Category Navigator™ Signals for Swing Traders

Navigator™ Signals for Swing Traders
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Every once in a while, the market likes to humble me. Yesterday, the S&P 500 bounced at the 21-day line as expected and returned to the 4195 area, where I was looking to get short. However, the market ran out of time – but still – so far, so good. Then the price recovered enough to negate the Algo sell signal mentioned yesterday morning – standing the probability on its proverbial head. The sell signal may yet return today.

Nevertheless, the Founders Group honored our 5-day line stop at 4190, and the market failed to close above the 5-day line by the close. So I remain comfortable in cash at the moment. I am still looking to short rallies – but I am not getting aggressively short as yet.

Yesterday, the S&P 500 managed to close inside its wider range (between 4215 and 4180). But the NASDAQ 100 failed to get back inside its analogous range.

Former market leaders like Apple and Tesla continue to break down, which negatively affects the indexes. Bitcoin perked up a bit yesterday, but it is still throwing a pattern that typically points lower.

On the surface, then, it would not seem that the picture is any more transparent today than it was yesterday. The S&P 500 continues to move sideways – and that can chew up premium if you are investing with options.

Beneath the surface, the action continues to be about rotation. Rotation is healthy – correlation is not, especially on a down day. In thinking about how to illustrate this, I thought I would show you the positive extreme first:

In the chart above, you can see that the XLRE Real Estate ETF continues to move above its May peak to new highs. That makes sense in light of recent inflation trends.

On the opposing side, you can see from the chart above that the XLK Technology ETF has a lower peak than May. Given the lofty valuations, that makes sense too. The money rotating into the other sectors has to come from somewhere.

Then you can see from the last chart above that the SPY S&P 500 index ETF is almost matching its May peak, somewhere in the middle of the two previous price charts. 

Stepping out then, we still have Communications (XLC), Energy (XLE), Financials (XLF), and Real Estate (XLRE) moving higher at the expense of our former leaders in Technology (XLK), Utilities (XLU), Health Care (XLV), and Consumer Discretionary (XLY). We find industrials (XLI), Materials (XLB), and Consumer Staples (XLP) are moving sideways with the S&P 500.

With the pie chart below, you can begin to see how each sector influences the S&P 500 index. For now, the math is such that the aggregate of current sector performance moves the S&P 500 sideways. When I cannot achieve my goals in the S&P 500 index futures, I will look up the top 10 holdings of each sector fund that is moving. Because the ETFs are cap-weighted, I can often buy options on one or two top holdings to meet my goals. A good resource for this is ETFdb.com.

It is vital to carry the current leadership forward, as trends tend to persist. Institutions have barely scratched the surface investing in many of these existing, leading “value” sectors and will likely reposition themselves further if the correction I am expecting materializes.

I sketched a head and shoulders topping possibility in the NASDAQ 100 chart above. The pattern projects a low down to 12,200. I am not a huge pattern trader, as our brains look for them – even when they don’t exist. I will point them out when I see them, however.

The NASDAQ 100 index has likely seen its lows for the week, bouncing off its Weekly Expected Move low yesterday. I see the same H&S pattern present in Apple (AAPL). If the design materializes, the S&P 500 might fall to the May lows in sympathy with the NASDAQ 100 – a target around 4050. I would speculate that these levels will establish the bottom of a new trading range. But again, I am guessing. Guessing is what we do while we wait for the market to do its work.

I see the trading range possibility because, as yet, the market appears to be digesting current valuations – not rejecting them. The sentiment is neither frothy nor particularly supportive – almost dead neutral. We do have the cycle correction ahead, but there is no way to predict the depth or the exact start date. The dip could visit the 200-day moving average, an unpleasant journey to 3750 on the S&P 500. However, with the average in a nice upward slope, why not simply move sideways into the line over a few months of the summer?

The linchpin in all of this is Federal Reserve policy. If the Fed eases up slowly, something they clarified yesterday, maybe they can engineer a soft landing such as I am describing. They made clear yesterday that they might slow up corporate bond purchases – but not treasuries. The market will find that palatable. 

Part of the market’s recovery yesterday was due to the Biden administration easing up talk of higher corporate taxes, offering a minimum 15% corporate tax instead. The market liked that too.

Stay tuned, as the road ahead promises to be interesting.

A.F. Thornton

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

Navigator™ Signals for Swing Traders
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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

Navigator™ Signals for Swing Traders
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Welcome to our Nightmare

It might be hard to believe this evening, but 40% of the stocks in the S&P 500 hit new all-time highs on Monday, and that may actually be a record (and a buying climax). In March 2020, I projected an “ideal” date for the peak of the 18-month cycle to be May 8, 2021 (this past Saturday). It was not hard to predict, as I used the average length of nominal 18-month cycle peaks going back a few years. But even as of Monday, I doubted my own work, and then we were stopped out of our remaining positions in the Founders Group on a violation of the 5-day line. 

There were still many constructive charts on Monday. This market has been nothing, if not relentless. But the news of the cyberattack on one of the largest oil pipelines in the country was too much to bear. As we have seen in the last 48-hours, the ripple effect through the economy poured more gasoline on the inflation fire – no pun intended. We now see gas price shock, lines at the gas station, and more transportation bottlenecks. So the catalyst arrived, and down we go.

I was watching two key stocks this morning for clues about the future. One was Visa, and the other was the XHB (Homebuilder’s ETF). That covers consumer credit trends and the largest purchase consumers make (that has been inflated to the moon over the last 12-months). As you will see below, both are telegraphing unpleasant circumstances.

Even this morning, the market fought hard to hold support for the first few hours. But if you followed the playbook in the Pre-Market Outlook, it was a rewarding day. And there is little doubt that the 18-month peak has arrived, with the only remaining question being how far down we will go before the decline is finished. 

As mentioned over the past few days, the 200-day moving average is a typical target for the 18-month cycle trough, usually followed by a retest. The correction then ends with a somewhat scary capitulation – a dastardly down day that may trigger exchange circuit breakers on heavy volume. Only time will tell. Of course, there may be nothing normal or typical in the current circumstances.

Perhaps the most disturbing aspect of this initial stage of the downdraft is that there was nowhere to hide (except cold hard cash and a slight blip higher in the Energy ETF). U.S. Treasuries – normally THE haven during a stock market decline – were off significantly today. The inverse of the U.S. Treasury sell-off is that interest rates actually rose on the day – a most unusual circumstance in such a steep stock market decline. The U.S. Dollar rallied – perhaps driven by the attractiveness to foreigners of higher U.S. interest rates and a flight to safety.

The inverse stock/bond behavior is a shout-out to our old friend, WWSHD (When What Should Happen Doesn’t). If stocks decline, interest rates should fall, making the U.S. Dollar less attractive. The counter-scenario at hand might portend a deeper (as opposed to shallower) trough ahead of us.

For now, the put/call ratio and volatility index both closed a bit overdone on the fear side. We should get a short-covering bounce in the morning off the 50-day line on the S&P 500, also the former channel top line. It is hard to believe that we already got to the 50-day line today. As you know, that was my ultimate target if we broke support this morning, but I thought it would take a few sessions to get there.

Typically – or perhaps better stated – ideally, the market would rally a bit here and give us the penultimate shorting opportunity on a long, third wave down in Elliott Wave terminology. We shall see.

In the meantime, there are more stocks to short in this decline than I have money to short them. We will start with the pumped-up popular stocks with no earnings. We can work it from there.

By the way, at one point tonight, Bitcoin was off nearly $10,000. Apparently, Elon Musk decided that Bitcoin was bad and no longer acceptable to Tesla because it had too large of a carbon footprint. Of course, this was after Tesla recently sold their Bitcoin for a $1 billion profit. How about a “green” donation, Elon? Apparently, Bitcoin tripped hard on the news.

One more quick point, if you would kindly indulge another small rant. The Fed released a paper last week discussing the dangers of the asset bubble underway. In a series of Fed governor speeches over the past week, the Fed has been jawboning the market down. 

Any notion that the Fed will save this market, then, is sadly misplaced. They want it to fall. If it falls, the ensuing calamity will likely temper inflation, and the Fed won’t necessarily need to raise rates and bankrupt the U.S. Treasury.

Wall Street having already been alerted, the Fed can now lay the problem off on the 8 million new retail traders in the market since last year. Wall Street will cheerfully introduce the newbies to the concept of “south” now that they only understand “north.” If that is not enough, the Fed can consign losses to all the “buy and hold” 401(k) plans out there.  You know, “invest for the long-term.” Perhaps stated another way “stay in until we get out.” 

A good stock market walloping also should scare the little people into spending less and maybe getting a job for the meager serf wages offered. Maybe the wages can even fall further, with the ongoing, massive, illegal immigration. They need jobs too! 

By the way, how many baby boomers are about to retire? The number is historic, you say? What is it the young people text to each other these days, “Laugh out Loud?” Do you see how this works?

Ahh, the World Economic Forum’s Great Reset – “You will own nothing, but you will be happy.”

For now, it’s Davos or bust. These are, indeed, extraordinary times.

A.F. Thornton

Navigator™ Signals for Day Traders Navigator™ Signals for Swing Traders
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The markets left us hanging at the close, as they often do. And that leaves me sitting on my hands for now.

The S&P 500 index gave us a nice fade trade off the open, buying the high of the break of the first one-minute bar. But the trade ended at the opening price. As is typical on large gaps, the market went sideways for most of the day in about a 50-point range (Gap Rule #4). Try as it might, the index never got back through and above the opening price, an overall sign of weakness. Also contributing to weakness, the index closed below its 21-day line. But the index spun a bit of a tail, held the 4015 support discussed here, and held the trendline connecting the March 3rd and March 25th lows.

The price behavior, then, is a bit ambiguous. It would seem that we still have a sideways, balanced pattern, with repeated “look above” and “look below” attempts that fail. It isn’t easy to discern if the last high was the 5th and final wave of the runup since March 3rd, or simply part of this move across the channel and into the trendline – perhaps still a 4th wave consolidation with a 5th and final wave rally ready to get underway.

And that brings me to the NASDAQ 100, which was stronger today, filled its gap, and closed at the top of its daily candle. The NASDAQ 100 behavior and position lead me to believe that the S&P 500 index is, indeed, topping. The NASDAQ 100 remained under its 50-day line, and the price could not get back up into yesterday’s range at all. Despite its relative outperformance of the S&P 500, the weak price action that preceded the NASDAQ landing today somewhat negates any positives. But the NASDAQ 100 held its trendline (though a sloppy looking structure) and still has a pattern of (slightly) higher highs and lows.

The Russell 2000 small-cap index held its support lows but has broken its 21-day line and a rising trendline. The Dow remains the stronger-looking index, at least on the chart, and has yet to violate anything significant.

I am unmotivated to take any new positions until the picture is a bit clearer. Still, my bias remains that the market has topped and will spend some time sorting through valuations, interest rates, and inflation expectations. Like the pipeline cyberattack, any more black swan events, and you may need to lock me up. Lately, I feel like I am walking around in a moving elevator. I prefer more solid ground.

A.F. Thornton

Navigator™ Signals for Day Traders Navigator™ Signals for Swing Traders
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The NASDAQ 100 and monsters of tech were hit hard today on a spike in 10-year U.S. Treasury rates. The downtrend accelerated on announcement of a major pipeline shutdown do to a cyberattack. 

As I warned this morning, the 30% tech weighting eventually spilled its negative returns into the S&P 500 mid-day, and caught the Russell 2000 as well. While there were more advancers than decliners, and more positive than negative sectors, the tech math overcame the gains from the other sectors and S&P 500 index members, at least for now.

We are stopped out of all positions and back to cash.

A.F. Thornton

Navigator™ Signals for Day Traders Navigator™ Signals for Swing Traders
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Disappointingly, the selling in technology has accelerated mid-day, partially driven by a spike in 10-year treasury rates. If the S&P 500 breaks Friday’s low, we could be left with a failed rally and our stops would be triggered. Stay alert, as I will make a final decision about 15 minutes before the close.

This also qualifies for one of those WWSHD moments. When what should happen doesn’t is often a signal that the market wants to go the other direction. We will see what the market decides to do before the close.

Navigator™ Signals for Swing Traders
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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.

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