in order of return, so you can see where the money flowed:

Since a lot of this was short-covering, I am not sure this tells us too much about future fund flows quite yet. We need to watch leadership in any follow-through rally for additional clues (if we get the follow-through). Value stocks are likely to lead growth stocks for a bit longer, but we shall see. The offense sectors did lead defense today, a preliminary change.

At best, we may have an oversold bounce to monitor for continuation into the rest of the week. We also need to get past the Fed meeting Wednesday and some leading tech stocks reporting earnings later this week.

If this is a bear, we will likely recover only half of the total decline from December before we roll into another leg down. Even before that, we may still need to retest today’s low in the next week before traders and money managers have the confidence to buy in earnest.

The Weekly Expected Move high sits around 4489 on the S&P 500 Futures and 448.84 on the SPY, which may cap gains for the rest of the week.

Of course, we may wake up to more consternation tomorrow, but it is less likely after such a strong comeback and reversal. And then there is Russia and Ukraine.

Strap in, and I will keep you posted.

A.F. Thornton