All posts by AF Thornton

Founder's Trading Journal

Reverse, Reverse Rotation and Cross, Cross Currents

AF Thornton 0 Comment

Somebody once sent me a Christmas card, and it told the story of a contrarian. At first, our subject was a normal investor. Then, she realized that the real money was in being a contrarian. Soon, being a contrarian became so popular, it stopped working. Ahh said our subject, now I need to be a contrarian, contrarian. The card went on and on in the most humorous way until they finally put our subject in the looney bin.

In Charles MacKay’s classic book “Extraordinary Popular Delusions and the Madness of Crowds, he wrote, “Men, it has been well said, think in herds; We will see that they go mad in herds, while they only recover their senses slowly, one by one.” Certainly, yesterday smacked a bit of crowd madness.

Of late, when bonds rallied (interest rates fell), so did growth stocks and the NASDAQ 100. When bonds sold off (interest rates rise), energy and financials rallied, and growth stocks and the NASDAQ 100 sold off. Those relationships were all broken yesterday. Rates fell, and bonds rallied, but this time the NASDAQ 100 sold off, and both financials and energy rallied. Go figure.

Likely, yesterday’s break in the routine has to do with money manager window dressing as we approach the end of the first calendar quarter. Unfortunately, and despite the overnight rally, we did not even get a chance to raise our NASDAQ 100 stops yesterday before they triggered. Price went on to break key levels in the NASDAQ 100 index, so the index is off the table for now.

Rather than rush through more detail this morning, and given that our swing strategy is back to cash, I will take some time and put out something more extensive this afternoon. But for now, our thesis remains intact. We started the final and fourth nominal 20-week cycle in the nominal 18-month cycle at the March lows. We are open to the cycle peaking earlier than normal, and there are certainly arguments to support that. But since that would be the outlier case, I would need more proof.

Today’s Day Trading Plan

As to the S&P 500 index, we will be coming into the morning session trading near the bottom of the overnight range with a true gap down, so gap rules and potential for an early upward fade of the gap are in play. Settlement yesterday was 3882, so in overnight trading, we could not hold the 3900 roundie or the 21-day EMA at 3894. We will currently test the 50-day EMA at 3864 to see if it can hold, then on to 3850 and other key levels as set forth below.

Overnight inventory is net long, so any selling at the opening could be old business (overnight traders taking profits on their long positions). Keep that in mind if we approach the overnight low at 3859, in addition to gap rules #2 and #4. Another negative, the market seems to be rejecting the old balance area between 3875 and 3940, and the 4000ish Fibonacci target set from the crash bottom a year ago continues to remain elusive. Again, we have to consider quarter-end rebalancing as having some influence over the next week or so.

Key levels currently below us to watch today will be the 50-day EMA at 3864, overnight low at 3859, the half-roundie at 3850, and the next point of control at 3830. Remember that we are oversold from the standpoint that we are trading well below the 10-day point of control at 3930 and the 10-day value area low at 3920. If the overnight low holds, then target the levels above sequentially and monitor for continuation.

Key levels to watch above us also include the overnight halfback at 3877.50 (also yesterday’s low) and the overnight high and 21-day EMA around the 3895 area (also the bottom of yesterday’s single prints). Likely, traders will test the overnight low first.

Yesterday’s action carried our two key indexes, the S&P 500 and the NASDAQ 100, below their 21-day EMAs, and I carry that forward as bearish. The NASDAQ 100 has also breached its 50-day EMA, and the S&P 500 sits right on its 50-day EMA at 3864.

A.F. Thornton

Founder's Trading Journal

Following the Leader

AF Thornton 0 Comment

At the moment, where the NASDAQ 100 leads, we will follow. The Founders Group stepped up to a fully invested position yesterday, with half in the S&P 500 and a half in the NASDAQ 100. The market will open well above yesterday’s entry prices, thanks to Europe jumping into the indexes with both feet last night. Let’s see if we get a follow-through in the regular session today.

The potential head and shoulders reversal patterns, marking the 20-week and 20-day cycle pivots, remain in play but require a move to the 20-week neckline today or tomorrow to maintain symmetry:

If the pattern progresses and succeeds, that tells us we are on the right track. If it fails, that also tells us something. In the latter case, failure could foretell a rare, left translation peak in the last nominal 20-week cycle of four in the nominal 18-month sequence. So I am keeping an open mind to all possibilities, but the probable outcome is moving to the neckline and eventually break higher.

In the meantime, energy stocks are moving down to their trendline, so I keep an eye on that. Interest rates are in a short-term down cycle – and that is helping lift the NASDAQ 100 for now.

Other than the issues above, I am looking to get the 5 or 8-day exponential moving averages under us to use as a rising stop. I will publish levels later this morning.

Day Trading Plan

A new day confirms the slow rotation back into tech, with returns in the Nasdaq 100 doubling the S&P 500 overnight and making me look smart. Naturally, I relish these days and bank them for the days I don’t look so smart. Breadth’s weakness tells me that the rotation isn’t solid yet, and the whole thing still seems to carry an air of falling apart at any moment, but the rotation is happening.

The gap higher this morning is in the middle of yesterday’s range for both the NASDAQ 100 and S&P 500 futures, and hence gap rules are not in play. Overnight inventory is balanced to slightly net short. Current prices are ticking in the upper third of the overnight ranges. This indicates some strength going into the morning session.

For all the late-day selling yesterday, note that value (where 70% of volume occurred) was unchanged. This keeps the status quo intact more than any other data point. The Globex highs in the NASDAQ 100 and S&P 500 futures at 13150 and 3919, respectively, should be seen as  potential breakout levels. There is nothing else pointing to the open’s potential direction, so let the market sort itself out for 30 to 60 minutes and follow the usual quartet pattern.

Founder's Trading Journal

Happy Anniversary!

AF Thornton 0 Comment

Somehow this intro got deleted in the first publication. I wished everyone a happy anniversary, as a year ago today, the China Virus crash bottomed and the Founders Group went to a fully invested position. What a day that was, as I communicated on these pages. It was one of the braver moves I have made over the years, and I fear I am becoming more conservative in my old age.

So far, the market has followed through on our reverse rotation thesis as tech led the rally yesterday and seemingly is confirming the same overnight. There was selling in both Asia and Europe last night, but the market traded in a rather tight range that landed in the middle of yesterday’s regular session range. This tells us little about what to expect from today. But I am pleased with our progress so far, as we begin this last 20-week cycle before the 18-month cycle inflicts a reality check on the markets.

By the way, the volume could have been better yesterday. Perhaps a better way to look at volume is to break down each daily candle and put the volume out to the right – looking at volume at price. For even better context, we can look at the amount of time the market spent at each price. The volume concept is called “Volume Profile,” and the time concept is called “Market Profile.”

Essentially, you are looking at something that starts as a bell curve and forms various shapes and patterns that can tell us a lot about the market and where traders are positioned. This works on any financial instrument that involves volume, whether it be an index, ETF, or stock.

We focus on the bulges to the right in the profiles above, indicating what price had the most volume and caused the market to spend the most time. I think you can see that the price that attracts the most volume and where the instrument spends the most time is a key piece of information, whether you are looking at a single day, the Globex overnight session, or the regular day session. In my case, I also look at an aggregate of the last 10-days. The “10-day POC” marked by the yellow line above is the price (about 12950) that has attracted the most volume over the past 10 trading sessions (about two calendar weeks). 

On the NASDAQ 100 profile above, the settlement at yesterday’s regular session close was 13071. Since most of last night’s trading occurred below that level, we can say that traders are coming into today’s session net short. As the session opens today, those traders may help drive a rally as they go to cover their shorts this morning. Overall, however, the overnight profile is in the middle of yesterday’s regular day session, giving us little direction about today’s regular session trading. Every profile gives different information about the day that might be ahead.

The Navigator swing strategy is 25% S&P 500 and 25% NASDAQ 100, and I am looking to add to those positions on pullbacks.

Today’s Day Trading Plan

Now that you have a better sense of the profiles as set forth above realize that a lot of the key levels and concepts I talk about here come from the profiles above.

Yesterday, I noted that the Friday low should be considered secure. Accordingly, and for now, pullbacks to the 15 or 30-minute 21 EMAs are buyable unless we take out Friday’s low. The NASDAQ 100 continues to lead,  which gives lower odds of any short setups working in the S&P 500.

Overnight inventory is net short but not 100%. The entire overnight range is within the RTH range, which indicates balance.

Use yesterday’s settlement at 3812.62 (S&P Futures) and 13071 (NASDAQ 100 Futures) as bias lines. Otherwise, follow the quartet and monitor for continuation. There is a lot to digest, especially in the NASDAQ 100, from yesterday’s gains.

A.F. Thornton

Founder's Trading Journal

Update: Stops

AF Thornton 0 Comment

We are having an awesome morning thus far, but I take nothing for granted. The Founders Group moved our stops up as follows:

SPY – 389.75

S&P 500 Futures – 3897.50

QQQ – 314.75

NASDAQ 100 Futures – 12967.50

I will update these pages if our stops change for any reason.

This information is provided for educational purposes. Always do your own homework.

A.F. Thornton

Founder's Trading Journal

Soup Du Jour

AF Thornton 0 Comment

At the end of the day, trading is nothing more than a hypothesis overlayed on randomness that may or may not play out. Even more fun, when a trade fails to play out, your lizard brain blocks all access to your cerebral cortex and higher thinking, almost guaranteeing a loss. If that wasn’t challenging enough, it seems we always have a “soup de jour” of sorts that traders hang on every month. Call it the “issue du jour” – or classic groupthink. 

Right now, the issue is interest rates. But it changes. I remember when we hung on every monthly trade deficit. Then there was the budget deficit. If those issues were so important in the 90s, what the hell does anyone think now? 

And so it goes with interest rates. They have not yet even reached pre-China Virus levels. Anyway, to be successful at this, you have to have perspective and see the game for what it is – a game. You have to play the game better than most other traders.

Of course, there is pressure on rates. But will it be the end of the world if they go to 2%? Really? Ensure the person you are listening to is not a Hedge Fund manager on CNBC who is short and trying to talk the market down. 

History does not bear out that higher rates kill the market, but here we are in the game – so let’s play it. Right now, it is a contest between financials and tech stocks. To make it interesting, we have the cyclicals moving around the periphery. Rates go up, financials – particularly banks – perform well. Rates go down; tech stocks perform well.

Looking at it another way, the NASDAQ 100 rises when rate scares abate; the Dow rises on cyclical prospects, and the Russell 2000 / S&P 500 benefit from the financials. Actually, the S&P 500 gets yanked in every direction.

So we are 50/50 Nasdaq 100 and S&P 500 to work all ends toward the middle, giving an edge to reverse rotation back into tech, at least for the short-term. Then, as the 18-month cycle peaks, we will go back into full correlation again – and we will head for the hills. 

Based in Italy and one of the foremost experts on Hurst Cycles, David Hickson put out a great video on Saturday reviewing the current position of the cycles and the coming 18-month peak. It is a bit technical but worth reviewing for the bigger picture.

Meanwhile, back at the ranch, our latest mix and signals appear to be working well this morning, now that quadruple witching is over. By the way, here is some European humor for you:

Scary, right? So far, I am gleaning that the Europeans think we are a bunch of idiots in the US. But they have always had a superior attitude.

Day Trading Plan

One would think that being six hours ahead of New York trading. I would be in the future and have some advantage over the U.S. traders. I had a lot of fun this morning (here) trading the Globex markets (there), so I was not left with crumbs as usual in the US. I could get used to this. But anyway, I don’t typically trade on Mondays – but if you do – here goes it…

I would assume Friday’s low to be secure in the S&P 500 until it’s not. Today will be all about whether or not the overnight NASDAQ 100 strength continues into today’s session and overcomes the S&P 500 index relative weakness.

While the NASDAQ 100 futures moved out of Friday’s range overnight, the S&P 500 futures were unable to duplicate the success, and as such, the extremes of Friday’s S&P 500 range are the main key levels. Even with NASDAQ strength, there is potential for the S&P 500 to remain within range. There will be a small gap higher at the open, but it is not a true gap, so gap rules are not in play. Overnight inventory is balanced in the S&P 500, so let the market sort itself out before jumping in with both feet.

I will communicate new stops on our current positions later this morning.

A.F. Thornton

Founder's Trading Journal

Update: Stops

AF Thornton 0 Comment

This morning, we retested the Globex lows on both the NASDAQ 100 and S&P 500 500 indexes. The lows held, keeping our reversal pattern on the NASDAQ 100 intact. The S&P 500 tagged its 21-day EMA and reversed higher, also a confirming signal. These are good omens and support the bottoming of the nominal 20-day cycle thesis. 

Of course, professionals all see the same things on their screens. What can be frustrating is that a bounce here would be due anyway from those of us applying the same theories, but it has to be enough of a consensus to turn the markets. Combined with our Algo buy signals, the scenario looks promising so far. Of course, we always set stops because regardless of the probabilities, the market has a mind of its own at times and could care less what I think.

As previously mentioned in these pages, today is quadruple witching – so there will be quite a few cross-currents as various options and futures expire for the week, month and quarter. While I would not day trade today, today is fine for establishing our Navigator Algorithm swing buys.

The stops I am communicating below require the set levels to be violated on the NYSE close. We will not worry about hourly closes. I will send out a signal if we are honoring any stops – as at least today, I am not on an airplane. I am just operating a half-day ahead time zone-wise.

Unless otherwise posted, here are the initial stop levels: (i) NQ (NASDAQ 100 FUTURES) is 12,680.50; (ii) QQQ stop level is 308.75; (iii) ES (S&P 500 FUTURES) is 3874.50; and (iv) SPY is 386.50. As communicated this morning, we are starting with 25% positions in each index. We will add to the positions as more confirmation of the turn establishes. In this regard, I am looking for a price on the 30-minute charts to rise above and successfully retest their 21-day Exponential Moving Averages.

While you can set these stops with futures and cash indexes, there is no way to set a stop on options. So the stop is mental in that sense, and something you just have to watch from day to day. That has been part of the frustration as the markets have gotten so choppy and volatile. it becomes very difficult to swing-trade options, but hopefully we have positions here that we can retain for a bit.

While the probabilities are in our favor at the moment, we must stay alert and keep an open mind as to other possibilities. Check your emails throughout the day. I will update our group if anything changes.

I hope that sharing our strategies, along with the commentary, is educational and beneficial. At the end of the day, however, I don’t know your personal circumstances so you have to make your own decisions as to how the knowledge and education applies to your own portfolio.

Have a great weekend!

A.F. Thornton

Founder's Trading Journal

“V” for Victory and More Buy Signals

AF Thornton 0 Comment

We are spoiled rotten of late. It seems that no matter the dip, the market takes off out of a “V” bottom and never looks back. But now, as the nominal 18-month cycle matures, the market is settling back into more typical behavior. Let me digress.

I talk about cycles incessantly. The reason is, cycles give us context. Just like you can take a quote from someone out of context and render the opposite meaning, so too you can take a peak or trough in the market out of context and get the wrong impression. The quote example leads to inconvenience. But the market example can cost you money.

Last March, the markets bottomed a number of cycles simultaneously, from the nominal 54- month (four-year Presidential cycle) on down to the nominal 18-month, 40-week, 20-week, etc. That is why the dip was so pronounced. When long-term cycles nest with all the shorter-term cycles below them, we experience the most pronounced corrections. The Mental China Pandemic was simply the catalyst – but the dip would have occurred regardless. Fundamentals can exaggerate the amplitude of the cycles, but the nest of lows would have presented anyway. Here is an example of how the 9-month cycle is phased:

Time-Price-Research: J.M. Hurst

While it is true that the nest of cycle lows exacerbates the dip, it is also true that the rally on the other side of it is usually something to behold. The new bull run that comes out on the other side is usually so strong that the shorter cycles are barely discernable at all, especially in the first nominal 54-month cycle that ensues. In other words, the market barely dips, and when it does price only spends a nanosecond at the trough. We have seen this over and over since last March.

The aforementioned behavior is different in more mature cycles. In a typical dip as the market matures, there is a retest after the first run out. That is how financial markets were behaving before last March. You might have heard this described as “Elliott Waves” or “three pushes.” Essentially, these theories reference the fact that the markets tend to move in five waves; three advancing waves and two correcting waves as can be seen in the chart below:

ELLIOTT WAVE UNTANGLED. - EGM Analytics

Closely examined over the years, these waves have particular characteristics. There is no need to review that here – as it is a science in and of itself. Notably, for this morning, the first 1-2 sequence involves anywhere from a 50% to 80% retracement of the first run out or blue “1” wave as labeled above. This forms the “2.” And this makes sense because at this point in the “1” wave rally, there are a series of declining peaks and troughs leading into the dip, so until the market has a dip that presents the first higher trough, few people jump on board. When the trough turns at a higher level than the troughs preceding it, you have a classic trend reversal and everyone jumps aboard. And not just buyers come flooding in, but the shorts also panic buy to cover. Hence the longer run in the “2-3” sequence as compared to the “1” wave illustrated above. Makes sense, right?

Then there is the head and shoulders pattern. Recall our discussion back on February 24th. Here is a refresher illustration, using a reverse head and shoulders, the relevant pattern this morning:

Tutorials On Reverse Head And Shoulder Chart Pattern

Recall that I pointed to this pattern as a typical pattern presented when bottoming a cycle. As you can see, it also marks the transition of a trend reversal, which is what we see at cycle lows.

So where am I headed with all of this? Take a look at the NASDAQ 100 index as it currently presents this morning? How does this all tie together?

Allow me to summarize the possibilities. Emphasis on “probability” as nothing is for certain in the markets, and we must always keep an open mind. Yet for the Founders Group, we put our money where our proverbial “probabilities” lie, especially when our algorithms confirm a buy signal.

So here is the argument: (i) we are retesting the nominal 20-week cycle low, which is now the “head” in the illustration above; (ii) this is the first round of the nominal 20-day (calendar day) cycle out of that trough; (iii) the average length of the 20-day cycle trough to trough has been about 10-12 trading days, and we are on day 11; (iv) we see a potential head and shoulders reversal pattern coming in the right at the mark; (v) since the cyclical indexes are stretched, we expect a reverse rotation back into growth stocks, currently spooked by interest-rate scares; (vi) the Fed said nothing Wednesday to cause concerns about any reversal in the accommodative rate policies; (vii) while the momentum in the markets has waned of late, market internals remain very strong; (ix) the NASDAQ 100 and S&P 500 indexes tagged their 20-day future lines of demarcation yesterday, further confirming that the 20-day cycle has reached its projection.

The Founders Group was stopped out of our 8-point stop yesterday on our S&P 500 position. We are currently reestablishing a 25% position, along with a 25% position in the NASDAQ 100. We are still using futures, but it is fine to buy the cash indexes (SPY or QQQ) or April 16 at the money calls on the same. I will communicate stops later this morning. If you did not honor yesterday’s stop on the S&P 500, hold the position for now and add the NASDAQ 100.

A.F. Thornton

Founder's Trading Journal

Buy Signal – S&P 500 Index

AF Thornton 0 Comment

The Founders Group just bought a 50% position in the S&P 500 Index at 3932 with an 7 point stop. This means that if the S&P 500 futures contract has an hourly close below 3925, we exit the position. This is a risky entry at these levels, and not for the faint of heart. This is a Navigator buy signal swing trade – but still use caution. For calls, use at the money April 16th calls – which are the 395 calls at this writing. The position will be choppy through Friday, but should position us well to ride one more wave higher next week. If not, our stop is set. We are sharing this for educational purposes only. Do your own homework and make sure you evaluate your position size relative to your account size and risk tolerance.

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