All posts by AF Thornton

Mid-Day Update – 8/16/2021

Above are the four most common outcomes of an opening gap down, as we experienced this morning. Of the four, the behavior is closest to the lower right-hand corner. We wedged into a reversal about 11:00 am EST. We have experienced a nice rally up to test the gap, where we find ourselves at this writing. The bottom of the gap (where the market opened) is also yesterday’s low and the old trendline we broke this morning. All of this congregates around 4450, a half-roundie that could provide resistance.

Whether this is true buying the dip or short-covering is not entirely clear, but it is certainly not the disaster it could have been this morning. You should be happy with some nice gains if you followed the morning plan. We breached 4441, setting up a short trade to 4430. The market wedged into that level, setting up a long trade that you should still be holding, but getting ready to exit on the current rising wedge now forming into the gap around 4450. After I exit this trade, I am done for the day.

I suspect there might have been some intervention in the markets this morning due to the global picture. We can never know for sure. Also, the global chaos is likely to hold the Fed tapering and interest rate hikes in abeyance. Kind of like bad news is good news. In any event, the sellers were unable to press their case below the morning low, and the buyers are still in control for now. We will see what the afternoon brings.

The put/call ratio is elevated and that may stymie further declines today. But until proven otherwise, we are still in the initial stages of the nominal 40-day cycle correction.

A.F. Thornton

View from the Top Down – Interim Update – 8/16/2021

The rising wedge reversal pattern mentioned in yesterday’s weekly report has broken this morning. The Navigator Algo has issued a sell signal. This appears to be the anticipated reversal into the 40-day cycle low. I have set an initial target for the 40-day low at 4200 on the futures. Currently, the futures are trading at 4437.

I have marked the cycle FLDs (Future Lines of Demarcation) on the chart immediately above. The 40-day FLD is the initial target, also currently at 4200 or so. Notice how close it is to the blue line, which is the 21-day EMA. We will see how all of this develops, and I will keep you posted. Keep in mind that this is the initial target. We could certainly go lower as the decline develops further.

The Founders Group is holding on to the Energy (XLE) position until we approach the close today. While the XLE may not hold, you can also imagine that the situation at hand could destabilize the Middle East. With the current administration increasing our dependency on Middle East Oil, oil prices might soon reflect the chaos. I want to see how the price behaves into the close before I decide whether to hold or fold.

Note that we are approaching the 20th anniversary of 9/11. We have no Southern Border at the current time. More than 5,000 terrorist prisoners have just been released from Afghan prisons by the Taliban. This is a lethal combination, and there is nothing to stop terrorists from entering our country.

This morning, China (the CCP) has already posted headlines aimed at Taiwan and Hong Kong, using Afghanistan as their example. The CCP is warning that Taiwan and Hong Kong need to submit to CCP control as there will be no interference or rescue from the United States. Not only is this tragic, but it could also be a strategic nightmare. Keep in mind that most of our computer chips come from Taiwan.

Recall what I have previously communicated about Fourth Turnings. Every such turning in history has resulted in major wars.

The turn of events in Afghanistan over the weekend has profound, global implications, most of which have not even come to light as yet.

Stay tuned,

A.F. Thornton

Morning Outlook for Day Traders -8/16/2021

We will be opening with a true gap down this morning and Gap Rules will apply. The gap down is occurring in the context of Afghanistan (the new Saigon), the China Virus Delta Variant, Fed taper rhetoric, a rising wedge reversal pattern and the 40-day cycle trough due later this week. 

The Fed Minutes will be published Wednesday, and monthly options expiration is due on Friday. Lately, options expiration has been brutal, resulting in trips to the 50-day line.

My line in the sand today would be the Globex low at 4441, then Thursday’s RTH low at 4430.25. Friday’s low is weak and won’t be much of a barrier to lower prices, so keep that in mind. 

Taking out the Globex high at 4459 would shift my bias to bullish. It coincides with a prominent POC.  Conquering Friday’s RTH high at 4463.25 would open up our remaining upside targets of 4480, 4500, and then 4537. Friday’s high (also the all-time-high) is poor, so it is vulnerable to penetration once tested.

Overnight inventory is net short, so the imbalance could lead to a brief rally on the gap, but don’t let that fool you into buying the first dip. Instead, follow the Gap Rules.

The bottom line is that If the overnight low holds, that will be a sign of strength and vice versa.

A.F. Thornton

View from the Top Down 8/15/2021

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             When the Fed Expands the Balance Sheet, the Market Rises and Vice Versa

Golden Anniversaries and Dead Trading Gurus

Let me start by confessing that I am in one of my moods. So you are forewarned. I could not help it, as today is the 50th anniversary of President Nixon taking the United States off the gold standard. I thought it was worth mentioning since the 50th is a “golden” anniversary, pun intended. The U.S. debt of nearly $30 trillion and growing would not be possible without that monumental step taken on a warm Sunday afternoon in August 1971.

And then there are those pesky “unfunded” liabilities. Would they still be possible?

Unbacked, fiat (paper) currencies have been the undoing of every global reserve currency (and world power) in history. As we see today, the people demand more, the politicians deliver, and the central planners kick the can down the road until they can’t. At least gold forced a modicum of discipline. That is why it had to go. It was the cost of the Vietnam War then.

Coincidentally, there are vestiges of the 1970s all around us now. Gas lines, inflation, riots, protests, Marxists – I have seen this movie before. Now Afghanistan is the new Saigon.

The most any reserve currency has lasted in history is about 100 years. Whether you trace the roots back to the Romans, Dutch, British, etc., it all ends the same, and it doesn’t end well.

Try as they might, central banks cannot cancel the economic cycle. By deferring the pain of the Financial Crisis, and now the China Virus, the ultimate price we pay is certain to be much greater. We could face the worst bear market of our lifetime. A depression of the 1930s variety is unimaginable to the modern world, and that is why we are vulnerable to repeating it right on time for the longer-term cycle trough.

The only thing that backs the U.S. Dollar now is confidence – plain and simple. What do we know about confidence? It takes a long time to build but can be eroded overnight. And there is no lack of enemies willing to help us fall. China, Russia, Iran, and even our European competitors, are waiting in the wings to pick up the pieces.

Perhaps the only thing we have going for us is that none of those countries are any more responsible than we are for fiscal reality. It will be a “global” solution with a new, “global” currency to replace the U.S. Dollar when it all comes tumbling down. No doubt we will all be paying a world income tax, too, as our sovereignty gives way to the New World Order. Brace yourselves.

I hope I don’t live to see this, but it is as inevitable as the sun coming up in the morning. Let me ask you, how is your confidence in the U.S. Government these days? How will the world look at Afghanistan’s overnight collapse and surrender to terrorists? What about our government’s fiscal responsibility? Another $6.5 trillion in spending goodies on the table, really? What about the national debt. What about inflation?

Today’s anniversary also got me thinking again about the Fourth Turning. We are in the midst of the Fourth Turning, which is why there is so much consternation and turmoil. It is part of the generational cycle.

To simplify it, we are four generations (roughly 20 to 25 years each) removed from the Great Depression and World War II. In other words, most of us are the spoiled grandchildren of our grandparents and great-grandparents. So we tend to ignore or minimize the risks and realities of life – like avoiding debt, hard work, individual responsibility, frugality, a responsible government, ethics, and the like. I always like to call it “unearned wealth in undisciplined hands.” And so, history repeats as memories fade.

The Fourth Turning that preceded the Depression and World War II encompassed the Civil War. Before that, the turning encompassed the Revolutionary War. This turning likely won’t end until 2030. The precedent is both sobering and grim, and we are barely at the midpoint of the cycle. If you wonder why everything seems so unhinged, the Fourth Turning is your explanation.

The generational cycle also got me thinking about a fairly well-known and deceased market guru named W.D. Gann. As with most dead gurus, he tends to be more celebrated now than when he was alive. Rumors abound that he died with a several hundred million dollar fortune. His son, once interviewed, stated otherwise. His son indicated that Mr. Gann sold trading programs from the trunk of his car.

Nevertheless, Gann’s math and predictions were contemporaneously tested by a reporter for a prominent financial publication in the early 1900s. To the reporter’s astonishment, Mr. Gann’s predictions came true day after day during this “test.” So there was (is) something to the Gann number calculations and predictions. In 1912 or so, he predicted a stock market crash in 2020. That is certainly an attention-getter.

Important for our discussion, Mr. Gann was keen on a 90-year stock market cycle, which I believe is somewhat related to the Fourth Turning. The last 90-year cycle trough was the 1929-32 stock market crash and bear market. The cycle provides a window between 2019 and 2022 for its next trough or bottom. Maybe the March 2020 China Virus crash was it. But what if we were to revisit the March 2020 lows sometime in the next year?

That would be a shocker. Is it probable? Likely not. But when I look around, I cannot exclude the possibility. There is no lack of catalysts.

Taking the micro view, the vaccines don’t work. The government was slow to reveal this, but the evidence mounts daily. The Delta Variant is highly contagious, as are government bureaucrats who enjoy their newfound authoritarian rule. More lockdowns? Maybe. Socialism and Marxism seem to be taking root in our government and previously trusted institutions. The printing presses are out of control, and interest rates seem to be going up right now – which could burst the financial asset bubble.

Taking the macro view, corporate and sovereign debt is beyond historical comprehension. Interest rates are artificially low. How do I know that? Who in their right mind would accept a yield of 3% on “Junk” Bonds? That is what you pay for your secured first mortgage. Who buys this junk? I want to hire the Junk Bond industry’s marketing person. By the way, junk bond prices are not confirming the new highs in the S&P 500 index. That is a bad omen.

With the supply of debt at historic levels, who will buy all of it? What will they be willing to pay? The less buyers are willing to pay; the higher interest rates will climb. The fundamentals of supply and demand tell us that rates will go higher. I cannot tell you if it is now, next week or next year. All I can say for sure is that the fundamentals support higher rates, and they won’t stay low much longer.

For all of this historical debt to work and not crush all of us, the Fed has to stay in control of interest rates. It is the key to avoiding national collapse and bankruptcy, not to mention financial ruin for the rest of us. But there have been times in history where the Fed loses control, and the market takes the helm. That could be underway even at this writing.

It is scary to contemplate that the cheapest asset class on the planet is commodities, even after the recent rally. Likely, the rise in commodity prices is just getting started. What if all the money chasing stocks suddenly shifted to commodities? What would that do to the price of wheat, corn, cotton, and the like? Inflation anyone? Likely so. What will we do if the commodities indices were to go vertical as the NASDAQ 100 has?

Is the stock market rally real anyway? In the chart at the beginning of this discussion, the Fed’s balance sheet is green, and the broad Wilshire 5000 Index is blue. The green line rises when the Fed expands its balance sheet (going into debt). Notice how the stock market then correlates and zooms.

Yet, when the Fed stops growing the balance sheet, and the green line flattens, the market stalls and corrections are deep. When the Fed reverses and starts shrinking their balance sheet, the market starts throwing what is now called a “taper tantrum.’ Do you recall the 20% decline in the latter part of 2018 into Christmas Eve? How about the expanding triangle from 2017 until 2020? It was not fun.

My goal in sharing these thoughts is not to terrify you. First and foremost, be aware. Don’t be a sheep, be a sheepherder. Stay tuned to these pages. My goal is to help you avoid the coming pain. Then I want you to take advantage of the situation, just like our esteemed elite will do. So don’t fret, prepare.

The Stock Market

After three range days last week, the market broke out of the tight consolidation and completed the Head and Shoulders reversal pattern mentioned last Wednesday (8/11) in the Morning Outlook for Day Traders. The market now sits at the top of three pushes and a wedge, usually a reversal pattern. Coincidentally, the 40-day cycle trough is due later this week. So I am expecting at least a minor dip to get underway.

We still have open targets and measured moves above us, ranging from 4480 to 4537. Of course, we would have to conquer the roundie at 4500 too. I mention this because sometimes, the market can throw over the wedge for a few days. If the wedge reversal fails, always remember that failure is a signal too. We might shoot up to the upper targets before rolling over.

If the wedge reversal materializes, we will look to our lower support levels for a bottom, outlined each morning in the Morning Outlook for Day Traders. Major support on the daily chart starts around 4414.25. Lately, the pivot back higher has been found at the 50-day line, currently about 2.5% below us.

Notably, breadth, strength, and momentum are not confirming the latest all-time highs thus far, bolstering the case for falling into the cycle trough. If rotation back to value and cyclicals truly is underway, the shift could help cushion any decline, especially if the 18-month cycle truly bottomed on July 19th. Only time will tell.

Whether it is the Delta Variant, the Fed Minutes coming out on Wednesday, or the Fed Conference in Jackson Hole later this week, there are plenty of catalysts to trigger an even deeper market correction. We will monitor this carefully.

We are only holding an Energy Sector Position (XLE) at a 10% allocation in the Navigator Swing Strategy. It has not really gripped yet but fits the reflation theme. I am keeping a tight rein on it.

We realized very nice profits on our SPY and XLF calls last week. I will reconsider the positions on the dip. However, the Dow Industrials (DIA) may be the better choice if rotation continues to confirm the reflation trade.

The Bond Market and Interest Rates

Perhaps more important than the stock market these days is the bond market and interest rates. Using the Treasury ETF (TLT) as our proxy for bond prices, the bonds look like they could be forming a topping pattern, especially apparent on the weekly chart. The formation process is still underway, so it is not a definitive pattern yet. Nor can the Fed afford to lose control of interest rates. They will do all in their power to keep rates low. To succeed, the Fed needs bonds to rally, or at least go sideways.

The unstable rate environment is one of those times when we need to stay tuned. The weekly chart did manage to find support on the mean last week, so the bond bulls have hope.

Conclusion

The stock market is overvalued, and it can stay that way for a long time – or not. As you will see from the first chart in this discussion, the Fed delivered this overvalued market on a silver platter by expanding its balance sheet. If they even stop the expansion or begin contracting, the market will correct more significantly than we have experienced this past year. The market also will become more volatile. But that is a liquidity issue.

The other significant risk to the market is higher interest rates, and an economic slowdown is sure to follow. Perhaps the new China Virus wave and scare will do the Fed’s job for them, keeping the economy and inflation tame. Further economic dislocations would abate the need for tapering (beginning to slow their balance sheet growth) or raising interest rates.

Thus far, however, inflation seems to have arisen from the virus waves and accompanying supply disruptions. Since we are experiencing a throwback to the 1970s, how about some stagflation too? Remember that fun period of time?

In an environment such as this, we need to take the stock market day by day. That is why I have preferred day trading to swing trading. I am monitoring relative strength and rotation, as well as the cycles. My focus is intense, and the reins will be tight, even on a swing position acquired on a dip.

The hard truth is, one of these dips will keep going and going and going. That is the cruel nature of the market.

A.F. Thornton

Interim Update 8/11/2021

Since I had to work the last two days anyway, here are my notes today. The market never rests, even though I need to from time to time. As always, take it in slowly from left to right.

After the market gapped open, the bears took control. When the index opens that far above the mean, the only question is this: how long will it take to drive the market back to it? Today, the market reversed lower and sliced through the mean, filling the entire gap. The gap-fill bottomed with many other important support levels, and the market reversed higher into the close on a small head and shoulders reversal pattern, forming the head of an even larger reversal pattern. The market ran out of time to complete the pattern. The pattern could resume overnight or tomorrow.

It is noteworthy that the decline was large enough, once again, to force another trading range. The open acted as a magnet late in the afternoon, just as it has on all the range days in the past week. Note that the open drew the market in like a magnet, whether it happened to be above or below the morning action on this and other sessions.

My biggest concern here is the labored progress into a rising wedge on a number of the indices, including the S&P 500 Index:

As with all chart patterns, they do not always pan out. Nor does a break of the pattern ensure a decline any further than where the pattern began.

Nevertheless, this is a reversal pattern into what is normally the peak of the nominal 40-day cycle. I like to be in cash mid-month anyway. But if the decline begins or happens overnight, we can be stuck in our calls. So we sold our SPY calls into the strength at the open today.

We also sold our remaining XLF position. The price has literally gone parabolic, reached its Weekly Expected Move, and it was in a good place to take profits this morning. We can always repurchase it. 

We have retained the XLE position, and it had a nice day too. But it has lagged a bit, so I will monitor its progress for the rest of the week.

Now I am really going to try to take some time off.

A.F. Thornton

Interim Update Revised – Sell Signal Now All Spy Calls

Let’s sell all of our SPY calls this morning into the strength of the market reaction to the CPI report. A lot of this is short-covering, not really voluntary buying and investing.

That leaves us with 5% XLF Calls (Financials) and 10% XLE Calls (Energy). Stay on alert for my signals, recall that our initial SPY target was 4450.

I am anticipating the nominal 40-day cycle making its appearance soon. On that dip, I might be choosing a more economically sensitive index such as the Dow. The Democrats are pushing the $1 trillion infrastructure, along with another $3.5 trillion linked budget package. Where that money is directed will impact the indexes.

Also, there will be a Gap at the open, and Gap Rules will apply. Here are the four most common outcomes to a Gap higher:

Not easy to take some time off, is it? At least the market isn’t going down, that is typically what happens when I am on a plane.

Enjoy your Wednesday.

AF Thornton

Interim Alert and XLF Sell Signal

Now that the XLF is at its old high and has made the measured move from its breakout base let’s sell 1/2 the position cutting it from 10% to 5%. This locks in profit and will help if the XLF fails to break to new highs.

Yesterday was another trading range day, but the market did its job of holding Friday’s breakout.

There were some large bear surprise bars this morning after a nice rally and breakout to new highs. So far, we have moved back into yesterday’s range.

The bear surprise sell-off bars this morning could be a one-off event. Nevertheless, we need to pay attention. This could also put us back in a trading range for the rest of today’s session.

Rising wedge patterns concern me on the daily charts (e.g., the NASDAQ 100). After the S&P 500 reaches the 4450 measured move, I am concerned that we will move into the next 40-day trough due the second or third week of August. That could be a hard down and might finally give us a 5% to 10% trading range.

We will be selling our SPY and SPY calls when the SPY reaches just below 445.

The XLE is picking up steam this morning and remains a hold for now.

Rotation is full-on this morning, with the NASDAQ 100 yielding to Financials and Energy. The latter two companions seem to be linking up again.

As previously indicated, I am out this week but promised to keep you updated.

A.F. Thornton

View From The Top Down – 8/9/2021

Let’s start with the treasury bond market tonight. Celebration of the end of the bear market in bonds, and its corollary cousin higher interest rates, was premature just as I had expected. The weekly chart above highlights a few of the bond market sell signals. Lower bond prices mean higher interest rates. There is much more, and the technical principles and rules are the same whether applying them to a 5-minute or weekly chart, and the stock or bond markets.

When you break a rising wedge, your first target down is equal to the base of the wedge, and in many cases, the beginning of the wedge itself is tested. In this case, that would be a test of the March/April lows. We would have to deal with a potential head and shoulders topping pattern if that were to occur.

I don’t want to believe that the pattern will materialize. The measured move would be 40 points down from the neckline, taking us to the 2018 lows. That would be a 25% drop from current levels. With current corporate and sovereign debt levels, this would be Armageddon in bonds, interest rates, and the economy at large.

Yet, maybe this is precisely how all this craziness ends. I don’t know about you, but I want to be off the grid with solar panels, a satellite dish, and a greenhouse by then. If I short the market, will the firm that has my account still be in business to pay me?

In short, the intermediate to long-term treasury bond market appears to have completed a corrective parabolic wedge rally into down trendline resistance on the weekly chart. The weekly bear bar closed on its low last week, which was below the previous week’s low. The bear bar was one among other sell signals. We also have a Navigator Algorithm sell signal. 

Looking at a close-up of the TLT action on the daily chart, you see the breakaway gap Friday closing on its low, also breaking the 21-EMA or mean.

I have been anticipating this turn of events which is why we picked up the XLF and XLE positions a few weeks ago. What is bad for bonds is bad for technology and growth stocks. But it is good for the rotation trade back into financials and energy, at least for a short while. I was a bit early, but my patience has been rewarded.

When you step back and look at the Financial Sector ETF (XLF), a 10% allocation in the Navigator Swing Trading Strategy, you will see that the sector is breaking to new highs for the first time in 15 years, only recently rising above its January 2007 peak. Banks are flush with liquidity, recently passed their stress tests, and will now be allowed to restart stock buy-backs.

Moreover, as you will see above on the close-up view of the daily XLF chart, it was a happy Friday. Just take the TLT candle Friday and flip it and you have the XLF candle. The XLF has a breakaway gap UP from a shelf and consolidation with an initial target of the old high to the left. TLT will test the former low and XLF will test its former high. The XLF measured move target is even higher at double the consolidation range. The XLF likely will get to the top of the channel, with a few zigs and zags along the way.

Our other 10% position, the XLE, has a bit more work to do to catch up to the XLF.

If you haven’t noticed, gasoline prices just hit 7-year highs this weekend. Don’t you love inflation? The XLE is coming off the bottom of its channel in what appears to be a rising wedge pattern on the monthly chart. If the pattern materializes as expected, this rally would be the third push higher in that monthly chart pattern.

The XLE macro rising wedge would make some sense. The inflation narrative is likely to be back on the table. This will put pressure on the NASDAQ 100 as rates begin to move higher again. Financials and Energy will experience a window of rotation and benefit. However, they both need a Goldie Locks scenario to sustain rallies.

Rates can go up some, just not too much. Higher rates increase bank profits from loan spreads. Inflation fears will temporarily make commodities attractive again, helping oil and energy stocks. But at some level, higher interest rates will choke the economy and bring on a recession. 

That may explain the wedge pattern on the monthly XLE chart. One more push to go with this next, potential rally. We have to monitor all of this carefully. The head and shoulders topping pattern on the TLT chart above, should it complete, would be ominous for all stocks.

Refer to last week’s outlook on the market (S&P 500 Index). Nothing has changed, except the positive news that we broke out above the balance area into Friday’s close at new all-time highs. Volume could have been better, but we are in the dog days of summer, and volume is typically light this time of year.

The breakout was unimpressive nonetheless. Apparently, it was not enough to force a gamma squeeze, which would really drive prices higher. We are still on guard for the look above and fail on Monday. Hopefully, the market is simply climbing the wall of worry.

Holding Friday’s SPY low around 442 by the close on Monday is the next mission. Our stop for our 60% SPY call swing position remains the 5-day EMA at 441 or so tonight. The equivalent low is 4416 on the S&P 500 Futures.

Even though I will be out this week, I will post any buy or sell signals and any other material issues should they arise. My biggest concern remains how well the S&P 500 can progress with tech and growth stocks under interest rate pressure, offset by energy, financials, materials, and other reflation trade candidates. As I have said before, it is a math problem. We may switch to a more focused index depending on how the week progresses.

There are still many “ifs” and “maybes” in this market. I have repeatedly voiced my concerns about what it is like to look out the window from the 99th floor. I feel like I am pinching my nose every time I jump in the water. But the market is anything but frothy at the moment, compared to the first quarter. There is a healthy dose of fear and skepticism, and that comforts me.

Fear only dropped fractionally last week, despite the market’s progress and breakout. This tells me that there is a ton of cash on the sidelines, also confirmed by various Fed reports and money manager surveys. For money managers, the only emotion that beats fear of loss is fear of missing gains or FOMO as we affectionately reference it. Underperform, and clients walk out the door.

Until the crowd gets giddy or even bullish again, I am willing to dip my toe in the water here and there.

Vigilance and flexibility are the keys.

A.F. Thornton

Epilogue – 8/6/2021

Today’s Notes

Recently, I have been conforming my daily notes into something legible. My goal is to help you improve your day trading by sharing my process and thoughts. Today’s chart (Friday) appears above. Obviously, it is extremely time-consuming to translate my crib notes, much less annotate the rest of what goes on in my head. I cannot do this frequently but will do so here and there when the spirit moves me. Importantly, the same principles articulated in the notes and on these pages generally apply to any time frame, including the daily, weekly, and monthly charts. The upper time frames can be a cakewalk if you can execute the principles on a 5-minute chart.

Since you may not be reading this on the day published, references to “today” are for the S&P 500 Continuous Futures Contract day session on Friday, August 6, 2021. References to yesterday are for the previous day session on Thursday, August 5, 2021.

Today in the Life of A Day Trader – The Play by Play

I always start the day by revisiting the current narrative. Any carryforwards I deem important are outlined in the Pre-Market Outlook on these pages. For example, the market’s task today was to hold yesterday’s high or not. Yesterday’s high was the balance area high of the past two-week consolidation.

We were opening above the high with a gap, and If the breakout failed, the implications were profound. I highlighted the risk in my reference this morning to Balance Rules. A failed breakout by the close implied a move back down to the balance area low at 4365.25 or worse. At least for today, we did not have to face that predicament.

I also want to be aware of the position of the daily chart, essentially the macro picture and anchor chart for my day-trading. What is the Navigator Algorithm communicating? What clues can be garnered from recent price action, the distance from the mean, patterns, etc.? Where are the positions of the nominal 40, 20, and 10-day cycles on the daily chart? When is the next trough due? How close are we to it? As an example, here is the position of the current nominal 10-day wave painted with the vertical lines on the RTH hourly chart below. The next trough is due August 10th. We closed Friday about 2/3 into the cycle.

Even if everything else is fine, markdowns of the larger cycles can catch me off guard when I am trading in the 5-minute weeds. If I want to get super granular, I track the nominal 5 and 2-day cycles on the hourly or two-hour charts. Also, I typically run the intraday cycle lines on my five-minute day trading charts once I discern the beat. Clearly, though, the larger the cycle, the more it will exert its influence. You can see Friday’s intraday cycles in the chart below.

Remember this about cycles – they are not a religion. They give you context. Like most indicators we encounter in the markets, cycles are imperfect. You can see that the cycle low came in a bit late on Friday afternoon. No problem, you continue to expect the low, but use your other work to confirm a pivot/reversal. The point is that after 8-10 candles, look for a cycle to peak in an uptrend. In a downtrend, it will peak earlier. In strong up and downtrends, the cycles are barely discernable. When you are approaching important support or resistance, discerning a coincident cycle peak can give you an edge. This is true in most any time frame,

Whether the cycle peaks to the left or right, also known as left or right translation, tells you a lot about what the market is trying to do. You will get the right translation (uptrend) coming off the bottom of the range and left (downtrend) coming off the top on a range day. There might be an exception if the first few candles in the cycle are parabolic, but you can generally follow those rules. Cycle highs and lows are also the right places to draw connecting trend, channel, or range lines. Cycles are rough guideposts to help you journey along with the price action.

Every morning, I give you key levels to watch, whether we head north or south. At a minimum, you should always draw these levels on your chart. As a core concept, you should always draw yesterday’s high and low and the overnight high and low on your charts every day. You also want to draw the open for the session as soon as it is available. Traders will take the market to these levels nearly every day and sometimes reverse back and forth until they find the path of least resistance. You monitor for continuation once the path moves forward.

In my case, I day trade from a regular session (RTH) perspective, so those are the levels I plot. However, I want to be aware of the previous day’s high and low if they happen to be outside the regular session range due to the previous day’s Globex (ETH) session. I also monitor the Globex open for the day I am trading. But in addition to the core levels, I will highlight any other levels I believe to be important for the session that day. There are many support and resistance levels in the market, but I prioritize, and so should you.

Next, I want to determine any influence Globex trading might have on the open. How much trading was there above or below the previous day’s settlement? As a side note, the previous day’s settlement and the close are not the same numbers. Settlement is the result of an official exchange algorithm and is more accurate for our purposes. It is available daily here.

If traders are net-long (trading mostly above settlement overnight) or net short (trading mostly below settlement overnight), that can affect the opening as they adjust their inventories and take profits at the NYSE open. This is why the market often turns after its opening direction.

Trading is a business, and market-makers are the wholesalers. There is an axiom that old business is always conducted before new business at the NYSE open. 

I also note where the market will open in reference to the overnight range. There may be a gap higher or lower that could result in an imbalance between buyers and sellers. As with any auction., the market is always trying to find a level that maximizes two-sided trading. Any imbalance, such as a large gap, disturbs the equilibrium. 

The question then becomes, will the higher or lower prices be accepted by traders? Price will gravitate to the level where most traders agree it is fair for that day or not. We generally call this price the Point of Control or POC. In a Volume Profile, it is the highest volume node at price for that day. In a Market Profile, it is where price spent the most time. The POC price levels for both are often the same. More on this below.

I also want to know if any economic reports or events might influence the open or the day. I want to know how any of the previous day’s trading might influence today. For example, the market had a spike rally into the close yesterday (Thursday). That influenced today’s open, as the rally continued to a parabolic climax significantly above the mean on the first opening candle. I could anticipate the price pulling back almost immediately. In the Pre-Market Outlook, I also noted the potential application of Spike Rules and Gap Rules at the open today. You should familiarize yourself with the rules.

Once the market opens, I give it a little time, depending on my strategy for the open as dictated by Globex trading and any applicable trading or set-up rules. This morning, we experienced a small gap open with a parabolic spike candle. The spike turned out to be the second leg of a two-step rally that started into yesterday’s (Thursday) close. As mentioned above, the top of the spike was unsustainably above the mean, and a climax bar (extremely long and vertical) setting up a short trade. Also, we opened with a small gap. Small gaps tend to fill in the first hour.

I took my first short position a few candles after the open and marked it on the chart above. The short trade was clear to me after no follow-through on the climactic opening bar. My target was below where the gap started anticipating a gap fill. My stop was two ticks above the high of the climax bar. Coincidentally, my downside target was the mean and our key line in the sand – yesterday’s high.

Range openings tend to lead to range days, at least for the first part of the day. So I want to rely on my range-day tactics until the price action negates them. I immediately mark the opening price, so I know where it is the rest of the day. The opening price will act as a magnet on a range day. I also want to draw a horizontal line across the high climax open bar for an upside reference. It could be the high of the day and is likely to be the top of the range. Generally, you should be drawing horizontal lines at peaks and troughs throughout the day to reference support and resistance.

After my short trade, the market fell right back to the top of the gap, and I covered the short at the target. After I covered at support, the next two candles spun tails off the support zone established by the candle where I had covered the earlier short. The second candle ran the stops under the first candle I used to cover my short position and tagged the mean. I took a long position from a limit order right at the mean. The two previous candle tails showed strong buying. Also, there was a positive NYSE tick divergence on the buy candle (discussed below). I set a four tick stop.

This new long trade was a low-risk, low-probability trade. I did not have to lose much money to find out if the trade worked. On the other hand, there was no certainty that the trade would work other than the two tails preceding the buy candle and the positive tick divergence. Generally, the more confirmation you have that the market is turning, the higher your risk to stop and vice versa.

As mentioned, however, I use a few other tools that do not appear on the chart above. I will discuss them below. The example I just mentioned is that there were fewer downticks when the price tagged a lower low at the mean on the third buy candle. Fewer downticks indicated that the selling was abating and helped me gain confidence to initiate the long trade from the mean, also an important support zone.

The market subsequently rallied into a rising wedge reversal formation, causing me to sell near the bear breakdown low in the first decline of the morning. Incidentally, on the profile charts, this is where the single prints began. While too complicated to explain in this writing, I know that emotional selling began there. Poorly positioned longs are likely to sell to break even. Also, the wedge, micro double top told me to sell, and the sell was near the top level of what I already expected to be a range day.

To digress just a moment, I now mark the opening range once I had the pivot high and low for the morning. I discuss the opening breach and retreat trade often on these pages. I want to immediately mark the high and low of the range to know when a breach is at hand. I also mark double the range above and below the opening range as targets should the range breach in either direction.

The market then rolls over again from the wedge, double top reversal. It heads right back down to our magnets, the open, mean, and yesterday’s high. I then drew the downtrend line connecting the two-morning peaks. At this point, it looks like we could have a lower high trend reversal at hand, but we are only on our second push down in a potential trading range. Usually, we look for three pushes.

At the second push low, the market stalls at our key reference points once again. Traders then battle it out for a half-hour around the open and mean. If you did not believe that these levels were important, you only have to look at the first chart above. The market forms a micro converging triangle around the open, which puts us in breakout mode. This means that I trade in the direction of the triangle break at its apex.

On the upside breakout, I take another long position for a scalp up to the downtrend line connecting the two-morning peaks and sell at the line. I sell, anticipating a third and final push down.

There is nothing to do after this sell for a bit. The market appears to be forming a larger converging triangle pattern, and we are close to the apex. Triangles are just a form of trading ranges and consolidation patterns. You trade in the direction of the break from the apex, just as we did from the micro triangle.

I took another long trade on the upside break of the larger triangle, with a trailing stop two ticks under the mean.

If the market was going to break back into a bull trend, this is where it would happen. However, after the first strong bull candle, it was clear that limit order traders were dominating the market, which is common on range days.

Unlike trend day tactics which are opposite, limit traders short big bull bars and buy big bear bars. So their presence was clear to me. Regardless, I stuck with my long position looking for three pushes up, just like we had three pushes down, with a trailing stop four ticks under the mean. I could have scalped the wide channel, but for Friday, I preferred the swing approach. It was a personal choice rather than a technical decision.

Given it was a range day, and the bull channel was wide and unimpressive, I sold the peak of the third push and waited. Also, the Friday lunch hour (or two) in New York and Chicago started, so it is usually a good time to quit trading and maybe check in one more time for an afternoon drive or trade into the close.

As the afternoon wore on, the market tried to wedge into the mean and reverse higher, but the wedge failed (a WWSHD) moment, and the market fell below the mean (a bad sign) and right back to the magnets. On a range day, it is typical for the market to return to the open in the afternoon if it does not otherwise break into a bull or bear trend earlier in the day. Also, after a triangle break, the apex may need to be tested for support.

The downdraft accelerated into a climax low on an upper time frame trendline and near the open and support zone. This was a scary moment, as the market threatened to go back into the balance range, and that would not have been a pretty sight.

I took a final long trade from the micro double bottom pivot and pleasantly rode a “V” reversal up into the sell zone at the top of the range. It was late in the day, and I did not have enough time on the clock to be wrong, so I took my profit. The market rolled over one more time, and then there was a brave long trade into the close. That is not my cup of tea, late on a Friday afternoon. Strange things can happen in the last 30-minutes of the session, cleaning your pockets out.

Now, let’s clear the chart of all the notes and see if anything else about Friday’s session becomes clear:

Well, what do you know? Lost in the 5-minute weeds, it is difficult to discern that our trading range was a larger, symmetrical ABC corrective pattern, more often than not a bull flag to go higher. This illustrates the importance of running different screens and views of the market, including an uncluttered, empty chart. You likely will see patterns and price action you might otherwise miss. I never want to miss the big picture.

Additional Tools

Let me introduce you to some additional tools that helped me today and are incredibly useful on range days and even other days. First, take a look at the Volume Weighted Average Price, or VWAP below, with standard deviation bands framing the VWAP (yellow line at the center):

Now, does that seem like it might be a useful tool on a range day? I think so. The VWAP marks the dynamic price center, and the standard deviation bands mark overbought and oversold. The VWAP and standard deviation bands build throughout the day with the data. They may not be useful initially as data builds, though sometimes they can be. However, once the day has some data underneath it, VWAP can be useful for turns from overbought and oversold as the range builds. Some traders fade the outer bands and cover at the VWAP or middle.

Here is another useful tool on range days. Think about it. A range day implies that neither the bulls nor bears are in control, otherwise known as “balance.” The auction has reached equilibrium. We can use Market and Volume Profiles to trade equilibrium:

You often see me refer to the Market and Volume Profiles on these pages. I discuss value area highs and lows and the POC or Point of Control. These tools are presented in the chart above, along with the statistical mid-point of the day’s range.

On the right side of the chart are the profiles. Pointing left in dark blue is the time at price, and to the right in lighter blue and gray is the volume at price. The Points of Control are the yellow/orange horizontal lines marking where the prices spent the most time and had the most volume.

Note that the profiles taper at each end and are wider in the middle. This is characteristic of range days. Highlighted in gray across the price bars is the value area. The value area is where 70% of the volume occurred today, framed by the value area high and low.

Note that the market is overbought when it is above the shaded value area. It is oversold when it dips below the shaded area. I had the privilege of studying Market and Volume Profiles under Jim Dalton, considered one of the foremost experts and a pioneer in the field. It pays to read his books or take his video courses. I also find that Peter Reznicek is terrific at teaching and practically applying the Dalton concepts if you want to learn more.

For now, just note the usefulness of these tools on range days. At the high of the day, only 182 contracts traded on the S&P 500 futures. Buyers dried up above that level. Only 195 contracts traded at the low. Sellers dried up below that level.

As price approaches the top and bottom of the ranges on diminishing volume, that is a clue that the market is getting close to a peak or trough. Contrast the high and low numbers mentioned above with the 42,000 contracts traded at and near the Point of Control and around the middle of the range.

The profiles are actually useful on any day other than a strong trend day. In my day-trading work, I track a profile for each 30-minute candle. A rising value area and POC favor longs, and falling ones favor shorts. When it meanders, you will find yourself in a range day. The granular profiles appear in the chart below. Note the meandering value area and POC during the day. Note how the POC rises toward the close, a positive sign.

The granular profile chart helps me track how the market, POC, and value area develop throughout the day. At some of the lows on the 30-minute bars today, barely 42 contracts traded, a clue that there were no sellers left below that price, and vice versa for buyers at the highs. When I sometimes call out the potential high or low of the day, I am observing this. 

The stacked bars changing from red to green to the right of the profiles analyzes bid and ask trading, a sign of emotional buying and selling. When the bars turn bright red, the candle is peaking. Bright green, and the candle is bottoming, at least for that 30-minute candle.

Let me share one final tool with you, and then you and I can enjoy the rest of our weekend. The tool I want to share is the NYSE Tick, measuring up and downticks (trades in the market). Divergences between price and the tick reading are the keys. I will focus on a couple of points in Friday’s session for illustration purposes::

The highlighted rectangles focus on tick divergences. On the first low of the day and candle, where I took a long position on the mean, you will see that downticks did not confirm the low. That was a clue that the decline was bottoming. On the midday high, the opposite was true. Upticks were not confirming the higher prices. That was a clue that the advance was peaking.

The blue circles highlight another useful tick warning. When you see a new tick high in the session, as highlighted in the first blue circle, those are computer buying programs. A new price high typically follows. Ticks are an advance clue of a potential rally (or decline). At the very least, a new tick high, compared to recent ticks, is telling me that the low was likely in place, and my long trade had a higher probability of success. 

The flip side of that coin is presented in the second blue circle. A new tick low is a warning that sell programs have kicked in, with a decline to come and likely a new price low. It also helps confirm my long exit and/or short trades.

So how do we put all this together? Let me summarize the mid-day sell, somewhat in the same order as the charts above. Key in on the first chart in the sequence, with my notes.

We start the day with the narrative, presumption, and evidence that this will be a range day. Most days are range days of some variety. That is the market “default,” as it were.

I mark the key lines, including yesterday’s RTH high, our line in the sand. I also mark the opening price and stay cognizant of the mean (blue line), the 21-Period EMA. I continually draw horizontal support and resistance lines, as well as trend and channel lines. I plot targets and look for reversal patterns such as wedges, three pushes, double tops, and double bottoms. I expect these to occur when the price gets too far from the mean on either side of it.

Unique to today, the Pre-Market Outlook pointed to further evidence of a potential range day as the NASDAQ 100 was expected to pull the S&P 500 in one direction. In contrast, the Dow Industrials and Russell 2000 were expected to pull it in the other.

There continues to be a battle for leadership between growth and value stocks and small and large-cap stocks. The reopening trade battles the stay-at-home trade. The reflation trade battles the deflation trade. Today, and based on the pre-market July employment report, we anticipate rotation from tech and growth back to cyclicals. This will pull the S&P 500 in both directions, which is likely to support a range day.

With that backdrop and confirmation of the trading range from the price action all morning, let’s take a closer look at the mid-day peak. It will help to have the first chart above handy as I walk through the narrative.

I am long as we approached the peak on a third push higher – often the reversal leg. We were almost to the morning high, a good candidate for the top of the range. We were at the top channel line of the small but wide bull channel. The rising channel was sloppy and choppy, with many limit order traders dominating the market, another sign of range day behavior and a weak bull trend.

The price was tagging the standard deviation VWAP overbought line, and ticks started diminishing as the price moved higher. Price is above the value area high and overbought on per the Market and Volume profiles. Volume is tapering off on the 30-min profile in the third push higher – with only 140 contracts trading at the high. The adjacent 30-minute bid/ask bar lights up bright red, indicating emotional selling and a possible peak, even with the limit order traders in control.

The price even starts a micro, expanding triangle at the top channel line, often a topping sign and the break of which would be a pivot lower. Think of it as a reverse, converging triangle. We are potentially completing a “B” wave in a larger, corrective bull flag pattern. We are passing the mid-point of the intraday hourly cycle. Not shown above, we have a Navigator Algo sell signal and a negative momentum divergence at this peak on the 5-minute chart. I won’t bore you with those charts, as you have enough to digest for this writing.

There is more, and nothing is infallible, but what does the weight of the evidence suggest I do here on a range day? Sell, plain and simple. A short trade might even be appropriate if it was not right before lunch at the Chicago and New York exchanges.

Maybe this is too much information, but that is how I day trade. Those are my tools and my process. 

Moreover, I study overall day trading patterns like flashcards. As you might suspect, patterns repeat because human nature does not change. There are roughly 100 of them. That seems like a lot, but there are a finite number of day trading patterns that repeat. 

You learned your multiplication tables, right? Range days, uptrend days, downtrend days, gap days, etc., have all happened before and will repeat themselves over time. It does not take long to realize what kind of day is unfolding and how to trade it when you know these patterns. 

It is like studying old exams in college because you know the questions will be the same or similar. I had law school final exams that were identical to the past exams. Do you think practicing those exams was an edge? I graduated 9th out of about 160 students in my graduating class, yet few students ever pulled the exams from the library and studied them. Practice makes perfect, as the saying goes.

I use nearly the same process outlined above for higher time-frame swing trading. We will leave that process for another day. Know this – the process is virtually identical in any time frame.

As we began this discussion, the daily, weekly, and monthly charts are a cakewalk if you can successfully trade a five-minute chart. By the way, what is a cakewalk?

Enjoy your weekend and this extensive briefing. I will publish the View from the Top Down Sunday for the macro view. Friday’s breakout from a two-week trading range was unimpressive. Maybe it is just the rotational math, but my guard is up.

A.F. Thornton

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