All posts by AF Thornton

The WEM low is the magnet we expected this morning on the S&P 500 and has drawn the market back up from yesterday’s puke into the close. And yesterday’s spike low at the close has been negated thus far. Moreover, I like the positive divergences on the hourly S&P 500 ETF (SPY) chart.

Perhaps the close might tell us something positive today. But Ukraine remained a wildcard after Biden’s missteps at his press conference yesterday.

Lacy Hunt has a new article this morning pointing out how consistently negative real interest rates (such as we have now) have led to recessions in the past. You can calculate a good “real” rate proxy by subtracting inflation from the 10-year treasury rate. Conservatively, that puts the real interest rate at -6%.

Unemployment claims jumped today – comforting the bond market. So while last year at this time I was worried about inflation, I am still leaning towards inflation peaking. At these sovereign debt levels, economic growth is already challenging without help from the Central Banks.

With the punch bowl being drawn away by the Fed and the Eurodollar curve already inverted, the risk of recession begins to loom large. At this point in the market cycle, the risk of recession calms inflation and interest rate fears and gives Central Banks around the world some flexibility.

Anyway, let’s see how the divergence on the hourly chart manifests today. I would be more bullish if there was more fear. If this were a typical intermediate low, the fear should be higher. On the other hand, the nominal 20-week cycle is not usually a big dip. We are more likely to see that at a nominal 40-week low along the typical bullish path.

While we took out a lot of critical support levels yesterday, it is always possible that it was a flush of all the stops sitting a few ticks below, and we will come back up into range. If so, we could establish some longer-term swing positions.

We started the week looking for the rescue operation. The rescue has been on weak ground – but the week isn’t over.

Anyway, I thought I would pass on the positive hourly divergence as a bit of good news since I have not had much encouragement to pass along lately. The Algo has flipped back to buy – but it is on the hourly chart only. That did not get us too far last Friday, but I will continue to take some brief trades here and there to bide my time in front of the screens.

I want to remind everyone that the recent playbook has been a swing low on the Friday (tomorrow) of monthly options expiration or the following Monday, and then a turnaround on Tuesday. Here, with the Fed announcement on Wednesday, we might see an additional 24-hour delay. But most of the time, we rally into the Fed meeting, though times are changing.

Also, keep in mind that the S&P 500 may still be looking to establish the bottom of what will become a new trading range. We have peeled off about 10% on the large-cap indexes which is a good start back to reasonable valuations.

Stay tuned.

A.F. Thornton

While the Weekly Expected Move lows are drawing in price again this morning, it is only after we seemingly lost the intermediate trend at yesterday’s close. The Russell Small Cap index violated its one-year trading range. Trading ranges tend to double when violated, which would be unpleasant for this sector. The one-year trading range now looks like a major market top rather than a consolidation to go higher. A bear market for small company stocks (greater than a 20% decline) is now on the table.

The damage does not stop there as the NASDAQ 100, the Covid ERA’s darling and the FAANG stocks’ home base, broke its intermediate uptrend. The NASDAQ 100 correction now exceeds the 10% threshold, and the NASDAQ 100 is on its 200-day line. As well, this implies that the large-cap stocks are now joining the broad market decline which started late last year. In other words, the generals are now retreating with the soldiers.

So that leaves our core index, the S&P 500, still in the vicinity of its intermediate trendline. The WEM low is drawing the index back up this morning after losing the battle at yesterday’s close. But it is hard to argue that this index won’t follow its cousins lower as well, perhaps with some fireworks into next Wednesday’s Fed announcement.

The Founders Group barely booked break-even stops on its nibble positions yesterday before the market rolled over at the close, and we were flat stopped again. So we have nothing to show for our brief forrays at support last Friday or yesterday. The market didn’t punish us either for trying.

We remain 100% in cash with no gains (or losses) for the year thus far. Had I not been battling Covid when the year started, I would have been short from the December highs. Unfortunately, both the Covid and medicine made it difficult to think and process complex information.

It is a bit surprising that the intermediate trend is not holding. Yesterday’s treasury auction went well. There was a lot of demand which helped cap the 10-year rate at least temporarily, though it is at a two-year high. One has to conclude that uncertainty around next Wednesday’s Fed announcement has a lot of money sidelined.

So while we are in the zone for a low on the nominal 20-week cycle, lately averaging about 16 weeks, it would appear that the low will come in (likely with some fireworks) next Wednesday with the Fed announcement. That is our best guess for now.

Day traders should initially focus on spike rules this morning, with the top of the closing spike at 4549. Trading above the spike starts to negate the lower prices of the spike. Trading below or within the spike is more bearish as it confirms yesterday’s closing prices with value (time + price). Remember that the top of the spike and the Weekly Expected Move low is approximately the same price – 4549 to 4550.

Note that the POC and Settlement are at the same level today at about 4525. This becomes a good bear target for the day if yesterday’s closing spike is confirmed. As with all POC’s they tend to act as magnets. Target this level on bearish trades that have accompanying context.

With yesterday’s value area (where 70% of volume occurred) so large, it isn’t easy to point out any potential inflection points above. Be aware that rallying up through a lengthy value area is harder than rallying through normal value ranges.

The Weekly Expected Move low at 4550 will continue to act as a magnet through tomorrow’s weekly/monthly expiration at the close. After that, the trend is either broken or not. If broken, the S&P 500 has quite a bit of downside to joining its brethren. The 4550 level will be the halfway point to the ultimate low – if typical projections apply. Shorts then become more plausible to the projected pivot point.

I wish there were better news, but it is what it is.

A.F. Thornton

The Founders Group has nibbled once again on a QQQ and a SPY at-the-money call, February 18th monthly expiration. Eventually, we will sell a higher call to neutralize any potential volatility compression, creating a debit spread.

While I am inclined to manage the positions tightly and get to a break-even stop as soon as possible, it can also make sense to begin building a long position. I will contemplate that a bit longer. These positions are only about 5% of our $10,000 beginning year account.

While we don’t have an Algo buy signal yet, we are at a logical pivot point, and the risk to stop is minimal. The more confirmation one seeks in a turn, the higher the dollar risk to stop. I will keep you posted.

Going long here is certainly not for the faint of heart, but the pessimism is both rising and comforting. It is not extreme, though, which is why I want to keep plenty of powder available. I would love a straight capitulation and flush to get uberly aggressive. But we never get exactly what we want. The safe play has been the Monday/Tuesday pivot after Friday expiration. We add the Fed announcement Wednesday for some extra color.

For now, The market reminds me of watching the grass grow. It feels heavy and almost too orderly.

A.F. Thornton

The rescue operation showed up overnight as the S&P 500 Index camped on the Weekly Expected Move low – approximately 4550 on the Futures and 455 on the SPY. And when all else fails, one can redraw the intermediate trendline to give it some benefit of the doubt at this level. All we can do is give it our best shot.

As with last month, the market is seemingly drawn into the monthly options expiration Friday. Why that has been a dip these last 6 -7 months has escaped me. I will look into it, but it has drawn us into the 50-day line over and over, and it has paid to buy the dip. This month, the 50-day line sits materially above us – so options expiration is a bit more negative.

And the WEM low also equates to the weekly 21 or mean line – a logical pivot point. And then there is the intermediate cycle – we are in the 15-week zone of a cycle running between 14 and 18 weeks since the March 2020 Covid low. We should expect a pivot soon.

Were it not for next week’s Fed meeting; you would have had a nanosecond to get positioned before takeoff. And that is interesting in and of itself. Not long ago, the prognosticators told us that the Fed couldn’t raise interest rates or the world would come to an end. Then they told us the Fed wouldn’t raise interest rates. Now, they tell us the Fed will make up for lost time because they are behind the curve and their “credibility” is at stake. They have had no credibility in my lifetime. I suspect “transitory” will join “irrational exuberance” (as in 2000) as the defining term of this era.

And when you have a stock market priced for perfection, the challenges abound. 7% consumer inflation and 10% wholesale inflation will show up somewhere. Either corporate profits will shrink – or consumers will stop buying at the higher prices. After all, the cure for higher prices is higher prices. Wages are not even close to keeping up. Inflated prices are their own natural governor.

Anyway, I don’t think there will be a sustainable upside until next week, but we will let the price action guide us. Yes, rates will go up, but they are still not going to be high by historical standards. The natural forces are working to abate inflation. For all we know, it could be peaking.

But the easy days of blindly buying dips are behind us. It would be nice if the market could hold the intermediate trend, but I still see a 50/50 chance of tagging the October low at 4268. The 200-day line (remember that?) is rising and sits around 4418.

And I am wondering if we will see a capitulation or spike low to end this corrective phase—something like the old days – where the market pukes before it recovers. The Fed meeting is a good crescendo point next week.

By the way, the Fed balance sheet shrank over the past week. So quantitative “tightening” is now real.

I think it is a bit too late to short unless you want to sit in front of the computer 24/7. So I am looking for a buy at this point.

Anyway, let’s see how the rescue operation goes today. Maybe we can do something towards the close.

In the meantime, oil prices are approaching new highs. That signals economic growth, not contraction. Gold is in a converging triangle – ready for a big move. It is just that I have not yet figured out the direction. I am working on it. Given the inflation at hand, one would expect a move north. But Gold has not exactly delivered as one might have expected up to this point. And higher interest rates on U.S. Treasuries provide stiff competition.

I will drop a line when and if something changes. Cash is king for now – but let’s see if we can get a characteristic intermediate low in the next week or so. We are not there yet by most measures.

Let’s see if the rescue operation follows through today.

A.F. Thornton

The S&P 500 is wedging into the WEM low, laying the ground for a rescue operation. May be good for a quick bounce trade.

https://www.tradingview.com/x/Hmz9HeZk

The S&P 500 has already shot to the Weekly Expected Move low right out of the gate in this shortened trading week. It is another test of the demand line and intermediate trend, the fourth since the year began. It is also a test of last Monday’s low.

One would expect the market makers to mount another rescue operation here. If they fail, the selling could accelerate as market makers sell futures to neutralize their portfolio deltas. The put/call ratio has climbed to significant fear levels as it did Friday so that one could hope for another short-covering rally later in the session.

The problem this morning, of course, is the breakout in interest rates and the inflation-driven campaign for a reversal of friendly Fed policy. The Fed meeting is next week. Market participants will hang on every one of these meetings for the foreseeable future. It promises to be a rough ride for equity investors.

As you can see, the critical 10-Year U.S. Treasury rate is breaking the long-term Head and Shoulders reversal pattern we have been watching for many months. This breakout is a monumental event—nearly every loan in the country keys off this rate. It won’t help the deficit either.

The chart pattern projects a near doubling of the rate up to 3%. The pre-covid rate was about 3.25%. While the higher rate would indicate a return to normal conditions, it is still a massive adjustment for lofty equity markets when combined with the higher inflation we have been experiencing. Of late, the higher rates punish growth stocks (e.g., technology and the NASDAQ 100 the most).

Save for bank stocks and energy, the broad markets are already fragile. We had a lot of breadth divergences on the December high. If interest rates cause the big cap names to cave, there is not much to help the markets hold their current ground. A move to the October lows on the S&P 500 futures (4260) is not outside the realm of possibilities.

It has been a few years since we saw the kinds of corrections that would give us capitulations and spike lows, but one has to assume that such corrections (which are normal) will ensue again. It will be a treacherous environment for equity investors for now. A bear market could undoubtedly follow, but only time will tell.

Investors should not initiate longer-term equity positions until we have clear evidence of the cyclical low, likely to come in after the Fed meeting and towards early February.

In the meantime, there should still be some good, short-term trades in both directions,

Friday now appears to be a one-hit-wonder, as we were flat stopped on all positions this morning as the Navigator moved back into an hourly sell signal. The buy signal was short-lived, as they sometimes are. The market is now in a bearish tilt.

Naturally, things could still improve this morning, but we are now trading below the intermediate trend line on the S&P 500 in a third test of the trend and the fourth on the year. The NASDAQ 100 is worse, having arguably lost its intermediate trend as interest rates are climbing.

For now, we will stay in cash and do our best to identify the intermediate low that lies ahead.

Fed policy uncertainly is ruling the day in an otherwise lofty stock market.

A.F. Thornton

[Uodated with Chart and Weekly Expected Move parameters]

More pressure on interest rates over the three-day weekend has the markets erasing most of Friday’s short-covering rally. The market will open on the intermediate trend threshold for the third test in a week and fourth of the year. I would use Friday’s low as today’s bull/bear threshold. The S&P 500 Futures WEM range is 4752 to 4576 this week.

If Friday’s low fails to hold, we would finally have a break of the intermediate trend, and we would then focus on the Weekly Expected Move low for the rest of the week. This would most likely lead us to establish the bottom of a trading range. If Friday’s low holds, then we have a chance of climbing back into the rising wedge on the daily charts.

Remember, we still have some cyclical forces and this Friday’s monthly options expiration, both exerting downward pressure on the markets. Wherever we might land, the wind could be at our back after the end of the month and starting into early February.

The cycles vary somewhat and could drag us into March, so we have to take this on a day-by-day basis. Also, we have a Fed meeting next week, so buyers may hold their powder until that meeting passes.

As of now, Gap Rules will be in play at the open this morning as the market is slated to gap lower (not a true gap but a significant one to the bottom of Friday’s range). Overnight inventory is net short, which could give us a bounce at the open on overnight short inventory profit-taking. If the market can move above the overnight halfback at 4626, that would bolster today’s bullish case. Below 4626 and I have to give a slight edge to the bears.

Persistence beats resistance. We cannot keep pounding on the intermediate trendline and expect it to hold much longer.

A.F. Thornton

[Updated with Expanding Charts]

We hit it out of the park with Friday’s trades in the unique circumstance where the major indices tagged important demand levels while the crowd was overly fearful and short on the session. As suspected, the shorts panicked into the close giving us a 50 point rally from our entry point on the S&P 500. The IWM (small company ETF) and the QQQ (Nasdaq 100) delivered similar, positive results. Again, the circumstances were unique for trades with very low risks to stop.

There is yet nothing to indicate that the equity markets are out of the woods. However, as long as the S&P 500 Index stays above the current demand line marked on the S&P 500 futures chart above, the intermediate bull market channel is intact even though it is a rough ride of late.

This gives us an absolute dividing line to guide us in the weeks ahead. Break it, and we can use time at price from December to calculate a new fair value target for January at 4440. This level is also likely to converge with the rising 200-day line – a logical, new demand area. I would back up the truck on long options should we achieve that level – everything else being equal.

I thought it useful to show you the put/call ratio on Friday in the chart above. It hit a short-term extreme associated with the October and early December lows. This was unusually helpful for Friday’s session.

Traders were pounding on the demand line all day trying to break it, resulting in a lot of traders stuck “short in the hole.” When the market then fails to break the demand line by late Friday afternoon, the shorts tend to run for the exits all at once, fearing a long weekend and Tuesday rally (the U.S. markets are closed on Monday). We saw that panic short-covering materialize about two hours before the close, and it never stopped.

But the CBOE put/call ratio is a very short-term guide – good for a session at best. Note that the 10-day put/call ratio average is still rising (yellow line in the chart above). For intermediate-term confidence, the line should be falling or peaking.

So intermediate investor sentiment is neutral, giving us no edge from a macro perspective. Regardless that we find ourselves in difficult price action, there is no sign of a reliable intermediate low. Investor sentiment would need to deteriorate further, resulting in more negative price action as we move into the 15-week trough next week. In short, we need more fear.

As you can see in the chart below, Smart and Dumb Money Confidence is also at a crossroads. This is additional confirmation that there is not enough negative sentiment to favor cruise control with our trades. We need to manage them closely at the moment. The CBOE put/call ratio can merely help us on a session-to-session basis.

We will work with the current trades using the Navigator Algorithm applied to the hourly charts. For the most part, we will ignore the news and speculative Fed narratives. Below, you can see the trades in Friday’s turn through the index quadrants.

We took the Navigator Algo buy signal on the 15-minute chart for the early entries in Friday’s case. The buy signal then materialized on the hourly charts as it moved across the various time frames in a “W” pattern. Applying the Navigator Algorithms to the hourly charts on the trades will tend to be more responsive than the daily charts with the current volatility. We will let the Algo takes us out when it is ready.

But short-covering is not the same as buying. There is no guarantee the markets will follow through Tuesday, but I suspect they will for a few sessions, especially given Friday’s successful retest of Monday’s low and the reversal candle off the demand line.

The chart above shows the entry on the S&P 500 Index futures 15-minute chart from a longer perspective. Note that the 15-minute candles have moved above the mean. The mean should now provide support, and perhaps an additional entry point if one wants to add to positions. We would use a combination of a mean violation and an algo sell signal on the 15-minute chart to go to a high sell alert status. Ultimately though, the hourly chart sell signal would take us out.

All in all, what Friday’s trough represents is another 20-day cycle low. Clearly, the pattern is loose and exaggerated, which is bearish. This wide, unruly pattern departs from the relentless one-time framing candles we saw even as late as the year-end rally. But the pattern of higher highs and lows remains intact.

Perhaps more important, the intermediate cycle has been running about 14 to 18 weeks, trough to trough, at least since the March 2020 lows. The latest week is the 15th week since the October trough and coincides with Friday’s low. The cycle varies somewhat and the trough could still be in front of us to combine with next Friday’s monthly options expiration to exert a potential negative influence. After that, and depending on where that takes us, I might be inclined to be more bullish and continue to work the rising wedge pattern on the daily chart.

You can expect us to undertake many similar kinds of “trades” as the year ensues. The year ahead has the potential to destroy the latest crop of novice investors, assuming it doesn’t take down long-term investors as well. The Federal Reserve (along with a misguided Democrat administration) has managed to screw up the economy so badly; it will take a miracle and a lot of time to recover from the various distortions. The fear now is that another Fed policy mistake (reversing course too fast) will only make things worse.

Not that I am qualified to be a critic. I don’t even pretend to be an expert on the economy or inflation. In fact, I don’t think I have ever met any such purported expert. I do observe a lot of bloviating. Yet knowing that the Federal Reserve can mess up so badly with more resources than any entity in the world only underscores why I won’t even try to tackle these “theoretical” concepts.

What I do understand is price action. The rest is a bunch of noise and egocentric pontificating. And while others will continue to try to explain everything to you (as if they even know), I will stick to what I know. I intend to make a fortune this year doing so, just as I have these past two years we have worked together. I hope you will join me.

When we can enter and hold on, we will. When we have to trade, we will trade. And when it is not clear, we will stay out.

I am working on a video this weekend that will explain the strategy for the year ahead. I have heard from many of you that my predictions at this time last year were right on the money – and you want more. Yes, I predicted the inflation that arrived and it has even exceeded my expectations. I think a first grader could probably have done the same – given the flood of money supply into individual hands. But it doesn’t really matter, and I would rather have been wrong.

For now, the biggest short-term risk on the table is a Fed policy mistake in the context of an overvalued stock market detached from fundamentals. The Fed correctly perceives that their credibility is at stake, which may cause them to overcompensate. They are, at the end of the day, human and fallible. Any further mistakes could devastate portfolios and retirees. Financial markets are in a delicate state.

It does not help that the Fed’s track record in these matters is abysmal. As Zero Hedge illustrates in the chart below, since 1960, with stock market valuations over 20x earnings, the Fed started long-term rate-hiking campaigns that resulted in three bear markets, two recessions, and at least one debt crisis. The outcomes often led to new credit crises requiring even more bailouts.

That certainly is not an enviable track record. And so the question is, where does this all take us?

It ends with us becoming uberly wealthy by capitalizing on the mistakes and volatility at hand, taking advantage of the new crop of rank amateurs now participating in the financial markets. Remember, either they are taking our money, or we are taking theirs. While that may not help the country, our personal survival is ensured. I don’t know about you, but I have no intention of letting the idiots in charge destroy my wealth. I am too old to start over.

And what about Bitcoin? Unsurprisingly, it has not been a hedge against anything. You can have it – I am not interested.

As the Chinese proverb goes, “Better to be a dog in times of tranquility than a human in times of chaos.” But chaos is profitable. You cannot trade without volatility. There will be plenty of that as the year ensues. Let’s keep our eye on the ball and take full advantage.

A.F. Thornton