Update 1 – Pre-Market and Morning Outlook

The divergent, negative behaviors in the NASDAQ 100 (QQQ) and technology generally (XLK) this morning are holding back the S&P 500 (SPY) and Russell 2000 (IWM) from making much progress – but the NASDAQ profits are not leaving the market. Instead, they are rotating into other sectors. 

These are not recommendations to buy, but unofficially I picked up some at the money calls in Southwest Airlines (LUV), Disney (DIS), and Expedia (EXPE). I used a screen to look for names in volatility squeezes. Of course, they also have to have liquid enough options for the bid/ask spreads to be reasonable. These names are all in volatility squeeze bases. 

The retail sector fund (XRT) appears poised to break out of an ascending triangle. The Energy sector fund (XLE) is at a new post-pandemic high.

Both the S&P 500 and the Russell 2000 benefit from continued leadership in Financials, but the technology selling needs to abate to let the S&P 500 continue to break higher. The Russell 2000 (IWM) is also moving to break out of a nice volatility squeeze and basing pattern – but still has a bit of a climb to get there.

Due to its weighting, and as mentioned this morning, the negative behavior of the NASDAQ 100 has the potential to derail the entire rally, but that is not the most likely outcome. Stay tuned.

A.F. Thornton

Pre-Market Outlook

Monday Morning - 5/10/2021

Keeping in mind the negative divergence in the NASDAQ 100, overnight distribution in the S&P 500 is neutral to bullish, with the S&P 500 achieving a new all-time high in the Globex session. Overnight action indicates acceptance of Friday’s strong closing prices thus far.

Nevertheless, we will be opening inside Friday’s range, and in the middle of the overnight range, so there is not much to guide us as to direction at the open. In the circumstances, I would rather trade later than sooner.

If sellers get some control this morning, I will be looking at the top of the single prints at 4912 and, of course, the roundie at 4200 as lines in the sand for positive or negative tone change. The index should find support around those levels, and failure to test those areas also should be carried forward as bullish. 

The next support level would be 4180 at the base of the spike – but reaching down to that level today would result in a slightly negative short-term bias.

Price action above Friday’s high has the potential to continue the rally. Of course, monitor for continuation, keeping the NASDAQ 100 weakness firmly in mind. Technology is 30% of the S&P 500 index and can stunt the rally with such a large divergence.

As mentioned in the View from the Top, there are more stocks breaking out of volatility squeeze bases than I have money to invest. Those might be good alternatives if the rotation from growth to value continues to distort the indexes.

A.F. Thornton

View from the Top

Week of 5/10/2021 - Navigator Swing Strategy 100% Long

We triggered an algorithm buy signal last Friday morning at 4208 on the S&P 500 index. Given the consolidation in most indices, they are nearly all firing long out of volatility squeezes, a positive boost to a normal pivot higher from a correction. In this case, we were coming off the 80-day cycle low last Tuesday. From all appearances, this will be the final rally before the 18-month cycle peak begins to influence the markets.

With the indices firing long out of these volatility squeezes, a number of stocks are following suit and breaking out of bases. Viewing a scan last night, themes include travel and leisure, industrial (infrastructure beneficiaries), and retail. Some examples (without recommending the same) include Southwest Airlines (LUV), Williams-Sonoma (WSM), Caterpillar (CAT), and Deere (DE).

Seemingly, technology and growth stocks are suffering from profit rotation into the new “value” themes, as we can observe the NASDAQ 100 lagging the rest of the market. We have experienced this push/pull rotation several times since the new year commenced. You need to adjust your sails accordingly. I also believe that the NASDAQ 100 and growth stocks generally are losing ground as investors lock in substantial trailing profits and capital gains in anticipation of capital gains tax increases.

The Founders Group focused on the S&P 500 futures as our vehicle of choice for now, as the index is the best compromise of the current themes. With the futures leverage, we can achieve all the return we need. Of course, you can use the S&P 500 Index ETF (SPY) as a straight cash investment or options on the SPY as an alternative to the futures, depending on your risk tolerance.

Nothing has changed much in the big picture. Inflation continues to present as the sovereign debt crisis builds to a crescendo. On a positive note, however, many global economies (including Europe) have not even opened up yet, so there is more recovery growth ahead of us.

We will use a 5-day EMA as our stop line for now. I will issue a sell signal if we see a material close below the EMA. My target for the S&P 500 this week will be 4280, at which point I will reevaluate our position. There is a plausible target of 4500 before this last rally leg finishes, but we will see how it goes.

A.F. Thornton

Buy Signal Update – 5/7/2021

The S&P 500 futures just barely tagged 4216 and then pivoted almost instantly. As predicted, the index is moving sideways today. Do your best to try to enter around the 4215 WEM high level if possible. Otherwise, you can try for a dip early next week. It might make sense to wait toward the close. On uptrend days, the market often curls back over during the last hour. FOMO (fear of missing out) might nip that in the bud today, but patience is usually rewarded.

Tech continues to be noticeably weak, we will see how the rest of the day goes, but rotation favors cyclical and inflation beneficiaries. Notably, the April employment report missed the estimates by a country mile. 200,000 new jobs versus estimates of 1.5 million. Someone should get fired for that miss.

Wages were up 0.8 % – more evidence of inflation. When wages begin to respond, it will be hard to put the genie back in the bottle.

Have a great weekend.

Update on Emails

Sometimes I spend half of my time trying to outsmart software. As well, living in front of nine computer screens can put me in a geeky netherworld.

On mornings, I am in an understandable rush to get the pre-market commentary out – but as close as possible to the open for the overnight analysis to be accurate and timely. In a rush, I often make mistakes, typos, or like this morning – digit errors.

Once the outlook is distributed, I then go back to proof and edit one more time. So if you see a mistake, it is often corrected already, and you can see this by refreshing your browser.

Up to this point, the content snippet in the email has not been correctable – even if the content has been corrected on the website. So I eliminated the snippet today. This email is the new format. Click on the Castle Rock image or the “Click Here for New Post” button to read the update.

Make sure our return email is whitelisted – so nothing gets stuck in your spam folder. Already, my email does not like the new image and spammed me.

A.F. Thornton

New Buy Signal – 5/7/2021

Buy signal corrected – buy is 4208, not 4108.

The Navigator swing strategy has triggered a new buy signal at 4208 on the S&P 500 index futures. It is recommended that the buy signal be executed towards the close today or on a return to 4215, where weekly options expire. 

The Founders Group is 100% invested using the S&P 500 Mini-Futures Contract. Risks are extremely high, so be very, very careful and use stops. You can use other indices or sectors by analogy.

Due to the Weekly Options Expiration at around 4215 on the S&P 500 index, the market-makers will likely drive the price back down toward this level before the close. If so, that would be a good place to get positioned today.

If the market makers cannot drive the price lower, an unlikely outcome, then wait for a dip on the one or two-hour chart to get involved – even if it is next week. The point is, we are now buying dips as we enter this last phase of the rally before a larger correction unfolds.

A.F. Thornton

Pre-Market Outlook – 5/7/2021

Friday Morning, May 7, 2021

There are afternoon drives, and then there are afternoon drives. Yesterday afternoon looked like a Range Rover conquering Mount Everest at 100 m.p.h. All the bears remember is looking up at the tire treads as they got run over. And thus begins the 3rd (and perhaps final) run from the March lows, before the summer doldrums and fall correction sets in on the larger, 18-month cycle. This run is the 3rd push higher and the fifth wave in Elliott parlance, confirming our suspicion that the consolidation from April 19th through yesterday was part of a 4th-wave correction/consolidation.

Confirming that the shorter, 80-day cycle low is firmly planted, the NASDAQ 100 is pivoting (with relative weakness) from its 50-day line. Normally, the S&P 500 tags its 50-day line as well on the nominal 80-day cycle low. Instead, the index pivoted from the 21-day line. The S&P 500 did not tag its 50-day line, another bullish WWSHD (When What Should Happen Doesn’t). Added to a historic (never happened before) 13-day winning streak in the S&P 500 a few weeks ago, the price action can only be interpreted as extremely bullish, at least on the surface.

The S&P 500 also cleared its 5-day line yesterday afternoon – which is a “heads up” to a buy signal on the Navigator Intermediate-term swing strategy. My guess is that we will move through the trigger line today or Monday, solidifying the buy signal. I would have preferred more curl in the trigger line to bring us in lower than the old highs, but it is what it is. Also, I do not expect much progress today above the Weekly Expected Move (WEM) high at 4215 – as that is where weekly options expire at the close.

I was an aggressive buyer on the afternoon lows yesterday, but I was sweating bullets all the way. I practically wanted to pull a blanket over me and hide under the covers until the close. Maybe I was too aggressive. I often say, though, if it feels good, it is likely not a good trade. But it is definitely strange to be benefitting from breakouts in Dow stocks like Deere (DE) and Caterpillar (CAT). And the breakouts make sense in light of potential infrastructure spending ahead.

As a side note, when you have a three-week consolidation, you will find many stocks in volatility squeezes. If you need a scan for such stocks, shoot me an email at info@BluprintTrading.com. You will get the best bang for your buck choosing these stocks and riding these volatility squeezes as they fire long in a new rally.

Let me also identify two additional notables from this week and the last few sessions. First, the put/call ratio has spiked several times since last Friday, indicating too much short-term fear and that shorts could be easily spooked. That had a lot of influence on my aggressive actions yesterday afternoon – as the level spiked to .68, which has been the high end of the range since the March 2020 lows. If the market does not dip to accommodate the shorts by the close, they will cover, and that is what gives us the explosive rallies such as we saw yesterday afternoon.

Second, I cannot emphasize enough the influence of the Weekly Expected Moves (WEM) in the major indices. That is why I am constantly harping on the subject. This week, the WEM lows caught and saved both the NASDAQ 100 and the S&P 500. Market makers have to defend those levels or lose their proverbial shirts. Defend them they did this week. The NASDAQ 100 moved below its WEM low temporarily, but the market makers brought it right back so that their losses are minimized – if they have any at all – at expiration today.

Noting that these moves are influential, we need to look at the other side of that coin this morning. The WEM high in the S&P 500 is about 4215. That level may cap our gains today through the close, just as the WEM low cushioned the market earlier this week. 

One possibility is that 4215 caps us until the New York close, and then the futures will shoot higher in the short, post-closing session. Then, if all goes according to plan, it could make sense to hold longs over this weekend as there is a possibility that the futures will gap open Sunday night and Tuesday morning, no longer constrained by this week’s options expiration.

All of that sounds bullish. But lets at least look at the other side of this briefly. The more bearish case is that we stay stuck in the balance range and make another run lower. It is possible but less likely. All the reference points appear below.

Whatever you decide to do today, or on an intermediate-term basis, be cognizant that the risk in this market is as high as I have seen in my 34-years as a professional. Use stops, spreads, and whatever else it takes to protect your capital. For day-traders, your disaster stop is critical.

Morning Plan

We will open with a solid gap higher after a late day spike,  putting both spike rules and gap rules into play. Click on both terms and get familiar with them as a framework for how early trade may play out. The overnight high is a new all time high (ATH) at 4914. 

As with any true gap, look for the counter trend move first (fade) and note how much of the gap fills if any. Spike rules will tell us bias in the slightly longer-term as they will define whether or not prices from the late day rally yesterday are being accepted or not. Note the outcome after today’s session.

Given the Weekly Expected Move high at 4215, and today is weekly options expiration at the close, do not be surprised to see a brick wall at 4215, which could take us sideways for most of today’s session.

Keep in mind the bullish implications of new all-time highs. There is no overhead resistance – as nobody is stuck above us in a bad location. In fact, it is the opposite. Shorts will be forced to cover – though it appears that they had their opportunity last night in the Asian session. 

Upside references today will be the WEM high and all-time high at 4214/4215 (13,529 on the Nasdaq 100). Downside references will be the Navigator trigger line at 4208; the roundie at 4200 (roundies and half-roundies are always key psychological levels); yesterday’s high at 4197.25; and the top of the single prints and 10-day point of control at 4180. I am bullish above 4180 , though I do not expect much additional progress today with the WEM high as an obstacle. We can (and likely will) move above the level, but I will be betting that the move will be temporary as market-makers defend 4215 until the New York close.

Since options expire at the close, one remote possibility is that short-covering and exuberance push the S&P 500 far enough past the WEM high that the market-makers are forced to buy futures to hedge their portfolio deltas. I have not seen this happen in a long time – but it is a possibility. It is a guess as to the level required to trigger this mechanism, but I would guess at least 50 points above 4215 could trigger the market-maker buys.

Have a great day.

A.F. Thornton

Pre-Market Outlook – 5/6/2021

Thursday Morning, 5/6/2021

Nobody came away happy yesterday. For the bulls, we can say that the market did not revisit the lows and held within what is now a bit wider balance range. But the market rejected the gap area, the old balance area, and the 5-EMA. What makes a bull sad, makes a bear happy. So the aforementioned bull negatives are bear positives.

Pin the Tail on 4180

There is the old game, pin the tail on the Donkey (poor Donkey). Here, the game is to pin the tail on 4180, where all the volume over the past few weeks is concentrated.

Options strategists are no doubt selling premium around that level now, perpetuating it. Every day that passes then, the risk of an explosive move increases. Whichever direction the market moves outside the bounds of the balance area, all of those option players will have to scramble to unwind their positions. For now, the balance area is bounded by the all-time at 4211 and the recent low around 4114 – roughly a 100-point range.

For now, the S&P 500 index has support at 4114; also, the Weekly Expected Move low. That likely means that the big move will occur next week. Only time will tell. The recent low is likely an 80-day cycle low – a low of relative importance. However, if a bear market is underway, the cycle will peak early and roll over in what is called “left-translation.” What that means is that if you look at the semi-circle representing the cycle, it has the tendency to peak left of center rather than right of center, as with a bull cycle.

Yesterday’s action gave me no reason to change our intermediate strategy, which remains 100% cash.

Today's Day Trading Strategy

We will be opening inside yesterday’s range, with overnight inventory nearly 100% long, raising the possibility of a negative counter-auction at the open. Key support is the overnight low around 4151.50 and the half-roundie itself around 4150. From there, the key reference would be a retest of the recent low, 4/20 low, and WEM low, which is an area ranging from 4120 to 4110.

A move back up and through the open would be bullish, as would a move back up and through the 5-EMA and back into the balance area above 4167.

Watch internals. It is challenging for the S&P 500 to overcome tech if it continues to weigh the market down.

I would trade later rather than earlier, when the picture may be clearer.

A.F. Thornton

Pre-Market Outlook – 5/5/2021

Wednesday Morning, May 5, 2021

This morning is nearly the reverse of yesterday. The S&P 500 will be opening above yesterday’s range with a true gap higher so gap rules will apply this morning, but in the opposite direction from yesterday. The market will open in the upper half of the overnight range, with inventory nearly 100% long. Last night, the market nearly filled yesterday’s gap down and tried to find acceptance back inside the old balance range above 4167 – and we will open within that range this morning.

When overnight inventory is 100% long, we expect a counter-auction at the open, where the overnight traders take some profits. With a true gap, that can be part of the initial fade.

I would analogize where we are to working on the top floor of a skyscraper. Everything looks fine in your office as you are walking around and talking to your colleagues, until you go to the window. If you click to enlarge the chart below, you will see what I mean.

Monthly Chart - S&P 500 Index from the Day I Started in this Business in 1987

Other than a minor correction low yesterday on the 80-day cycle, neither the S&P 500 nor NASDAQ 100 indices broke their trends. With the S&P 500 index holding above the 21-day EMA and the NASDAQ 100 still below it – my short-term bias remains neutral.

The catalyst for the cycle low yesterday was some remarks released from Treasury Secretary Janet Yellen, indicating that higher interest rates may have to be tolerated to cool the economy because the extra $4 to $6 trillion in deficit spending was needed by the Biden administration regardless of its impact on the economy and inflation. Kudos for a bit of honesty.

Then, apparently, Ms. Yellen was taken out to the woodshed behind closed doors. The market later turned around when she backtracked on her earlier statements and towed the party line. “The inflation is transitory, and there is no need to raise interest rates.” Well, Janet, that did not seem to lower my expenses, now did it?

Although we are in the middle of the gap and also back within balance, I will start the session by noting whether or not overnight inventory corrects at all and, if so, how much. Whether or not prices can trade back into yesterday’s range will be important in gauging strength today and identifying the best trade in the daily timeframe. I would avoid this gap area and trade later rather than earlier, giving the market some time to show its hand before engaging with it.

A gap-and-go scenario will play out one of two ways today. We can get an early fade that will fail where we would expect it to then reverse higher, or we could have an initial drive lower that puts the single prints into play right away. The short is either at the balance area low or on a cross back down through the open in the first setup. The second setup is always harder to pull off as there is less of a reference as to where to place a stop.

With value (where 70% of the volume traded) significantly lower yesterday, my focus today will be on the gap and where prices trade in relation to its top and bottom.  Above the top of the gap is more bullish, while below the gap puts prices back into yesterday’s regular session range and confirms yesterday’s negative action.  The divergence between the NASDAQ 100 and the S&P 500 on the daily charts is considerable and adds to the complexities of where we find ourselves in this market. 

Be careful today. There are a lot of cross-currents.

A.F. Thornton

View From the Top – Interim Update

Tuesday Evening, May 4, 2021

Sometimes I can be dumb as a skunk (no offense to skunks). I was getting all excited this morning, thinking the market top had finally arrived. I shorted several indexes yesterday (Monday) and started handing out parachutes to less fortunate traders who went all-in long yesterday at a poor location. It is a wonder I wasn’t popping champagne corks.

But, from all appearances thus far, we merely put the bottom in on a minor correction today – likely of the 80-day cycle variety. Perhaps completion of a fourth wave in Elliot Wave parlance – with a fifth and final wave about to take us higher. This also was the “minor” low possibility I mentioned in Sunday night’s weekly outlook. I had already profitably covered some of my shorts at the open today (dumb – I should have kept all of them until mid-day). I have been such a chicken lately (no offense to chickens). I suppose I have been overly protective of my capital due to the positive and rational economic and political environment. Of course, I am being facetious.

I sent out this alert as we approached the important support zone mid-day, where I covered the rest of my short positions on the S&P 500. Reviewing everything tonight, the volume spike today and the second spike in the put/call ratio since last Friday makes me believe that the low is in – at least for now. That does not necessarily portend new highs – likely some indexes and sectors will see new highs and some won’t. It all depends on the success of this next attempt to pivot higher.

We shall see what tomorrow brings, but the indexes are more likely than not to pivot higher here. The S&P 500 might even attempt new highs before finally rolling over into the 18-month cycle correction. I am not so confident about the relative strength of growth or tech stocks and their dominant index, the NASDAQ 100. The index would be lucky to reach its recent all-time high. All of this leaves me in a 24-hour wait and see mode.

The difference between a minor low and a major one, and the complications we face here, has to do with our new friend – inflation. The positions of the cycles also influence the outcome – and the longer cycles have wide variations in their troughing windows. 

To satisfy the criterea for an intermediate correction, nearly all 11 S&P 500 sectors will need to participate in the precipitous decline. Today, tech bore the brunt of the decline as we continued to see rotation back into the value/cyclical sectors, particularly those that benefit from inflation. This creates a math problem because different sectors have different weightings and influence on the indexes. With the highest index weighting at 27%, Tech can weigh the major indexes down like an anchor – even when the other sectors are trying to float.

The labels below from today show the current sector weightings in order of their influence. Four out of the 11 sectors were still positive (green versus red) today. Healthcare would be defensive and expected to perform better in a decline, so it does not count as much in my analysis of the day. But Financials, Industrials, and Basic Materials are risk-on sectors that all benefit from higher inflation and interest rates. Energy benefits as well – and it was barely negative.

Also, there is a bullish, ascending triangle in retail (XRT). Even Warren Buffet believes retailers have pricing power here. By the way, have you noticed the shrinking package sizes at the stores lately? Sneaky! Incidentally, Mr. Buffet announced that he was terrified by current market valuations at the recent Berkshire Hathaway meeting. 

So for the moment, what we are seeing is another rotation out of tech and into sectors that can both preserve their profit margins and benefit from the inflation that is brutally attacking the economy, consumers, and lower-income Americans – courtesy of the Uniparty (both Democrats and Republicans) run amock. 

Our rulers have fallen in love with the printing press and seemingly lost their minds. Or, from a more dystopian perspective, they are purposely levying inflation – the most hideous, regressive, underhanded, and hidden tax known to humans on unsuspecting and Americans. Lower and middle-income earners will suffer the most – just as they always do. Our rulers suggest that only Americans making less than $400,000 will see a tax increase. Really? What a joke! Does that include inflation? Obviously not.

I laugh when all the headlines read, “Inflation is Coming.” Look around, friends; it is already here. Look at housing prices, gas prices, grocery prices, car prices, etc. – what the hell do they mean “it is coming”? The recent rise in lumber prices alone adds $36,000 of additional cost to the price of the average newly constructed home.

I can hardly discuss inflation, as I am seething with anger watching our politicians take this country down the same road as 1920s Weimar Germany. The current crop of politicians are so unbelievably arrogant in ignoring history’s lessons. I am darn sick and tired of their new love with MMT (Modern Monetary Theory). It is not unlike the Covid-19 vaccine- we are all current guinea pigs of inadequately tested and proven theories. 

With MMT, particularly the leftist politicians and bankers think they can print as much money as they want because the US Dollar is the current world reserve currency. The truth is – MMT really stands for “more money today.” The hell with the future. It is the current ruling class version of the argument “this time its different.” Those are the four most dangerous words in financial market history. IT IS NEVER DIFFERENT – no matter how much smarter this group thinks they are than their predecessors throughout history.

Here are the lessons of history – in case one of these morons ever reads this. There isn’t a single fiat currency that has lasted as a reserve currency for more than four generations in the history of the world. Moreover, there is no dominant world power that has lasted more than four generations at the global helm in recent memory. That is what a fourth turning is all about.

I am seething because I have to sit and watch our corrupt political class walk us right into a collapse, surrendering world domination to China. Sometimes, I even believe a cabal in our government wants the collapse so they can reboot us in the authoritarian model of China and the World Economic Forum’s Great Reset. The US Constitution is a terrible inconvenience for these people. They prefer to toss it out in favor of the surveillance state.

Know this; there are no accidents or coincidences. It is almost as if “heads” – the central planners win – “tails” the people lose. I can hardly contain my disdain for Washington, D.C. these days, and the incompetent, ego-maniac bureaucrats that run it. Our founders feared this day would come from the outset of the country.

And let me be clear; I see little (if any) difference between Republicans and Democrats, save a very, very few good ones on each side. 

Make no mistake about where we are – this is the people versus the ruling class. This is not about Democrats versus Republicans, conservatives versus liberals, or one group identity versus another. All of that is a smokescreen to attempt to distract and divide us. God forbid if all of us got together on our common ground and threw all the “&*%(#$” out. If the people don’t get a grip soon, the Uniparty will take this country – and our assets – down. And it will happen sooner rather than later.

So maybe we party on from this minor low – I haven’t decided yet. I don’t want to be the last one to turn the lights out. I cannot possibly convey how bad things could get if we don’t turn these corrupt, asinine policies – and the inflation that follows – around soon. You know it in your heart. 

Unlike the ruling class, you have common sense, haven’t taken a payoff, and have no agenda other than a decent life for your friends and family.

Thanks for letting me rant.

A.F. Thornton

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