All posts by AF Thornton

I have been posting the technical notes that I keep throughout the day, week, and month. Of course, this practically includes a note on every wiggle of the index. What I will be doing from now on is posting that on a separate website page every day and trying to stay with the most important notes that affected the day and the best trades.

Friday’s Epilogue

Friday started with a True Gap down (open lower than the previous day’s low) driven by the Amazon earnings miss the night before. Gap Rules were in play. Note that I will be expanding the Gap Rules definition to include the four most common chart patterns that appear when Gaps are presented.

The market started unduly stretched below the 5-minute 21-EMA (mean) because it was a huge gap. So, depending on overnight inventory, traders typically attempt to fill the gap by running a test back up to the mean. The test usually fails, and the market can reverse several times before it takes a direction, which can often be sideways or no direction at all on a huge Gap. The playbook is the same whether the gap is up or down.

Friday’s case had two features of note, both mentioned in the Pre-Market Outlook. First, traders were 100% short overnight which left them vulnerable to a short-covering/inventory liquidation rally at the open. Second, while a serious earnings disappointment in a key name, Amazon’s earnings miss did not reflect a systemic problem.

As far as key levels, the weekly open, 5-day stop line, daily Navigator Algo trigger, 5, 15, and hourly 21 lines (means) all congregated as resistance to any rally around 4400, which is a roundie (important psychological level).

As mentioned in the Pre-Market Outlook, the mid-point of the overnight range was 4388 and would be my barometer of strength for the day.

Indeed, the conglomeration of aforementioned magnets became the resistance, and 4388 marked the bottom of the range for the most part.

So the market started with a parabolic micro-bull channel short-covering rally. It nearly filled the gap in the first 30-minutes, stalling at the loose juncture of our magnets and resistance. The tag of the 5-minute EMA on a climax bar was the reversal top.

In this particular Gap scenario, parabolic strength in the first run usually negates the risk of further declines in a downtrend day. Instead, the market typically wedges into a retest of the morning low and gap bottom l by mid-morning (Eastern Time), then makes another rally attempt to punch through the mean.

On large gap days, the retest usually fails, and you end up in a trading range the rest of the day, perhaps with another run at the low and high. As a bonus Friday, the put/call ratio shot up to .80, which is in the extreme fear end of the recent range, setting up the shorts for another short-covering rally before the day’s end. This can be uniquely advantageous on Fridays as the shorts would be reticent to hold over the weekend.

All in all, the day ended up as a trading range with a slight downward slope making it technically a bear channel and a dance around our 5-day stop line. To keep it interesting, the market literally closed on the line. I managed to get five nice trades on the day, four longs and one short, for a total of 35 points per contract. Add this day to your notebooks, as it is one of the four typical patterns we see on gap days.

Today’s Plan

The market is slated to open with a slight true gap (open higher than Friday’s high). If so, that leaves an island reversal from Friday, and Gap Rules will apply today, but in the opposite direction as Friday. If we don’t open outside Friday’s range, gap rules are negated.

Key support should be Friday’s magnets around the 5-day line. A good proxy for this is Friday’s RTH high at 4405, but no lower than the overnight low, and Friday’s CME settlement price at 4394.75. The target is the overnight high at 4422.50, which is a poor high, as carried forward from last week.

So take the usual tack. As overnight inventory is 100% long, look for an initial fade and some profit-taking.

Value has been relatively unchanged for six daily sessions now.  Although we are gapping up a solid clip from the Friday settlement, remember that a true gap is measured by how far it is above Friday’s regular session high at 4405.  By that metric, the gap is very tiny thus far.  We are also right in the middle of the aforementioned value areas. 

For these reasons, the opening trade may not be as clear as you would think.  When deciding if shock and awe is truly a factor on any open, always consider where the current price is in relation to Friday’s high/low, settlement, and the overall overnight range.

Good luck today.

A.F. Thornton

Priced for Perfection

The Navigator Algorithm system signals appear in the chart above calculated as of tonight with the Globex activity thus far. Note that the “Strength” label continues to flash the yellow warning light. I like to see this at 20 or above. As such, the algorithm has painted a preliminary sell arrow on the chart. This is usually the first warning in the sequence. The bottom line is that I am barely bullish up to the measured move targets right under 4550. We remain in our previous positions, 60% S&P 500, 10% Financials, and 10% Energy. You can be in the cash sectors or options on the SPY, XLF, and XLE.

Having said all of that, and at these levels, the markets are priced for perfection. Some yellow flags in my work are counseling us to be cautious. We need to keep moving our stops up with the 5-day EMA and stay extremely vigilant. Conservative investors should already have their money under the pillow – not in this market.

As communicated Friday morning, the Founders group was stopped out of our S&P 500 futures position Thursday night for a very nice profit. Futures are highly leveraged and must be treated a bit more cautiously than options or cash positions. While we came close to getting stopped out of our remaining positions in the SPY, XLF, and XLE this past Friday on the Amazon earnings miss, the positions held their ground. In fact, the entire session was a dance around our stop line, the 5-day EMA. You can see the details in tomorrow morning’s Pre-Market Outlook.

For the sake of time and brevity, I will flip through the screens from the broadest to the narrowest perspective, referencing the notated charts if you wish to print them. I will be publishing these updated, notated charts nightly on the Website. You will receive a link to view them tomorrow.

Monthly Chart Perspective

1. The Navigator Algo is in extreme overbought territory on the monthly chart with price closing 18% above the mean, 10% above the Algo Trigger, and above the 3-ATR outer extreme K-Band.
2. The spreads are historically high, unsustainable and require nothing short of “perfection” in the economy, interest rates and corporate earnings. The situation is comparable to the 2017 blowoff right before the Fed’s last “Taper Tantrum.” As you might recall, the Fed tried to taper the first Quantitative Easing from the 2008 financial crisis and the market went into a 20% correction. This began a 30-month consolidation, also related to the last administration’s tariff policies.
3. July was the 6th consecutive monthly gain for the S&P cash index. This has not happened in 10 years. Therefore, a 7th bull bar would be even more unusual. Also, we move into seasonal weakness in August and September. Consequently, August should close below its open to form a bear bar and begin some kind of consolidation for at least a couple of months.
4. Note that similar advice would have failed in August 2017, as the market went into a parabolic blow-off stage ignoring any August/Se[tember weakness. Also note that my similar thoughts about how July 2021 would unfold underestimated the market.
5. Also note that it is not unusual for the market to skip a deep cut in the first 18-month cycle dip following a severe bear market and a four-year cycle low such as we experienced at the bottom of the bear in March 2020.
6. Bulls will argue that we have risen out of a 30-month consolidation, with a friendly Fed and a lot of firepower. They will also argue that rotation from one group to the other will keep the market afloat. Yet, that is exactly what can create a lengthy trading range.
7. All of the important measured move targets from the March 2020 low congregate between 4500 and 4600, so I would be hard-pressed to have confidence above those levels. We could easily be stopped out before we get there, but the probabilities are that 4550 or so is our next destination.
8. The year-long rally is either a tight bull channel or a parabolic wedge. Because the rally is so strong, bulls will buy the pullback when it manifests, whether it is a 10% or 20% correction.
9. If the projections are achieved. the market likely will overshoot the top of the monthly micro bull channel, in addition to the 3-ATR K-Bands, increasing the odds of attracting sellers.

Weekly Chart Perspective

1. This past week was a bear doji bar, indicating nearly equal power between bulls and bears as the week closed near its open. The doji could be interpreted as a weak sell signal bar, and the weekly chart is extremely overbought.
2. Yet, the S&P 500 has another “V” reversal pattern on the daily chart and there are similar head and shoulders reversal patterns in the Dow, Russell 2000, and other indexes, not to mention some of their key member stocks.
3. This indicates a high probability of one more push higher into the measured move targets between 4500 and 4600. Beyond that is the 2009 bull top channel line which would require a blow-off of historic magnitude to achieve anytime soon. Achieving the top channel line of the 2009 bull market is not probable without a pullback and some consolidation.
4. The bulls were not able to create a follow-through bar after breaking into new highs from last week’s outside bull bar. We have had a small pullback trend (micro-channel) for 60 weeks, which is unusual, unsustainable, parabolic, and climactic. This mearly confirms what we see on the monthly chart.
5. The bulls have the potential bottoming of the 18-month cycle on their side, which could result in a tight trend upward but at a very mild slope. Of course, the cycle may yet to have bottomed. If it has, the cycle low also may help contain a 5% or more consolidation range depending on where the market finally peaks.
6. A tight bull channel/small pullback trend typically ends with a big pullback. The biggest pullback so far was the 10% selloff in September. A bigger pullback means 15% to 20%.
7. Traders have bought every dip/reversal for a year. They know the odds are that buying one of these dips will fail soon. However, they also know that it still makes sense to buy them until it stops working.
8. When there is a successful trend reversal, there is not a consensus that it will succeed until it is already half over. Until there is a strong, clear reversal, traders will continue to buy every 1 – 2 bar (week) selloff.
9. A small pullback bull trend is a sign of very eager bulls. They are buying small pullbacks because they doubt there will be a big pullback.
10. Even once there is a big pullback (15% – 20%), investors will still buy it, betting that there will be a test of the old high. Consequently, the 1st reversal down will still be minor on the scale of things, even if it is 20%.
11. As set forth above, the next targets for the bulls are the trend channel line and the measured move up around 4550.

Daily Chart Perspective

1. The market held both the 5-day EMA stop and Algo Trigger Line Friday, though just barely. So no sell signal yet, except on an overnight stop that was triggered in the Founder’s Group S&P 500 futures position.
2. Friday could be considered to have triggered a micro double top sell signal, but it is a low-probability sell signal given Thursday’s bull bar.
3. There is also an expanding top with the July 7 and July 14 highs and July 8th and 19th lows, and the Emini is near the top of the bull channel, using the May 7 and July 14 highs. Expanding triangles (broadening formations) are trading ranges but can be topping patterns. While you can legitimately draw the pattern on the chart, I believe that the 18-month cycle low on July 19th negates it. Any new patterns should start after that low.
4. What is more apparent is the “V” reversal bottom in the S&P 500, which is also visible as a head and shoulders reversal pattern on the Russell 2000 (IWM) and Dow Jones Industrials (DIA).
5. Until there is a strong reversal down, traders will continue to buy the dips and bet on new highs.
6. The latest bear bars have tails below and small bodies, which means the bears are not selling into the close of bars. They lack conviction and are unwilling to sell low.
7. Also, there are no consecutive strong bear bars on the daily chart.
8. Until the bulls aggressively take profits and the bears generate sustained, aggressive selling, the bulls remain in control.
9. We will maintain our Navigator swing positions in the S&P 500, Financials (XLF), and Energy (XLE) until we violate our stops, achieve our measured move targets, get a solid Navigator Sell Signal, or see a parabolic climax bar.

Sentiment

The one good thing the bulls have on their side is fear. Fear is associated with troughs, not peaks. Friday’s high put/call ratio screamed fear loudly, kept our strategy in the game, and led to an anticipated short-covering rally into the close. More interestingly, the broader and more diversified CNN Fear & Greed Index currently shows extreme fear.

With such extreme fear, and all the weekend headlines calling for a crash, the probabilities favor the market going higher.

Risks and Conclusions

The current breadth and momentum divergences in the major indices could be a warning of trouble ahead. They could also be reflecting the stealth correction in value and cyclical stocks that should be bottoming with the 18-month cycle and perhaps benefitting from some profit-taking and rotation from technology and growth stocks. We need to see how this progresses from the proposed July 19th cycle low before drawing any definitive conclusions. It is on my radar.

The persistent rally in U.S. Treasury securities also remains a concern. This means interest rates have been falling while inflation has remained persistently high, and we are told the economy is booming. As the old saying goes, “this does not compute.”

In the past, the stock market has followed interest rates down with about a three-month lag. We have to watch this relationship between stocks and treasuries carefully. The treasury rally could be an early warning that institutions are battening down the hatches, preparing for a stock market storm.

Finally (and likely related to the rally in treasuries), the Delta variant of the China Virus is a winner in the game of survival of the fittest. In other words, it is a clever and virulent mutation.

In short (and I am not a doctor), the spikes are more efficient at attaching themselves and invading you. This makes it more contagious. For example, if a person with the first strain infected three people, a Delta strain person would infect six. While there is no evidence that the virus is more deadly, it has infected both already vaccinated and younger people – including children.

So far, symptoms have been relatively mild for the young and some vaccinated people. Treatment modalities have improved considerably. Despite this, fear sells everything from website clicks to cable news, elections, and “government protection.” Reliable information and good advice are scarce.

To determine the size of the problem, we need to keep an eye on the Transport Sector (IYT) and the Travel and Leisure Sector (AWAY) for clues as to how this is affecting consumer choices. These two sectors look like they are at the bottom of a waterfall. They are communicating that the Delta Variant is a problem. Then again, sell the rumor buy the news?

The bottom line remains that we maintain our positions with tight stops in a risky and overbought market, intending to achieve the aforementioned targets while proceeding cautiously.

As always, stay tuned.

A.F. Thornton

I have only made one round trip this morning for about 10-points per contract. The buys are green, the green horizontal bars, and the sells are the red horizontal bars at the trade locations. I am in a second buy off the falling wedge reversal into the double bottom at 4386 at this writing.

We had a surprisingly strong bull microchannel off the open, and I bought the close of the second bull bar. I sold on the climax bar that broke out of the channel. I planned to buy the first retracement, but the bear bar was too big. Where I sold, you could also have shorted. However, I was reticent to short against such a strong bull opening that filled the entire gap down this morning.

From there, we formed a sloppy, choppy falling wedge, typically a reversal pattern to go higher. There were many scalp trades in that region, but I don’t tend to be a scalper.

The area (also identified as one of our key levels today at overnight halfback) provides much indecision because all the 21-period and Algo lines congregate there from the various upper time frames. Traders have been going back and forth, trying to find the path of least resistance.

More importantly, up around 4394 is where the 5-Day Line (our Navigator Stop Line) and the Nav Trigger on the daily chart sit. We want to close above that level today to stay short-term bullish.

By the way, black bars are down bars; grey bars are up bars. Yellow bars are outside bars, and green bars are inside bars.

So I am currently long against the double bottom and wedge reversal. Today likely will end up a trading range so that the morning high might be the target.

One final, important note. The Put/Call ratio is back above .75. The shorts are not getting what they want so far today. Given that the last hour today is the end of the month and week, we usually get a big move anyway. I will be looking for a potential short-squeeze.

A.F. Thornton

Amazon Missed and The Markets Hissed

Yesterday saw a bull trend from the open reverse mid-day at the top of the trading channel. My chart notes appear above. Amazon is getting the blame for missing their numbers and guiding lower for the third quarter. As it is one of the highest market-cap stocks in the indices, it has a big impact on the numbers this morning.

But that doesn’t explain everything. The market reversed midday, not after the bell. After the bell, it just accelerated. Instead, the market struggles to get from the lower back into the upper half of its longer-term channel. Can it? Will it? That is the question for August.

That brings us to our five-day line stop for the S&P 500 futures Navigator Swing position. The Founder’s Group stopped out last night at 4393.75 for a nice profit. Since there is no overnight stop for calls, I am advising you to hold those positions today. Month-end and the first few days of the month typically have a positive bias. As long as the market holds above the daily 21-line, and given that our stops were triggered in the overnight market, it makes sense to give the market a day to digest everything. When dealing with futures and the accompanying leverage, there are no such luxuries. The market hit an all-time high yesterday, so getting too negative too quickly makes no sense.

Today’s Plan

The market will open with a true gap down, so Gap Rules apply this morning. Overnight inventory is 100% net short, and it won’t take much to spook these traders. While the current 29 handles lower is noteworthy against the backdrop of new highs, there is plenty of context around that price that tells us that it could certainly be far worse.

We are currently 15 points from the ONL at 4370.75, and that ONL has four TPO’s across, telling us that sellers had difficulty getting prices lower past that level. Furthermore, we are opening out of balance with yesterday’s RTH range, but certainly still well within where value has developed over the last four sessions.

Note how the ONH topped out very close to settlement, which was also the multi-session high yesterday. Continue to carry this level forward as it is still in play. Overnight halfback is also making an appearance today as it’s always noteworthy on expanded overnight ranges that are gapping strongly.

When considering early trade, note how far from the ONL we have already come. This reduces some of the shock and awe as overnight inventory is somewhat already corrected. This makes sense as the gap is due to a single stock that impacted the NASDAQ 100, thereby also impacting the S&P 500. This is different from a more systemic catalyst which would have driven futures much lower.

Watch the overnight halfback closely at 4388 as an early barometer of strength. An opening drive that can overtake the line and hold it could easily have overnight shorts on the run. Today is the last trading day of the month and weekly options expiration. So month-end money manager shifts could distort normal price action.

A.F. Thornton

No complaints, the market looks fine going into lunch. Internals have remained strong, with 3 to 1 and 2 to 1 advancers over decliners in the NYSE and NASDAQ, respectively. Tick distribution has been mostly positive all morning. The S&P 500 has, indeed, broken to new all-time highs though I would not say it has set the world on fire, and I would like to see the break become more definitive in the afternoon drive.

We started with a bull microchannel on our five-minute day-trading chart, followed by a common two-step correction back to the 21-period line. That now gives us a lower trendline for the remainder of the day. We have a short-term target of 4440, as mentioned in the Pre-Market Outlook. We may not get there today, as the market is already up quite a bit.

Our XLF and XLE swing trades lead the S&P 500 in relative performance as money continues to rotate back to these areas after three months of correction/consolidation. So far, so good, but my guard is always up.

Having passed the Fed meeting and quarterly GDP report, along with stellar earnings from many key stocks, the short-term bias remains bullish other than contending with the seasonal weakness ahead for August and September.

For now, It would take quite a reversal for July to finish as a red candle, so the trend continues as our friend until she dumps us.

A.F. Thornton

Overnight inventory is balanced, and we are currently trading inside yesterday’s range. The daily chart implications are an overall triangle balance area starting with the 7/27 (Tuesday) base between 4416.75 (now the all-time-high) and the low at 4364.75. Then we have yesterday’s (Wednesday) inside Fed range day balanced between 4407.75 and 4377.50. Now we have the overnight range inside both Tuesday and Wednesday’s range and bounded by 4403 and 4480.50.

So what we have is a classic three-day triangle into the GDP and employment reports this morning, which included the widely followed price deflator inflation gauge. That may be why yesterday’s Fed day finished smack in the middle of the range and ended up as a yawner of sorts. With the market still inside this range at this writing, we can take Monday’s approximate 50 point range triangle base and roughly project it from the middle of the triangle.

On a break to the upside, we get to a minimum target of 4440, and perhaps eventually to our 4460 Weekly Expected Move high by tomorrow. On the downside, we visit a target of 4340, right below the Weekly Expected Move low at 4346 and close to the 21-day line and mean trading this morning at 4345.

Triangles generally are continuation patterns, so the upside is more likely than the downside. However, an upside break would also take us to the upper three ATR K-Band on the daily chart, an overbought extreme.

On the other side, visiting the 21-day line would not be out of the ordinary either and would complete a two-step corrective pattern off the last rally on the daily chart. But there are other potentially negative chart implications of visiting the 21-day line today or tomorrow to leave for another (hopefully unnecessary) discussion.

I will mention the potential expanding triangle topping pattern that began to form from a 7/2 daily base candle. I don’t think the pattern is legitimate, with an 18-month cycle trough in the middle of it, but I will mention it as a potential carry forward in your narrative. A negative break in the current three-day triangle would force my stops on the Navigator swing trades, a disappointment, to be sure.

Both the GDP and Initial Jobless Claims numbers missed their estimates this morning. That may be good news on the inflation front but less than good news on the economic front. The GDP number missed significantly, coming in at 6.5% versus an estimate of 8.4%. The jobless claims came in at 400,000 versus consensus estimates of 384,000. Continuing claims also are higher than expected at 3.269 million versus consensus estimates of 3.183 million. The GDP deflator came in higher than expected as well at 6% versus estimates of 5.4%. So inflation remains high, but perhaps slowing growth will tame it as predicted by the recent fall in 10-year treasury yields.

At this writing, none of this has managed to move us out of the overnight range, though we are trading in the upper third of the range and near the top. That still gives us no clues about how to trade the open, so it is better to get some price action under our belts before taking positions.

Keep in mind that the weekly open, defining a red or green candle for the week, is 4400.50. That will make the open an important level today. Also, tomorrow is the last trading day of July. The end of the month always results in some window dressing by money managers and sometimes strange market behavior. But there is a positive bias associated with the last few days of the current month and the first few days of a new month.

The bottom line is that Monday’s low at 4364.75 is THE line in the sand. Taking out the ONH at 4403.25 or the ONL at 4380.25 starts the ball rolling in the commensurate direction, then yesterday’s high or low, followed by Monday’s high or low and so on.

I will be using yesterday’s RTH high at 4707.75 as my threshold to look for long trades. As an abundance of caution, I will watch the middle of the range and yesterday’s settlement at 4391.50 as a threshold for weakness to begin presenting for shorts. Whatever the ensuing direction, monitor for continuation.

Good luck today.

A.F. Thornton