Late Day Update and Sell Signal – Charts Added

Put/Call Ratio Over S&P 500 Index - Arrows Mark Ratio in Similar Position
VIX Volatility (Fear) Index Over S&P 500 Index - Lowest Level Since Pandemic Lows

The Founder’s Group just closed its position in the NASDAQ 100 at 13870.50. My concern is the extreme complacency developed in the past 24 hours – most notably reflected in the put/call ratio. It is at the lowest end of its year-long Pandemic range. 

Typically, the indicator is not as good at picking tops as picking troughs. Still, the current level is exceptionally low today, indicating a disturbing sense of security in all that we see. Every time the ratio hit these levels in the past year, the market topped – at least short term. If a double top does develop, it will seem obvious (in 20/20 hindsight).

Also, we got out as the afternoon drive rolled over at a lower peak than this morning. Sell in the morning / buy in the afternoon is fine. Sell in the morning, sell in the afternoon is not so fine.

Tomorrow, we get the inflation numbers. While there is likely to be no surprise, it may nevertheless be a catalyst for what happens next. I am acting out of a superabundance of caution in making this decision this afternoon. The risk here warrants a more vigilant,  protective strategy.  Also worth noting is the VIX volatility (fear) index hit its lowest level in a year yesterday at 15.15. While the crowd is not giddy, they may well be asleep at the wheel. With the SKEW at record levels as well, tail risk is as high as its been recently.

This decision does not negate any of my previous comments. Likely, the market will break out here. But we had a nice profit in our NASDAQ 100 position, and I can always re-enter.

Sometimes, the return of our capital can be just as significant as the return on our money. Tomorrow may be one of those moments. Again, the odds still favor the break higher. Nevertheless, I am always willing to look dumb as long as I lock in a profit.

Another possibility is that the inflation reports drive a rally that the professionals use to liquidate their positions. Keep that in mind as well – kind of the bull trap I have been mentioning. 

Tomorrow promises to be exciting – assuming we are on the right side of it.

A.F. Thornton

Mid-Day Update – 6/9/2021

Yawn. Sorry to say it. The words are getting well-worn. More balancing action today. What will it take to break the curse? I am not sure, but it is, indeed, getting old.

Responsive trade from the Value Area Highs and Lows is all that is working today in the indexes. Once again, the value area is essentially unchanged from yesterday. Once again, the overnight action inside yesterday’s range accurately predicted more balancing. There is, however, plenty of action under the surface if you look for it.

Growth and tech still lead for now. I am surprised the NASDAQ 100 has not performed better, given that the 10-year rate tucked under the critical 1.5% level today.

We still need a catalyst. Let’s see what the afternoon drive brings. It starts in an hour or so.

Stay tuned.

A.F. Thornton

Pre-Market Outlook – 6/9/2021

Persistence Beats Resistance?

Sometimes I think even Barnum and Baily would be jealous of the circus that goes on inside my head. We have a full moon on Thursday. Does it affect the market? Most of the time – yes. Hospital emergency rooms fill up too.

Then we roll from June into the September futures contracts on the same day. The September S&P 500 futures contract currently trades about 10 points below May. Go figure. Coincidence? Maybe. Regardless, these extraneous factors can be tricky.

The S&P 500 has been beating on the overhead resistance around 4233 or so. The all-time (intraday) high is 4238.25. There is an old saying – persistence beats resistance. There is a 75% chance the S&P 500 will break out, but the other 25% can kill you. As I said last week, it is like Grandma slapping my hand in the cookie jar every time the S&P 500 tries to soar. Yesterday was no exception, but Grandpa cannot seem to pound the market down either.

The overnight traders (remember it is daytime where they are) often love to break the market out in Globex and take away the candy from the Americans in the regular session. Thus far, they have not managed to do so, so the S&P 500 is inside yesterday’s range. I do like the sell in the morning and buy in the afternoon action the past few days. That is more bullish than bearish. Also, the value area (where 70% of the volume occurred) is unchanged for three days in a row. That is undoubtedly not bearish.

So, where does that leave our plan for the day? Ditto yesterday. We are trading inside of yesterday’s range which still reflects a balancing market. If we do break out, it is a go/no go situation. Watch internals for support or not. 

We either need the majority in on the game or the FAANGMAN+T group to carry the water for everyone else. Today, like yesterday, is a bit like a look above under balance rules. Monitor for acceptance and continuation or not, as the case may be. Yesterday’s mid-day lows (4424 on the S&P 500 futures and 13829.25 on the NASDAQ 100) are my line in the sand today. My bias is positive above those levels.

Good luck today!

A.F. Thornton

Mid-Day Update – 6/8/2021

They are not making it easy today, and it reminds me a bit of yesterday. Yesterday, the market was weak all morning but left us with a happy finish. Selling in the morning and buying into the close is bullish. Interestingly, the S&P 500 and NASDAQ 100 are swapping leadership back and forth this morning. It is a bit like the wife directing me to place the furniture.

We had a two-step liquidation break off the open. The pop-down helped clear out the weak hands (it almost got mine). The market went right back into that dastardly balance range. Not again???

While the price flirted below 4022 (on the S&P 500), “value” (70% of the volume location) is unchanged from yesterday. The situation, then, remains positive and still calls for a hat tip favoring the bulls, though ever so slightly. 

Don’t get me wrong; the failed breakout thus far is a disappointment. But today is far from over. I will use the 11:30 am EST lows as my line in the sand for the rest of the day.

I do not see anything newsworthy to mention. The IWM (Russell 2000) has hit its WEM high, so I am done there for the week. Both the NASDAQ 100 and S&P 500 have room to run, but it is a hard-fought battle. That is not a surprise at these levels.

Could we possibly be forming a double top on the S&P 500 with the NASDAQ 100 coming in a bit lower? Sure, but I would not call it yet. I am bothered by the shallow levels we see on the put/call ratio. The surging put/call ratio and negative sentiment gave me the confidence to go in and stay put a few weeks ago. I wouldn’t say I like it when the crowd is complacent. It always makes me want to go the other way.

Perhaps offsetting the complacency, 10-year rates continue to behave, down slightly to the 1.5% level today. As well, sometimes they launch the trading algorithms mid-day, and the gamma squeeze will help the market wind steadily higher. Let’s see.

If we maintain the lows, my bias remains long, and I will make final decisions in the last 30-minutes of trading. As usual, I will post any changes.

I think traders are selling all morning in Chicago and New York, and then the hedge funds are jumping in over lunch. Isn’t this fun? I think I might have suggested you to take the summer off. You know what they say, “sell in May and go away.”

It is 7:30 pm here in Kefalonia, Greece as I write this, with a beautiful sunset over the Ionian Sea. While I am not here on the best of occasions, it would be nice to open a bottle of wine on the beach. But the U.S. stock market is open until 11:00 pm!

As always, stay tuned.

A.F. Thornton

Pre-Market Outlook – 6/8/2021

Breakout, Double-Top, or More Chop?

The market gods were smiling with forgiveness yesterday. When I confessed my sins on these pages, providence lifted my burdens. So even though I missed the initial moves off the 21-day lines in the indexes last week, the powers above brought the market halfway down Friday’s bar to give me another chance. It was as if a kind hand dropped from the clouds, opening up with the next opportunity.

For the Founder’s Group and the Navigator Swing Strategy, I put us into the NASDAQ 100 at 13,733. I saw a bit more conviction and relative strength there than the S&P 500. The index followed through with a double bottom and positive momentum divergence on the intraday chart. The NASDAQ 100 is moving higher in Globex at this writing. In fact, we are more than 100 points or about $2,000 per contract ahead of our entry, and breaking the neckline of a bottoming head and shoulders pattern that is now reversing higher and should take us up to test the all-time highs, if not higher. We will now use the 5-day stop line as we recently did on our S&P 500 position.

Yet, there is another lesson in these past few sessions that I would like to share. It happens often enough that you might want to place this one in your notebook. It can happen in any time frame. And while I mentioned I am not a pattern trader, I still don’t ignore them. Patterns can help us see the markets in different ways, and even set price projections when the patterns take. A great website for learning patterns and their possibilities is Bulkowski’s PatternTrader.com.

The lesson starts with last Thursday’s labeling of the NASDAQ 100. I had identified a potential head and shoulders topping pattern and labeled it as you will see in the first chart below. Of course, it was a qualified opinion. I often opine in such a way. But let’s face it, I am of no use if I am constantly saying “it might be this” or “it might be that.” And in further confession to the heavenly powers that govern these markets, the pattern did have a negative influence on my decisions last week no matter what I said or how much I was fooling myself.

When we are stopped out on the 5-day line, an Algo sell signal is painting, Tesla and Apple are breaking down, and we are in a large down bar, a topping pattern would merely seem like icing on the cake. I take my stop, head to the beach, and take Friday off, booking the profits and ever confident in my forecast. Thank heavens I didn’t stick around and short the market!

NASDAQ 100 Futures - From the Perspective it is Topping

But it is never quite so easy, is it? I have achieved my trading success by combing unrelenting curiosity with constantly questioning the current consensus. Frequently, a topping head and shoulders pattern (or a bottoming head and shoulders pattern) can morph into the same design but smaller and in the opposite direction. This morphing has often happened to me – and it should be in your notebook. I now always consider the possibility.

NASDAQ 100 Futures - From the Perspective it is Bottoming

So there you have it, the reversal’s reversal. Perhaps we will coin that phrase. And with the overnight action breaking out decisively, the NASDAQ 100 seems well on its way to challenging its old high. The pattern projects a move to 14,600, but even if we make it up to the old high at 14,064, the Weekly Expected Move high is at 14,038. That is a rough combo to take out before Friday. Perhaps we could do so next week. Also, remember that even as we break the neckline of the bottoming head and shoulders reversal pattern today, the index could fall back and retest the neckline before it decisively moves higher.

I suppose another item bears mentioning. Last week, the cyclically sensitive sectors such as energy, metals, financials, and industrials seemed to be rocking the universe. Yet this latest move has been all about the interest-sensitive growth stocks, responding to a somewhat unexpected rally in the bond market accompanied by falling 10-year rates. Who would have thought – only a few weeks ago?

Please make no mistake; interest rates will rule sector allocation as we advance and rates will most likely be moving higher. We should let growth do its thing here, but after the cyclical stocks and sectors rest a bit, they are still very much on my radar. Recall my comments from last week, set alerts for these cyclical sectors and stocks around their 21 and 50-day lines, depending on each instruments’ unique behavior. Perhaps the back and forth between cyclical and growth stocks will be with us for some time as the markets move forward.

I might highlight one more element of successful trading if you will kindly indulge me. No matter what happens in trading, you must be willing to jump right back on the horse to succeed. And no question committed students can and will succeed if they are engaged. I am not saying it is easy to do so, but I will constantly harp on this point.

I missed Friday’s move, but I waited patiently for the next opportunity. It came sooner rather than later, but that should not matter. Successful traders (and investors) are market sociopaths. They have no conscience but nearly an automated response to conditions as they present, right or wrong positive or negative.

Today's Day-Trading Plan

Hard to believe, but the S&P 500 futures tested 4215 last night once again and survived. I also noticed that some European indexes, including the German Dax Index, are already trading at new post-pandemic highs, aided by a strong Euro. Actually, at an exchange rate of 1.22 Euros to the Dollar, I am keeping my money in Euros while I am over here. It stings!

At this writing, both the NASDAQ 100 and S&P 500 will open above yesterday’s range and near the candle top.  A true gap higher is possible, and gap rules would apply if the true gap presents. Inventory is balanced, so there is no typical incentive to fade a gap – making a gap-and-go scenario more likely. If we make it to the old highs (only a hair above us on the S&P 500), the market will present us with a go/no go situation. Monitor carefully for continuation and be on alert for the bull trap. I don’t know how to tell you to avoid it – but if I had two contracts, I would sell one at the old high and get my stop to break even on the other to keep it as a runner for a continuation of the breakout.

On both the S&P 500 and the NASDAQ 100, don’t lose sight of the WEM highs at 4280 and 14,038, respectively. Even with a true gap higher on the open, the gap won’t be large enough to engender shock and awe, providing less potential for early trade given that there is no overnight inventory imbalance. The better trades might develop later rather than earlier in today’s session.

Upside references and targets are visual and mechanical for all. The all-time highs are the apparent targets on strength, monitoring for continuation after that. On weakness, watch the back-to-back settlements around 4226 on the S&P 500 to see if sellers get more active below them. I would not even consider the short side of anything unless we were below those levels. Continue to carry forward the gap below us we discussed yesterday.

A.F. Thornton, 

With Sincere Gratitude to Providence

Pre-Market Outlook Update

S&P 500 Futures - 5-Minute Candles

As expected, the market is balancing back into Friday’s range so far this morning. Maybe I have not lost my touch after all. The S&P 500 has twice tested the top of the old range at 4215. It needs to bounce on this second touch for me to stay positive. Tick distribution is favorable so far, and the cumulative tick has been building positive as well. So it is not as if the market is going down; it just isn’t going up.

There is nothing particularly negative at the moment. The (now apparent) news-driven gains from Friday have stalled. Perhaps we are still missing a catalyst after all. I do like the positive momentum divergence on the morning low on the 5-minute RTH chart.

The Founder’s Group has taken a position in the NASDAQ 100 at 13,733. The reversal down pattern now has a turnaround up pattern on the right side, if it takes. We are running a 15 point stop – using a little discretion to give the trade some room.

Growth stocks are strong this morning, as is the IWM (Russell 2000). The S&P 500 Advance/Decline line is about even. It is hard to get the breakout the bulls want without solid internals. Mixed internals rule the day thus far.

I would put odds at 60% that we still break to new highs in the next few days and about 40% that we don’t. Of course, that is more of an educated guess than anything else.

We shall see if the market will take a run at the highs mid-day or perhaps on this afternoon’s post-lunch drive. The put/call ratio is low, indicating complacency here, which is unhelpful.

It was important to determine early on that we would be balancing this morning. That way, you don’t become overly negative about your existing long positions.

As outlined in the morning’s commentary, I think the tone changes if we drop below 4209 and into Friday’s gap area. So carry that forward in your narrative.

Watch for the bull trap as well. The leprechauns may run us up and above the old highs this afternoon, only to take our gold while they run the stops and bring it back into range. Today is a quiet day so far, and that is when the leprechauns come out to play.

Stay tuned.

A.F. Thornton

Buy Signal

The Founder’s Group is taking a long position in the NASDAQ 100 futures at 13733 with a 15 point stop. This is a somewhat risky trade at the top of the range, but also note the upside reversal Head and Shoulders pattern formed from Friday. As always, do your own homework carefully. QQQ at the money July 16 calls or a debit spread will work as well.

Pre-Market Outlook 6/7/2021

Be sure to review the Top-Down analysis published earlier this morning. Not a lot has changed in the bigger picture from last week, except that we are now back at the top of the trading range, with bulls hoping for a breakout.

Except for a few ticks, the overnight range is within Friday’s range. The inability to break out of Friday’s range tells us that the market is in balance for now.

The overnight balance often carries over into the regular session. We always want to think in terms of probabilities – and that is the most probable course.

The all-time high right above us does complicate the probabilities. Market makers could try to run the buy-stops above the range to capture the order flow.

Pay attention to internals and FANGMAN+T. Strength with either or both could support a breakout.

Friday’s market profile resulted in a double distribution. The overnight halfback is the exact point where the upper one ends, and the lower one begins. Treat each profile as a different day. Acceptance in the upper one is more bullish than acceptance in the lower one. To put it another way, watch where value develops today.

The all-time high could easily be in play today, and traders should also note that the overnight high and Friday’s high are almost identical. That sets up a potential go/no-go level on the upside.

Given the overnight tone, assume further balance if the market cannot move out of the overnight and Friday range. Potential is there for higher over the overnight high, targeting the all-time high.

There is an unfilled gap below us from Thurs/Fri of last week. This gap should remain unfilled for the time being if the bullish sentiment from late last week is to hold. Filling it has the potential to change the tone. Continue to carry it forward as long as it is unfilled.

View from the Top Down

View from the Top in Assos, Cephalonia (also known as Kefolonia), Greece

The market was just plain wrong on Friday...

Can you believe I would even say that? If I thought it, you should run for the hills. Since I am being facetious, it is acceptable to read on. My personal opinion means nothing because the market is never wrong. Perhaps the jury is still a bit out on my trading range scenario until we see if the market decides to break to new highs today – but I missed Thursday and Friday’s turnaround from the 21-day line. Friday’s action was not what I had expected – I expected a breakdown, not up. To be good at trading and investing, our misses can be the best teacher.

So let’s get the hard part done first – the admission of being wwwrrrrong. There, I said it. I was wrong. The words still sting my lips – whenever wrong-headed decisions force me to utter them.  My job is to make sure we are appropriately allocated – in line with the net aggregate opinion of all market participants regarding all subjects on all time frames. Of course, the charts help me as gigantic psychological profiles of the current state of the market or any part of it. But I have to read them correctly. The market is always right because it reflects the net aggregate opinion I am required to discern accurately.

I did three things wrong on Thursday. First, I was lazy in the sense that when our 5-day EMA stop was hit overnight (which was perfectly fine), I figured there would be some time before we needed to get back in the market again – perhaps a few days or a week. Also, I wouldn’t say I like to day-trade Fridays, so I am less attentive.

Second, Thursday’s candle fell exceptionally far for the current context and painted an Algo sell signal intraday. I did mention the potential, fleeting nature of the signal in my writings here, but I must admit that the temporary sign made me overly negative. I should have waited for the Algo sell signal to paint definitively at the close of Thursday’s candle – instead of anticipating it. The signal negated by the time the candle closed – and I should have taken that as a potential WWSHD alert that a buy might be in order. After all, we were on the 21-day line.

Finally, I should have given more confidence to the 21-day line, exactly where the market bounced. Eight out of ten times, the market will find support on the 21-day line. Sure, I mentioned and expected the bounce. But I did not account for a complete reversal of the magnitude we experienced on Friday. I should have been more respectful of that possibility.

The way to execute this would have been to take a position at Thursday’s close, with something like a stop 5 points below the 21-day line. Our job is to find low-risk entry points, and this certainly fits the bill. Whether the market ultimately breaks to new highs or not this week, that would have been a 50-point trade or $2,500 per futures contract. As I always say, that buys dinner with the wife. Here in Greece, where your money goes a long way, that buys dinner with the wife for an entire year.

The NASDAQ 100 bounced off its WEM low Thursday. I should have recognized that this limited the negative influence of tech on the S&P 500. There were a few other clues the market would survive here as well. Breadth had been acceptable, and junk bonds were breaking to new highs. Investor sentiment was at least neutral, and even the bond market was rallying. While the NASDAQ 100 had taken a steep fall in the latest dip, it appears to be capable of recovering to new highs. I did not think the bond market or the NASDAQ 100 could perform as well as it did.

I also mentioned bias. I need to check myself on that issue as it had the most significant influence on my attitude last week. I do have a risk-averse preference at the moment. Inevitably, we need to check our prejudice at the door most of the time to be successful. As an example, junk bonds breaking higher Thursday and Friday is hardly risk-averse behavior.

Markets reverse when people like me think they are right but end up being wrong. I am always looking for things that prove I am wrong. But there is no perfection in the search. When I am wrong, it likely has to do with misreading something, missing something, or bias. I don’t think I missed much here as I look back on my writings. Instead, I got a bit lazy and too negative. However, if I am going to be wrong, I would rather the result be an opportunity loss such as the current case rather than actual, hard-nosed investment losses. 

As we have been discussing on these pages, we have been in a trading range now since early April, sometimes wider and sometimes narrower. We have looked above and failed, as well as looked below and failed several times. Every time we have a consolidation such as this, I have to decide whether it represents net distribution or net accumulation. The difference between the two can be very subtle if it is discernable at all. As of Thursday, I was leaning toward distribution. Now, the opposite appears to be the case, but we will only know for sure with a solid breakout and follow-through on either side.

I did mention I had been expecting a catalyst. The employment report missed on Friday. I suppose the market liked that in a Goldilocks sort of way. The economy is not so hot that the Fed has to put on the brakes, but not so cold that we need to be concerned. 

But the most significant jump on Friday came out when the Biden administration backed off their drive for higher corporate income taxes in favor of a 15% global, minimum, corporate income tax. Janet Yellen made clear to the G20 this weekend that the tax is a worldwide effort to discourage tax haven shopping. We will see if the potential agreement has a negative or positive effect on the markets today. Incidentally, Yellen also said that the U.S. needs higher interest rates and can tolerate higher inflation. That could also be a drag on a breakout today.

This week, the bulls have the ball, and odds favor a breakout of the range rather than a double top. Nothing else has changed much. The run since early March this year is the third push higher from the March 2020 pandemic lows. That is the typical sequence before an intermediate correction of the type we expect on the nominal 18-month cycle. 

The entire rally has been parabolic, and such climaxes can last a lot longer than we typically expect. Based on historical analysis of parabolic runs, it is even possible that a typical, intermediate correction of 10% to 15% may not present at all. The result would be unusual, but we cannot eliminate the possibility.

This latest run since the March 2021 low this year has a bit of a rising wedge shape to it – which is likely to be aggressively sold as it peaks. A rising wedge is a unique characteristic of an Elliott 5th wave (a third push higher in the sequence interrupted by two countertrend corrections). So far, June is an inside bar as to May – which might indicate that June will close below its monthly open. June is one of the weaker months anyway, historically. The first few days of the month should have performed better than we experienced. So there is a bit of WWSHD at play.

While the 1st intermediate pullback from the Pandemic lows will probably last only a few months, it is essential to note that it could lead to a trading range that could last a year or more. The January 2018 buy climax led to a trading range that lasted two years. The trading range that began in 2014 stayed more than a year, despite a strong bull trend.

So I am coming into this week neutral to slightly bullish. I think a break to new highs is more likely than not. The stars have favorably aligned for it. However, given the rising wedge pattern and the number of traders that could get sucked into the new highs, we need to be on high alert for a relatively sudden reversal that could begin the intermediate correction. I will continue to use the 5-day EMA as a stop line, along with the Algo trigger. The Founders Group is 100% in cash right now after a better than 300% year-to-date return.

I will be looking to re-enter the market (at least for a short-term swing) if the opportunity presents itself. As I have continued to point out these past few weeks, it is still a bit premature to get overly aggressive on the short side. The SKEW (premium in OTM puts versus calls) hit historic highs on Friday. So buying OTM puts is very expensive right now due to demand. The SKEW indicates that the institutions are substantially hedged – but it likely makes more sense to sell premium rather than buy it when the time is right.

As always, I will try to do better next time. I do sincerely hate leaving money on the table.

A.F. Thornton

Pre-Market Outlook – 6/4/2021

The market reacted positively to the April employment report released this morning, showing the unemployment rate dropping to 5.8%. As you know, I don’t typically day trade on Friday.

The Employment report got prices well above yesterday’s high. Still, we have now come back into range. We also have overnight inventory that is relatively balanced with an almost equal distribution of time spent on either side of settlement.

Even if there is a small true gap higher by the time the bell rings, we would still be well within the larger balance area where there is a lot of value range if you look to the last week of the market action. For these reasons, better trades are likely to develop later rather than earlier today.

The second thing to note is that I would only focus on two fundamental levels today – the overnight high at 4210.25 and yesterday’s low at 4165.25. On the NASDAQ 100, find the equivalent levels, keeping in mind that the index already bounced from the WEM low yesterday.

It is likely that anything between these levels is simply going to be responsive trade that doesn’t bring about any meaningful change.

Change is an important word. Trading is all about anticipating change and trying to either get ahead of it or get aboard.

The market is looking for a catalyst in my view, and when that arrives we will see the picture more clearly.

Chop, chop – is the buzzword for today.

A.F. Thornton

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