All posts by AF Thornton

Navigator™ Signals for Day Traders

Pre-Market Outlook – 5/24/2021

AF Thornton 0 Comment

Not a lot has changed since Friday. Friday’s high at 4185 (also the weekly high) is the upside breakout reference for the S&P 500, and 4150 is still important downside support, as are all ’50 point references. The overnight low at 4140 will be the line in the sand today for a negative tone change.

I have already pointed out the put/call ratio flashing enough fear for a short-term bottom. While not at an extreme, the CNN Fear/Greed index supports the put/call ratio findings from an even broader perspective. With the Bitcoin froth worked off and fear rising, a lot of the giddy sentiment is out of the way.

Overnight inventory is mostly long, and while traders were able to take out Friday’s low and test the top of the single prints at 4140, they brought the market right back to the top half of Friday’s range, which is where the market will open. But since we are opening inside of Friday’s range, it is usually best to let the market prove itself and take a position later rather than earlier.

Looking under the hood, the sectors began correcting in early April, falling one by one beginning with the Russell 2000, then tech, etc. So the market has been in an ongoing correction for six weeks. The math is such that the S&P 500 does not reflect the magnitude of some of the underlying damage. All of this appears to be part of the 80-day cycle, which appears to have bottomed and means the market is ready to launch a new run.

The problem may be that with the larger cycles still peaking from above, this next run may be labored and may also peak early. That is what we need to be prepared to assess in the coming week. Already, some of the up days have below-average volume. So it is still a tough call at this point.

As always, stay tuned.

A.F. Thornton

Founder's Trading Journal

Pre-Market Outlook – 5/21/2021

AF Thornton 0 Comment

The process of learning to invest and trade can be daunting at first. For many of us, it starts out as a search for the holy grail. Book to book, indicator to indicator, guru to guru – you are always just one step away from trading Nirvana. It is not unlike a search for the pot of gold at the end of the rainbow. And yes, mischievous little Leprechauns are everywhere.

For most of us starting out, the answers had better come quickly because our capital is rapidly disappearing. And if you are anything like me, it is not likely the first round of capital on the journey. There is no experience that compares to being forced into margin liquidation. Tuition – as we affectionately reference it. I have been there more than once on my journey – and we will leave it at that.

One complication of the learning process, however, is that your head can be stuffed full of minutia. The next thing you know, you overlook the obvious – the signal buried in the noise.

In the trading world, everything starts with price action. The rest – no matter what it might be or the claims of promoters – is context. The price is doing x, but momentum is waning. Momentum is context. The price is potentially peaking on the nominal 18-month cycle. The cycle is context. Obviously, context can be ranked in its level of importance but that is a discussion for another day.

Periodically, I will strip everything off my charts and just look at price and price alone. Price is the signal – the rest is noise. First I look at the line chart, then a bar chart, and then a candlestick chart. Sometimes I turn the chart upside down just to trick all my biases. Then I add in some volume. For these purposes, I keep it simple.

Over the past year, with the most aggressive Fed action I have experienced in my career, dips (when they occurred) lasted barely a nanosecond. We have seen a lot of “V” bottoms. V bottoms are the exception. The important pivot lows normally involve a two-step process. The market puts in a low, then retests it about a week later. The safest entry is on the retest.

There is no retest on a “V” bottom. Instead, the price just touches and goes – hence the “V.” You end up waiting for the retest with your hat in hand. Any hesitation and the market has already left you in the dust.

If you ignore all the noise, we just experienced the kind of bottom as they used to be. Likely, this will be more to the norm as we carry on from the giddiness of liquidity, Fed-driven markets. So it would be wise to add this one to your notebook.

So let’s examine this bottom in simple terms:

As you will see from the chart above, we bounced where we should on the trendline. There were other supports there as well, but I don’t want to clutter the graph. That is part of this exercise – keeping it simple.

Note the volume spikes below the first low. Volume typically surges like this when traders are churning indecisively at the low. If you look back to some of the other pivot lows this past year, you will see the same phenomenon.

Then we move on to the Tuesday retest, coming right on cue about a week later. Volume spiked again, but this time it spiked less than at the first low. A spike with slightly less volume tells us that the selling intensity was abating. The fact that sellers could not drive the market into the first low was another tell. The index left a long tail (the close was close to the open) on the day, as traders realized that the bears had lost control. From there, it becomes a matter of follow-through. That is where we find ourselves now.

There was another tell confirming the lows – namely fear. In the circumstances, it is a good time to measure trader anxiety. Fear accompanies reliable market troughs.

The first shorthand for measuring that fear is the CBOE put/call ratio. It tends to spike just like the volume. Too many shorts pile on at the lows, just like too many longs pile on at the highs. But it is at the lows, when the ratio spikes, that we can more accurately predict a bottom. I replaced the put/call ratio for volume in the chart below so that you can visualize the point.

The other fear indicator that is useful at important lows is the VIX (volatility index). Volatility peaks at lows, and diminishes at highs. Like the put/call ratio, the VIX tends to be more accurate at picking troughs than peaks. I replaced the put/call ratio with the VIX index in the chart below so you can visualize the point.

All in all, these simple clues gave us a low-risk entry point for longs. If an uptrend is defined as a series of higher highs and higher lows, and a downtrend a series of lower highs and lower lows, then a reversal is when the process ends, as here. We had a short-term series of lower highs and lower lows until Tuesday, when the progression to lower lows ceased. The process ceased at the trendline, one time frame higher, where the series of higher highs and higher lows has maintained the intermediate uptrend.

In Globex last night, we are breaking the short-term downtrend line (see charts above). We need that confirmed in the regular session today. If we can then clear the high bars from last week to the left on the chart, it should be clear sailing to the old highs. From there? Who knows, but the easy trade is over.

With this market, new highs are possible. It would seem that tech is moving again. Somewhat lost in translation is the fact that tech and growth stocks generally have been correcting for five weeks.

Ultimately, it comes down to math in a capitalization-weighted index. The stocks going up must contribute enough to the index to carry it higher. That is why the stalwart FANGMAN+T stocks are so important (Facebook, Amazon, Apple, Netflix, Google, Microsoft, Nvidia, and Tesla). They may be a handful of stocks out of the 500 member index, but they contribute 25% of the weight.

What I will be watching now is the progression of each daily candle. How far is the price invading the previous day’s candle? That tells you something right there. Is the volume supporting price progression?

And what about the nominal 18-month cycle? It requires an entirely separate discussion. But if we bottomed all of the cycles all the way up to 9-years in March 2020, and this is the first 18-month cycle in that series, it is likely to peak late in the curve. Also, the probability is that the correction will not be a crash – but likely something around 15% to 20% at most. The trough is due the first week of July, give or take a few weeks on either side. That is why we can’t trade it.

The peak is not predictable, as with all cycle peaks. And while the trough is more predictable, there is too much variation. Sure, one could say that we are 75% through the cycle and I will just go to the sidelines until the correction finally presents. While it is not my preference, that is a perfectly legitimate approach. For me, the context of the cycle helps me adjust the risk I am willing to take at this point. But it does not keep me out of the market,

Today's Day Trading Plan

Yesterday, the narrative changed, shifting back into a more bullish tone by breaking downtrends on the NASDAQ 100 and S&P 500 futures. As overnight trade is higher this morning, I will latch on to the more bullish stance.

Options expire at the close, which can hold prices more where they are, especially in the afternoon. That is why I typically don’t day trade on Fridays.

The triple candle peaks out to the left (4179.50) mark the next breakout. The level also marks the 10-day point of control. Conquering that level is the next link in the chain, but it might not be achievable on a Friday with the volume concentration there.

On the downside, and there could be some profit-taking at the open on extended overnight inventory, there should be support at the beginning of the single prints at yesterday’s regular session distribution. They begin at 4142.00. I would also keep them in mind as the area where there is potential for change in tone.

Carry forward that the overnight low came right down to the settlement (4153.50) and not further down in range, closer to those prints.

Always remember the market’s affinity for climbing in 50-point increments. If the index level is on the 50 or 100 point increment, it is likely to stall a bit as it works through or finds support or resistance at that level. If nothing else is relevant on the day, traders like to test the overnight high or low and yesterday’s high or low to find the path of least resistance. So go with the flow, and look for confirmation. Strong internals in either direction often telegraph success or failure at the crucial level.s

If I were trading today, I would give the market 30-minutes and see how it breaks from that candle. In an uptrend, I like to buy dips into the 21-EMA on the 15-minute charts for both the S&P 500 and NASDAQ 100. Let’s see if the NASDAQ 100 can maintain its leadership position from yesterday.

Have a great day and a wonderful weekend.

A.F. Thornton

Founder's Trading Journal

Pre-Market Outlook – 5/20/2021

AF Thornton 0 Comment

This morning, my dominant thought is that there are many issues at hand and so little time to discuss them. Suffice it to say; we are dealing with a lot of distortions related to how governments around the world reacted to the Pandemic – shades of “the cure was worse than the illness.” Deflationary pressures related to innovation and productivity are ever-present, perhaps even accelerating. Deflation surely will follow the bursting of the corporate and sovereign debt bubble.

Yet government action, shutdowns, trade deals, and the like have created bottlenecks and shortages, leading to price hikes all over the place – hurting low-income consumers who can least afford it. Are the price hikes temporary? Are they transitory as the Fed would have us believe?

There is only one way to reliably answer these questions, and it is the only thing that matters in trading – follow the money. What are prices and prices alone telling us? Everything else we discuss in these pages is nothing more than opinion and speculation that attempts to give price behavior some context. Frankly, my opinion is wrong often enough that even I would not trade on it. That is why we have objective algorithms and place so much emphasis on Market Generated Information. We call it M.G.I. I even like to refer to it as Magic – because when you consider M.G.I. over the talking heads, it seems to work like Magic.

Asia was on board with the bulls last night, but Europe fed the sellers until about 6 am EST. By the way, nine times out of ten, whatever the S&P 500 futures have been doing overnight, the market will switch direction at that hour. It did so this morning as well.

We will open with the futures mixed again, but with the Nasdaq 100 strengthing over the S&P 500. This is a carry forward of M.G.I. The S&P 500 futures overnight activity is balanced around the settlement, so the odds don’t favor early trading like they did yesterday.

We have nuances above and below that are of note. On the upside, we have the bottom of a small gap where the overnight high stopped. That is a long breakout point for the full gap fill. On the downside, the overnight low is a weak low as it stopped right at halfback, which is a visual and mechanical reference. But do not lose sight of the 4104 Weekly Expected Move low. Market makers have to hold that level until tomorrow’s close.

At a minimum, expect a balancing day and responsive trading. Most days are balancing days with responsive trading. That is the default day trading day. What I want to see is a follow-through from the successful retest low. Don’t lose sight of the fact that the NASDAQ has been correcting for five weeks – the longest stretch since 2012. It may be ready to take a trip back up, at the very least to establish the top of a new trading range.

As always, keep an eye on the 10-year treasury rate – it still holds the keys to the castle.

A.F. Thornton

Navigator™ Signals for Day Traders Navigator™ Signals for Swing Traders

View from the Top

AF Thornton 0 Comment

Wednesday Evening - 5/18/2021

Interestingly, I had been expecting the larger, 18-month cycle to begin topping soon, and likely it will. In the process, perhaps I have diminished the importance of the more minor, common cycle corrections that occur along the way. And what those corrections typically do is put in a low and then retest it about a week later. If all is well, the market progresses upward. Sometimes, the broad indexes can even mask the damage occurring under the surface in these minor corrections. Nevertheless, these corrections are minor because the sectors are not correcting in unison – lacking the correlation and capitulation associated with intermediate corrections.

Ask anyone who owns Bitcoin about this dip. At one point this morning, Bitcoin was down nearly 50% from its peak. In any other security, we would call that a bear market. Yet, the cryptocurrency managed to turn around today and finish significantly off its lows.

Holders of the QQQ or NASDAQ 100 index saw a nearly 7% decline at the trough last Thursday. The S&P 500 saw a 5% decline. Those are still rotten apples when you have to eat them.

Yet, in the context of an expected”crash” that was supposed to hit us (as divined by some leading gurus), the recent declines don’t seem so bad. We may even be entering a series of rolling sector corrections reflecting the multi-tiered market forces contrasting inflation and deflation.

Frequently, the countervailing forces result in a trading range market in the major indices that lasts for a while. Often, the market will dip below the trading range to finish the next cycle trough in the sequence – such as the nominal 18-month trough we are expecting to finish in about five weeks.

In the roadmap for day traders this morning, I pointed out the various vital levels and support at hand, especially the Weekly Expected Move lows. The WEM lines have been on the chart since last Friday. I constantly harp on the importance of these levels because they matter nearly every single week. 

How did the NASDAQ 100 and S&P 500 end today? Market Makers pushed the indexes right back to the Weekly Expected Move lows – almost to the penny. As long as the indexes stay between the Weekly Expected Low and High, the Market Makers who sold weekly premium all week get to keep their money. Outside those levels, they can lose and lose in a big way. 

Knowing this, when the market dipped below these levels and hit other important support this morning, a low-risk entry point for longs presented. It was a fabulous day to take that trade. On the S&P 500 alone, the trade was worth $3000 plus per futures contract. I like to trade ten contracts and sell the first five at a lower target to achieve break-even, taking risk out of the trade. Then I ride the other five contracts with a trailing stop and let the market decide when I should get out.

Looking at the big picture then, the bears had control yesterday and today at the open. They should have been able to drive each index down and below last Thursday’s lows. They couldn’t get the job done.

For the Navigator Swing Strategy, the market gapped open and underneath our stops. Traders had every incentive to drive the market down to and below everyone else’s stops sitting under Thursday’s lows. If nothing else, the order flow alone is profitable for them.

In fact, the lows came in higher on the S&P 500, NASDAQ 100, and Russell 2000. And the bottom line is, the bears had their chance and blew it. At that point, I am buying S&P 500 futures in the day trading account, so why take the Navigator stops? Granted, this is the exception to the rule. So I waited for the close and stayed the course.

Now buyers are back in control with a very successful retest under their belts. We shall see what tomorrow brings and I take nothing for granted as the market has had a few surprises in store lately. But today was a good day for the bulls, having been on their heels at the open.

A.F. Thornton

Founder's Trading Journal

Pre-Market Outlook – Update

AF Thornton 0 Comment

Two critical concepts got you an awesome long trade this morning. Note them, if they are not already part of your toolbox: (i) the CBOE Put/Call Ratio, and (ii) the Weekly Expected Move low.

CBOE Put/Call Ratio

Before the turn higher this morning, and with a sense of panic in the air, the Put/Call ratio not only spiked – it gapped open to .89. That was the highest level since last October, in the range of last Thursday, and an indication that short-term fear was so overdone that a long trade was low risk. In other words, it was your first clue that the market would likely survive here.

Then, you have billions of dollars at stake if the market makers cannot keep the S&P 500 above 4105 by Friday’s weekly options expiration. Even after the first dip last week, deep as it was, the market makers brought the market all the way back to close at the WEM low by the close Friday. You simply cannot underestimate the power of these forces.

You have these two concepts, plus the traditional support of two trendlines and the 50-day line on the S&P 500. Moreover, sellers were unable to push the market back into last Thursday’s low, much less through it.

For day traders doing multiple contracts, I would take profits on half here at 4093, and keep the runners with a rising stop. For the Navigator swing strategy, we are holding our intermediate positions.

A.F. Thornton 

Navigator™ Signals for Swing Traders

Morning Outlook

AF Thornton 0 Comment

Pre-Market - Wednesday, May 19, 2021

The markets have generated important information the past few days, and it is mostly unsupportive to the bullish case – at least as to what we should be bullish about. My conclusion is that there is little, if any, tolerance for material price exploration below the overnight low in the S&P 500 index this morning without concluding that financial asset markets are failing here. 

This could suggest that the18-month correction is underway, perhaps a bit stealthy at first. At the very least, the behavior suggests that the transition to high inflation expectations is distorting the picture as money moves to more tangible asset classes, leading to a multi-tiered market that may end up driving the financial indexes sideways for awhile. I want to step back if that is the case, as the transition could be very tricky in the initial stages until new trends are solidly in place. 

Both the S&P 500 and NASDAQ 100 indices are hovering in the vicinity of their Weekly Expected Move lows, and the trendline both indices found as support last Thursday. The trendline marks the lows that date back to the beginning of this up-leg in early March. With April retail sales and Fed minutes in play this morning, the market may find its footing – but that is a tough call at this point.

We will open with a true gap lower putting gap rules into play today. As with any gap greater than 10 points or so, gap rules #2 and #4 will rule the day.

NASDAQ prices will open just below the trendline. That is important because for sellers to get and maintain control by holding a trendline break, they will fight the overnight buyers covering their short positions at gains as overnight net overnight inventory is 100% short. Remember that job one in trading is to get inside the collective head of everyone else.

So the open today will be about the opposing forces of the overnight inventory correction versus opening below trend in the NASDAQ 100. Pay very close attention to early activity even if you are not actively trading it.

For the early fade, the usual techniques are valid. Either buy the first one-minute high or buy any cross back up through the open should the opening drive be lower. Target overnight halfback but also keep gap rule #2 in mind as you do so.

The gap-and-go trade playing for the potential trending day is always the most difficult to pull off because there is oftentimes not a good reference for a stop loss – especially with the Weekly Expected Move lows ready to catch the falling prices. Assume that any early fade that is weak can be a short on the cross back down through the opening print.

AF Thornton

Founder's Trading Journal

Morning Outlook – 5/18/2021

AF Thornton 0 Comment

I had a few technical problems to work through now that I am at my final destination. Sorry for the delay. Not much has changed in the outlook. Buyers have been in control for three sessions and overnight, but seem to be evenly matched with sellers at the moment.

4179 is the key level on the S&P 500. If buyers can push through that level, they can maintain control as they have the past few days.

Overnight, the NASDAQ 100 was leading the S&P 500, and the overnight action carried the index above the algo buy trigger. But as we often say, the action must be confirmed in the regular session. So far, traders are exploring the strength of the overnight low, we will see if they can bring it back up to test the top levels.

The key to this market continues to be the behavior of the 10-year treasury rate. To me, the chart looks like rates will move higher. Then the question becomes how much of a jump can the tech stocks can successfully handle. If we lose the tech sector, it will be challenging for the rally to hold together.

Stay tuned.

A.F. Thornton

Founder's Trading Journal

Morning Outlook for Day Traders

AF Thornton 0 Comment

I am unexpectedly traveling this morning, so this will be a post from my cell phone. Incidentally, I have passed through both New York and Paris so far this morning and the airports are packed, a stark contrast to a month ago when you could have the airports and planes to yourself. Europe is notable because they have been closed and just re-opened some countries on May 14th.

We had a V reversal at the end of last week with two bull bars stacked on top of each other in the S&P 500. The market turned right where it should and the trend is intact in all four major indices. Notably, tech is still weak and maybe other than Google (GOOGL), there is not much that would interest me in FAANGMAN+T.

In rank order, 10-year rates and the financial sector are the keys to the short-term kingdom. I will put out a macro picture later in the week when I get my feet back on the ground.

Commodities, whether they be metals, materials, agricultural, or energy are all on the move and threaten to displace the stock index quartet in relative strength. Gold is on its downtrend line and could break through (though gold has a tendency to be a heartbreak trade). The DBC and DBA commodity ETFs have now broken long-term downtrend lines – a major trend reversal.

Today, we want to see the S&P 500 stay in the top 1/3 of Friday’s bar at worst and continue higher at best. We are testing around the half-roundie pre-market. The 5-day EMA would be the line in the sand by the close. Otherwise, opening inside of Friday’s range at this writing gives us no early clues to the open.

A small pullback is in the cards after two bullish back to back days, but don’t count on it.

A.F. Thornton

Founder's Trading Journal

Pre-Market Outlook – 5/14/2021

AF Thornton 0 Comment

Just One More Thin Mint...

One of the funniest movies I ever saw was “Monty Python’s Meaning of Life.” Admittedly, I was punch drunk after staying up four days taking law school finals.

There is a scene where an obese man is stuffing his face, and at the end of gorging his meal, he asks for “one more thin mint.” After swallowing it, the man blows up from so much food. It reminded me of how I feel about the market this morning. It may want “one more thin mint” before it finally blows its top.

Yesterday went precisely according to plan. It was an inside, short-covering day. The short-covering was something to behold, as it usually is. But it was almost too good. And I am reminded that an inside day is typically a continuation – not a topping – pattern.

Yesterday, every index either bounced from its 50-day line or trendline – just as the indexes should in a bull market. Not a single one of our quartet, the S&P 500, NASDAQ 100, Dow, or Russell 2000, broke the uptrend. Nor has the overnight crowd been able to drive the indexes further south in the last 24-hours. Each one of these indexes has moved across its channel, allowing for a final, higher wave – perhaps that 5th and final Elliott Wave – to take us up to complete the intermediate top.

And even the declines into Wednesday’s lows were symmetrical, three-wave or what we call “two-step” patterns. Three-wave patterns are corrective of the prior trend, not impulsive as would reflect a trend reversal. There are what we call “head and shoulders” patterns to reverse higher in both the NASDAQ 100 and S&P 500 futures this morning. I even see “V” reversals on the 195-minute charts.

Another item of significance is our old friend 4115 on the S&P 500 Futures. The level provided support for a month before we finally broke through it mid-week. It was our “balance area low,” as we referenced it the past few weeks. This prior support should now be resistance.

The 21-day line sits just above 4115 at 4130. The futures are invading that space this morning. A close above 4130 on the S&P 500 today would be significant.

A close above 4177 would save the proverbial butts of the Weekly Options Market Makers. The Weekly Expected Move low sits right at that level for expiration today. Granted, part of the breakdown Wednesday was caused by these players neutralizing their deltas by selling futures, but there might be a few of them left to help drive the market to that level.

The final underpinnings in the bullish possibility this morning are the spike in the VIX (volatility index), Put/Call Ratio, and volume on Wednesday’s lows. For the most part, these spikes are as high as we experienced around the election last year when we were bottoming the second wave of this China Virus rally after a few months of sideways action. Short-term spikes in volume and fear are associated with a low that will hold, rather than a market about to break lower. 

That does not mean that the low will hold down the road. But it makes a rally more likely than a decline, at least in the short term.

If all of the above leads to a pivot higher here, we can anticipate another algo buy signal today, or more likely on Monday. And we would have to attribute the adverse action this week to a news-related distortion caused by the oil pipeline shutdown and ransom scheme.

You already know the bear case if you have been following these pages. We hit the proverbial brick wall at the current level, then reverse lower, confirming the intermediate, nominal 18-month peak.

Let me also mention another distinct possibility here. We always tend to think of rallies and declines, leaving out the distinct possibility of the market getting stuck in a trading range. If so, we would have the bottom in place now, and we would stall at the old highs and reverse lower again. We could play that ping pong game for a few months, perhaps with a final break as the nominal 18-month trough arrives about six weeks from now. Keep that possibility in your back pocket.

All of this underscores the importance of keeping an open mind to all possibilities, no matter our opinions. In one sense, I would feel better about this latest scenario, having lost some money executing on a buy signal precisely a week ago today. The signal rolled over on the news events and stopped us out Monday morning. Of course, that is why we use stops, as nothing is perfect in life or trading.

Today’s Plan

This morning we have overnight activity that has moved above the highs a bit on inventory that is 100% net long.

As we have a slight true gap higher at this point, the early session may be a tug of war between the inventory that needs to correct and the shock and awe that we are trading above the May 12th high. The morning activity will tell us a lot about the market.

Overnight activity has broken the downtrend of the last four sessions in the S&P Futures. Note that this trendline is very steep. Even with today’s gap, prices are still below the 21-day line.

Also, note the potential “V” reversal in play, and we will see if it takes hold. The measured move is the S&P 500 all-time high. Key resistance levels above are 4115 (prior support), 4130 (21-day line), and 4177 (the Weekly Expected Move low).

Sorry for the delay this morning. I am in the midst of an emergency. Check back later as I will be adding some charts to this discussion.

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