A.M. Notes – 10/5/2022

SpotGamma Option Mile Markers
SpotGamma Option Mile Markers
Tier One - SPX Gamma by Strike
Tier One - SPX Gamma by Strike

Good Morning:

My tolerance for giving up our swing buy gains is low. I had wanted to see the index hold 3775, and we are slightly below that level in Globex – so my finger is on the sell trigger. 

All I see is market participants moving their put positions around. If they are not buying calls – the rally is unsustainable.

Resistance remains at 3800, with support at 3749, then 3700.

A.F. Thornton

Morning Subscriber Notes – 10/3/2022

Good morning:

We are coming into Monday morning with nuances that will make day-trading challenging today. We are on high alert for a swing buy signal for swing traders.

The bear case currently rests on three pillars — excessive valuations, inflation, and a hostile Fed. Most are quick to add a fourth, “Recession.” While I am sympathetic to all four and lean bearish myself, I would also caution that the end of the world only occurs once for each of us.

There is evidence in positioning, short interest, put volumes, surging CDS, and rising cash levels that we are approaching panic levels. The risk is not so much that the bears are wrong as they appear overly eager.

For day trading today, I would ride a rally up to +1.5% on the upside, and then look to short. Or, if the price drops by -3% on the downside first, I might consider shorting. Anything in between is neutral.

• The Fed has scheduled an emergency board meeting at 11:30 EST. Panicking British, Japanese, and Chinese Central Banks motivated the emergency. The Fed may have to slow down its rate hikes amid signs that the corporate bond and U.S. Treasury markets could break.
• Oil prices are surging again as OPEC looks to cut production. Armageddon or inflation? It is always something, right?
• A plethora of Fed Governors will speak today, coincidence?
o Bostic at 9 EST
o Barkin at 11:45 EST
o Mann at 14:00
o George at 14:15
o Williams at 15:10
• I am unsure if the Fed will adjust the speech times per the emergency meeting. But the Fed is set up to communicate whatever comes out of the meeting.
• US ISM reports come out ½ hour after the opening, including prices paid and manufacturing. The consensus is around fifty-two. Lately, we have seen mixed economic reports, with the economy slowing but no symphony of indicators yet.
• The PCE (inflation) number Friday was unhelpful – and contributed to stunting the morning rally.
• We went into the weekend neutral as the calendar quarter ended Friday, but nothing has changed. The bears have not made material progress for seven sessions. I still see them as trapped.
• It only makes sense to be short at these levels if you expect a crash. And the shorts could be right, but I don’t like the odds.
• I see a falling wedge structure on the daily chart, normally portending a rally.
• The market is holding near recent lows on a boatload of shocking news – last week alone, we saw (i) three central banks around the world hiccup, (ii) Russia annexing part of Ukraine, and (iii) the sabotage of the pipeline that brought Europe 30% of its energy. Bond markets were teetering everywhere.
• The stock market had a negative week, but it should have crashed already if it were inclined to do so. Is it another Fed pivot hope floor? That could easily give way depending on any Fed announcements after today’s emergency meeting.
• Unless the market crashes soon, equity indexes may deliver another rip-your-face-off short-covering rally. Given that the final calendar quarter of the year starts today, FOMO could kick rapidly into high gear on a rally. That is my base case – even if there is too much news risk to day-trade today.
• But as all of you know, I keep an open mind and will switch on a dime if necessary.
• Overnight traders ran the stops under Friday’s low and brought the price back into Friday’s range. The bears did not make any progress.
• Sentiment indicators are in the zone for a short-covering rally as well.
• Per the Weekly Auction Analysis chart, we have a low volume node at 3590 or so, which is also the 200-week moving average and makes this a logical place for a bounce. An air pocket lies below 3590 (with two ancient unfilled gaps), giving prices a quick ride down to 3375 if the index fails.

Summarizing my thoughts this morning, the market has trapped the shorts unless we have an all-out crash which is not manifesting in Globex. I also see a buy algo operating at this writing. There is hope that the bond markets are forcing the Fed to slow down and make a “we will maintain stability” announcement per today’s emergency meeting. We will know more after the Fed Governors hit the speaking circuit. But the next cycle low of any significance is ideally due the third week of October – so today would start a short-covering bounce only – absent a major policy reversal by the Fed.

A.F. Thornton

Founder’s Room Notes – 9/30/2022

S&P 500 Index Futures - Today's Trades
S&P 500 Index Futures - Today's Trades
S&P 500 Index Futures - 15-Min Algo Status Panels
S&P 500 Index Futures - 15-Min Algo Status Panels
S&P 500 Index Futures - Daily Algo Status Panels
S&P 500 Index Futures - Daily Algo Status Panels

AF Thornton
9/30/22, 12:34 AM
9/29/2022 – Summary we were in at 3632.25 and out on a trailing stop at 3658. All Founder’s Accounts are 100% Cash.
AF Thornton
9/30/22, 9:22 AM
Good morning: I will leave the 15-Minute Algo Chart Up. We are still looking for a short-covering rally possibly kicked from behind by the Fed Plunge Protection Team. But we don’t have a solid buy yet. No day-trading today as it is weekly and quarterly expiration, combined with the last trading day of the calendar quarter and month.
AF Thornton
9/30/22, 9:24 AM
Bottom line – Buy, Sell, Hold, or Cash? -Navigator Swing Algorithm Mode is Cash/Neutral. -Navigator Day Trading Mode is Cash/Neutral Because of Expiration
AF Thornton
9/30/22, 10:00 AM
We do have a cradle buy signal on the 15-Min Algo at 3640.25. I took a couple of contracts but I know what I am doing and this is still a tough kind of day to trade,
AF Thornton
9/30/22, 10:02 AM
Target is 5-EMA at 3685 in an ideal world which this is not. So far there is resistance at yesterdays halfback.
AF Thornton
9/30/22, 11:27 AM
I am out on the first contract at 3671.75, moving stop on second above break-even and trailing two ticks under the algo trigger on the 15-min chart. The 5-day line target has moved up to 3695. So I have a limit order to sell at the target and a sell stop at 3656.50, moving higher on each 15-minute candle.
AF Thornton
9/30/22, 11:47 AM
For those not on the room’s mic, we decided to exit the second contract at 3676.50 and wrap it up for the day. I will come in near the close and monitor for a swing buy signal – if it presents.
AF Thornton
9/30/22, 3:36 PM
I think we will stand down today and see what develops on Monday. The Russian annexation of Ukraine’s four provinces and Ukraine’s application to join NATA are throwing the markets another monkey wrench. This is a crazy time; if the shorts start making money today, our short-covering window expires. And if they run the shorts into the close like last week, it still leaves the market hanging around the recent lows – a cliffhanger. Enjoy the weekend – keep your families close and safe. A.F. Thornton

AM Notes – 9/30/2022

Greetings Everyone:

  • Everyone knows I am not enamored with day trading Fridays, and I am even less motivated when it is the final trading day of the month and calendar quarter. We have both weekly and quarterly expiration today.
  • We are still in a small consolidation with one more thrust down possible, but also with the caveat that the Fed plunge protection team may try to spook the shorts – who look very trapped here.
  • Today and Monday are likely the short-term turning point for equities, but the turn could slide into Monday. Our two recent themes have been a sustained down move from FOMC into the end of September. And then a bounce out of today’s quarter-end OPEX.
  • Despite a very rough macro landscape, the equity market appears to have respected the options dynamics of time (expiration) and price (large put strikes). Despite all the market anxiety this week, the Put Wall (the strike we see with the largest put position) hasn’t changed from 9/23/22 at 3600.
  • If nothing else – as a sentiment indicator – the fact the Put Wall has not moved lower indicates that options traders didn’t buy significant puts at lower strikes despite the debt crisis. And every other sentiment indicator from the Fear and Greed Index, the 10-day Put/Call Ratio, and the VIX is coiled for a short-covering rally at the very least.
  • And the shorts are trapped after five sessions of pounding on the June lows with no reward. And need I say that traders established most of the puts near current prices?
  • Don’t forget that several large SPX block trades will hit the tape today as dealers facilitate the JPM collar roll. Ultimately today’s JPM collar will expire, and they are likely to establish a new collar for the Dec 30 OPEX.
  • Today’s market impact of this collar roll could come from intraday hedging of the position, which has a maximum level of ~$10 billion. The roll will likely impact volatility today, but estimating where and when is tough. That is why I wouldn’t say I like day trading expiration days. 
  • Likely, there will be some large Market on Close prints and potential jumpiness into the close.
  • After today, the JPM collar expiration impact is diminished because the position will be rolled out in time and price.
  • Interestingly, today’s expiration is not that large but meaningful because it’s purely put positions.
  • This put expiration is enough to give equities a bump, and that could lead to a rapid decline in implied volatility. So, we have Put deltas coming off due to expiration and Vanna tailwinds.
  • Note also the movement of the TDEX “Tail Risk” index. There was a sharp move in this metric over the last week, which tells us that traders were buying deep out-of-the-money puts. These puts could get smoked on a rally and help generate a 5% equity rally rather quickly.
  • We need to be very clear about this. The macro risks in this environment are massive, and it is the perfect environment for something to snap and cause limit-down style moves. That is why we favor playing rallies in call positions with fixed risk.
  • Also, we base this rally view on sentiment and position analysis, nothing fundamental.
  • Because we are in a Put-heavy environment with high volatility – rallies should be treated as unstable and subject to rapid reversal. Think CPI crash or even yesterday’s reversal from the 3940 Wed closing to the 3913 Thursday lows. Those were 3-5% rallies which retraced in hours.
  • There is path dependency here, too. While we look for a rally into next week, we believe clearing out Put positions ultimately allows for lower market prices further out in time.
  • While today’s 3600 Put Wall strongly appears to be the floor into today’s expiration, that floor is likely to be pushed lower after OPEX (i.e., Put Wall lower). Take, for example, today’s JPM collar position, which may be rolled down 3-5% from 3580 to somewhere around 3400.
  •  Bottom line:
    • Look for support today at 3653 and 3602, with resistance at 3700 and 3720 (SPY 370)
    • Be alert for a swing buy signal – perhaps near the close if the algo paints a solid buy.
    • Watch your text/email alerts closely today, especially as we approach the close.
    • No day trading today.
    • Any swing trade will only be for a short-covering rally – not “THE” bear-market low. We will keep stops tight.
  • Live charts will be up in the trading room.

Stay alert, and have a good weekend.

A.F. Thornton

Interim Update – 9/8/2022

With the volatility this morning, we lowered our sell stop on yesterday’s long position to 3933 to allow the market to react to the Fed Chairman’s speech. The new stop is a few points below yesterday’s midpoint at 3936.50, which should hold for the long swing signal if the rally has any legs.

In addition to the midpoint, we will monitor the 5-Day line at 3960.50, which becomes our new stop in a whipsaw that stays higher than our stop.

We will monitor the situation live, so be alert for signals today.

New Swing Strategy Signals – 9/7/2022

9/7/2022 (Wednesday) Buy/Cover Signal

We are issuing a buy signal to cover short positions at 3929.75. Aggressive accounts can take a long position in the Emini or micro at the same level. For calls. we used the October 21, 2022 monthly 395 calls @$11.25 (.SPY221021C395). This trade closes the 8/15/2022 short signal @4327.75.

Key Daytime Frame Charts – 3/15/2022


Using today (Tuesday, 3/15/2022) as a reference point, I want to walk through my process for setting the key levels I communicate to the Navigator Active Traders™ members each morning. I also want you to know how they work.

To summarize, first, I look at the options market to determine what kind of volatility is at hand for the week ahead, so I have a reasonable expectation of trending versus reversionary behavior.

On Friday evenings after the market closes, I set the expected move (WEM) range to establish my trading “sandbox” for the week ahead. Setting the probable zone allows me to prioritize the various support, resistance, and turning points price will encounter in the sandbox.

I set the expected move for the day (DEM) as a daily sandbox inside the weekly sandbox each weekday morning. The projected daily range allows me to further refine the support, resistance, and turning points in my windshield for that day. 

I look for clusters of support and resistance where I might initiate trades or target profits. I divide the sandboxes into quartiles for the day and week to help me correctly position trades depending on the bull, bear, or balancing context.

I monitor internals and follow-through, using market and volume profiles (a separate discussion) to help determine if the market is likely to trend higher, lower, or sideways. 

In short, I consistently apply a well-defined process that facilitates my day and swing trading success. Many of the variables discussed are also weighted components of our proprietary Navigator Algorithms™.

I publish the key levels at 7 am for the Navigator Active Trader™ subscribers. Subscribers also get access to attend our twice-weekly Pro Trading Room, where you can watch me prioritize and trade these levels.

You can click the button at the end of this discussion to learn more about a Navigator Active Trader™ subscription.

Weekly Trading Sandbox

Calculating the Weekly Expected Move is the first step in your trading plan for the week ahead. The move defines the macro sandbox for daytime frame trading during the week. It is your Sunday project.

The Weekly Expected Move gives you invaluable information about the overbought or oversold nature of the index in initiating trades and taking profits throughout the week. The market will stay within the boundaries 70% of the time.

I like to divide the weekly range into quartiles and generally look to initiate my long day trades when the index is in the first WEM quartile (shaded green) and target profits in the last quartile (colored red). Shorts are just the reverse.

It is also acceptable to divide the range into thirds. Whatever works for you is OK, as long as you understand the concept.

Of course, whether to focus on longs or shorts depends on context. Taking trades between the shaded boxes depends on the circumstances as well. But the closer you get to the middle when initiating a trade, the more likely you might be starting transactions in no man’s land.

Naturally, you can manage a trade initiated in the red or green zone through the middle. It depends on your target, and you can always trail a stop.

Knowing the range also helps you identify other key levels you may encounter as they travel inside the sandbox during the week. You can focus on the most likely moving averages, support, resistance levels, etc., where your trade might stall or change direction.

For the most part, you can ignore potential happenings outside the top of the red shaded boundary and the bottom of the green shaded edge, which are the maximum endpoints of the expected move.

The Weekly Expected Move sets the edges where Dealers and Market Makers begin to lose money if the price moves outside the range and stays there when weekly options expire at Friday’s close. Dealers and Market Makers will vigorously defend the boundaries or lose billions of dollars on a breakout.

Sometimes the price will exceed the boundaries intra-week. Such breakouts are acceptable to a point. But it is best to nail your profits at the boundaries. You will often be surprised to see the price return inside the range by Friday’s close. The possibility may create a trade set-up in and of itself.

But be aware that if the price exceeds either boundary significantly, Dealers and Market Makers may aggressively hedge their portfolio deltas by selling futures into the same direction of the move, potentially making the advance or decline worse.

Next, we set the daily expected move ranges for the trading day ahead.

Daily Trading Sandbox

Calculating the Daily Expected Moves is the second step in your daily planning. The boundaries define the sandbox for daytime frame trading just like the Weekly Expected Move does for the week ahead.

Combining the Daily and Weekly Expected Moves gives you invaluable information in taking your trades throughout the week.

Just like the week, I like to divide the daily range into quartiles and take longs in the first quartile (shaded green) and target profits in the last quartile (shaded red). Shorts are just the reverse.

But these decisions are also influenced by the index’s location inside the Weekly Expected Move range. Depending on the context, overlapping weekly and daily green and red zones deserve your attention.

For the daily chart, there are three expected move data points. The first data point is the expected high and low calculated from the RTH session Open. This calculation is beneficial when there is a large opening gap. Our estimate also incorporates options gamma, a valuable filter.

The second and third expected moves are data points calculated from the previous day’s close. Historically, the first data points from the close contain roughly 70% of the daily price action. The second levels frame about 90%.

Since there are multiple-choice data points in the daytime frame, choosing your anchors for the quartiles is a bit of an art. Is the market balanced or trending? Are the internals solid or weak? Did the market gap open? Should you be focusing on longs or shorts, or both? Pick the broader or narrower expected move range accordingly.

It is also helpful to identify other vital levels you will encounter in the daily sandbox. Suppose there are moving averages, additional support and resistance levels, etc… In those cases, you will better understand where to initiate new trades, set targets, and identify where the market may stall or reverse.

Now, let’s identify and add any key trendlines to our sandbox.

Today's Key Trendlines

Overnight and morning traders ran stops under the Primary Uptrend Line from the March 2020 China Virus Crash low and under the 2/8 low. Then they brought the market back up into yesterday’s range. The market’s rejection of lower prices and return inside yesterday’s range was impressive.

The price action reminds me that the market is holding its ground despite the constant stream of bad news since the 2/22 Ukraine Invasion low. As discussed in the 3/6 Navigator Oracle, the low remains secure. The market also conquered and retested a minor downtrend line on today’s strong advance.

All in all, today’s market action was bullish – even if it mainly was short-covering. But the market is still sandwiched between its Primary Uptrend and Downtrend Lines.

The pattern looks more like a bear flag to go down on the NASDAQ 100 and a falling wedge to rally on the S&P 500. But even on the S&P 500, the wedge may need lower prices to complete.

The Fed meeting reaction tomorrow will help the market resolve its consolidation. Quadruple witching expiration Friday would appear to provide some supportive gamma, but I thought that last month as well, and the market dipped into expiration anyway.

With sentiment at record low levels and a lot of cash on the sidelines, it would not take much to trigger short-covering. But there is unlikely to be an all-clear signal until next week.

Seasonally, the stock market tends to turn higher in mid-March. If the 2/24 low is the 20-week cycle trough, a relief rally is the most likely outcome as we get through the Fed announcement and options/futures expiration.

Let’s move on to the simplicity of the two support and two resistance levels I communicated this morning when the charts and colors briefly turned me into a mad scientist.

Today's Pre-Announced Key Support and Resistance

Today’s story was the market heading north after two bear days in a row, The market stalled at the first pre-announced resistance (1) for an hour. The level coincided with the minor downtrend line on the trendline chart above. 

After clearing the trendline, the market returned to retest the break above (2). Then the market rallied up to our second pre-announced resistance level, where the market stalled again into the close.

As we move down the chart list, you will see additional support and resistance constructs in the same neighborhood. The levels work whether you use them as targets for trade initiation or profits.

Now let’s look at some calendar-based levels.

Today's Relevant Calendar Based Levels

It is important to track certain calendar levels as they often act as support and resistance as the trading day begins and when you encounter the weekly and monthly levels in your sandbox.

I always mark the current monthly and weekly open because that is where the respective candles turn green or red (“screens go green”), as it is often said. I will also have the high and low for the previous month and week on my screens, as those can be important inflection points.

Remember that every bar or candle sets up a trading and breakout range, whether the bar is one minute or one month. It is impractical to trade a one-minute bar as such, but weekly and monthly candles are typically large enough to be monitored as a range. A sustained break above the candle is bullish and vice versa.

I also want the previous day’s high and low and the Globex high and low marked. Each day, the opening drives will often start by testing the overnight high and low and the previous day’s high and low to find the path of least resistance.

Today, the market opened at the overnight high and kept going. It finally reached yesterday’s high at the close. Yesterday’s candle was somewhat large, so it took a long trip up to test the top. Ultimately, the price closed above yesterday’s RTH high, another bullish sign.

If the previous day is a trend day with a large candle and extensive range, it is also helpful to mark the 50% point on the candle, also called the “halfback.” In such cases, the halfback can provide support or resistance and can be a target for taking profits on your trade.

Now, let’s take a look at the options market’s influence on today’s price action. 

Today's Influential Option Levels

The influence of options on the stock market has never been more significant. We track the highest impact levels and observe the index when it encounters them.

Every option generally has a dealer/market maker on the other side of the trade. With data from the exchanges and a few inferences, we can predict how these professionals will hedge their positions and where. 

Sometimes I feel as if the options information we convey is as close as we can get to legal, insider trading. Simply put, the various levels, regardless of the nomenclature, act as support and resistance. When there are clusters of lines, the area will likely be strong support and resistance.

For example, see the group of levels on the chart above around 4200, with the next collection above at 4300. These option levels have been primarily responsible for the market’s current rangebound conditions. You can see the influence today.

We also track the price where gamma and delta shift from negative to positive and vice versa. And there is another important level we monitor called the “volatility trigger.”

The market and price ranges behave very differently above and below these points. This helps me calculate the implied moves for the day and week. I can also anticipate intraday range expansion or contraction.

Today, the fact that the price traveled back up and through the gamma cluster at 4200 let us know that dealers and market makers are still willing to vigorously defend that price, which is also the Weekly Expected Move low. Coincidence? Not likely.

The market first stalled when it encountered the 4th largest combined gamma level of the S&P 500 Cash Index (SPX) and the Index ETF (SPY) around 4250.

Now let’s see if we can put all these together to give us a relevant framework traded today.

This is a one-minute chart of A.F. Thornton's Key Trading Levels for the 3/15/2021 expected range we call the "Sandbox" bounded by the top of the red shaded area and the bottom of the green shaded area.
This is a one-minute chart of A.F. Thornton's Key Trading Levels for the 3/15/2021 expected range we call the "Sandbox" bounded by the top of the red shaded area and the bottom of the green shaded area.

Completed Sandbox for 3/15/2022

Now, we can put it all together using a one-minute candle chart to magnify the granularity and separate some of the clusters. I’m not too fond of a busy chart. So in my setup, I can lay on the levels one at a time.

Also, don’t be afraid to rough out a level representing a cluster or shade a wider rectangle to define the area on your chart. Keep your charts as uncluttered and straightforward as possible. I crafted my process to put everything in front of me long before the open precisely to prioritize.

The first issue that stands out today is that you could have used the two support and two resistance levels I communicated to you in the Morning Notes. That is often the case.

With Internals strong, you could have bought any dip on a pivot (confirmed when my candles flip from orange to blue. You would be wise to skip the typical Chicago and New York lunch consolidation periods and catch the afternoon drive.

You could have used the Algo Trigger for confirmation in the five or 15-minute time frames, and the Internals guided that price action favored longs over shorts. 

I did not trade today because I am busy creating templates to deliver these charts every morning timely. They take so long to hand draw that I automate the lines and levels.

There are more issues to cover in day trading, but the information covered here is what matters as far as key levels.

Today's Conclusions

To summarize then, you start with the weekly range and focus on the material support and resistance levels you might encounter. Step out and look at the big picture.

Then each morning, you hone that down to what is in your windshield for the day. You look for clusters of support and resistance both as levels to initiate trades and then target for profits.

You monitor internals and follow-through, using market and volume profiles (a separate discussion) to help determine if the market is likely to trend higher, lower, or sideways. 

You need a consistently applied process to be successful day trading or even swing trading. All of the variables discussed above outline my approach and are also components of the Navigator Algorithms™.

I publish my levels at 7 am for subscribers to the new Active Trader Subscription. Subscribers also get access to our Pro Trading Room, where you can watch me use and trade these levels and learn twice a week.

Click the button below to learn more.

A.F. Thornton

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