Category Navigator™ Signals for Day Traders

Pre-Market Outlook – 5/12/2021

Wednesday Morning - 5/12/2021

The headline Consumer Price Index inflation number was released this morning, showing an annualized inflation rate of 7.2%. Surprise, surprise? Apparently so, as the consensus expectation was more along the lines of 2.4%. What planet are these economists living on?

Up until that moment. I would have written that overnight futures traders in Asia and Europe could not push the S&P 500 index to new lows, a bullish sign in the short term. Even after the Government released the headline number, the S&P 500 plunged 50 points, recovered, but is now heading back down again. In fact, overnight traders tested both ends of yesterday’s range but could not find acceptance above or below. Again, I carry that forward as potentially bullish in the very short term.

That sets us to open inside yesterday’s range, with overnight inventory net short. So we may see a counter auction higher at the open, though there is little else to guide us and the pre-market volatility may negate the counter auction theory. The Nasdaq100 and S&P 500 are now trading below their 21-day EMAs, which tips my macro bias negative.

We will be gapping back down into yesterday’s large range. While yesterday’s rally and relatively strong close seemed bullish, prices did not fill yesterday’s large gap. Prices filled it only fractionally. This still left a very large void above yesterday’s high. 

Value (where 70% of the volume traded) broke decisively lower from Monday. Last night’s overnight activity stopped right at the Value Area High, indicating that sellers are still in control. As set forth above, the CPI data release did take prices below yesterday’s low briefly. Undoubtedly, traders ran the stops under that low, but I still carry that forward as price exploration.

As the overnight high around 4150 stalled at the Value Area High, I will trade from the framework that sellers are dominant, and we should sell rallies unless we find acceptance above that level. Carry forward yesterday’s regular session low at 4103.75, as it was at a very technical level that is visual and mechanical for all traders. That could make this low weak should it be revisited.

Bottom line, bearish below 4150 today. But also carry forward that the overnight low at 4095.50 breached the regular session low at 4103.75 (also the prior support level from April). For now, those lower prices were rejected. Always remember, however, that overnight trade has less importance than regular session trade. Retesting the overnight low would be a bearish signal this morning and potentially put the daily 50-day line into play on the S&P 500 in the 4040 area.

A.F. Thornton

Epilogue – 5/11/2021

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

Pre-Market Outlook – Update 5/11/2021

Tuesday - 2:00 pm EST - S&P Futures at 4150

The NASDAQ 100 has managed to fill its gap at this writing, which is encouraging. But the index saw considerably more damage than the S&P 500 and currently rests on the top of today’s daily candle at its 50-day line. The S&P 500 has been weaker so far, has not filled its gap, and sits just below its 21-day line. 

On a positive note, the S&P 500 is holding this morning’s low and the swing lows from April that congregate around 4115 (on the cash index) and form the bottom of our widened balance area. We would expect buyers at 4115 – but will it be enough to keep the current trend intact? If we can keep the candle spike into this morning’s low, we can also hold the trendline connecting the March 4th and 25th lows. 

Another positive force is the Weekly Expected Move low around 4178. While it has been materially breached this morning, market makers have an incentive to push prices back to or above that level before Friday’s weekly options expiration.

The 4150 level, then, is the moment of truth. If the market continues lower this afternoon and closes below 4115, then we have confirmation of the 18-month cycle peak, a trendline break, and we break the recent pattern of higher highs and lows. We would then definitively shift gears to shorting rallies.

There is another possibility. The market could hold here and try to resume the rally. That would put yesterday and this morning’s sell-off as news-driven but severe liquidation breaks centered around the oil pipeline cyber attack. The considerable damage in the NASDAQ 100 (trading below its 50-day SMA) would suggest that the intermediate cycle peak we have been expecting is at hand. Either way, we should know more by the close.

Before the deterioration yesterday, many positive charts reflected companies benefitting from the normalization of travel and leisure and infrastructure spending. The prices were moving out of basing patterns, so the sudden decline undoubtedly changed the tone. It only takes a match to light the fire, forcing market participants to take a sobering look at the totality of our current economic and inflation circumstances.

I will update you after the close.

A.F. Thornton

Pre-Market Outlook – 5/11/2021

Tuesday Morning - 5/11/2021

Be sure to read the View from the Top – Interim Report from earlier this morning. From all appearances, the 18-month cycle peak has arrived. A reasonable target for this correction in normal circumstances is the 200-day moving average – not necessarily a straight shot to that level but more as a destination. This morning, the 200-day line sits at about 3665 on the cash S&P 500 index. On the NASDAQ 100 cash index, the line is at 13,324.

Gap rules will apply this morning, as both the NASDAQ 100 and S&P 500 indices will gap down with true gaps. The NASDAQ 100 is still leading lower this morning, but there is slightly more parity with the S&P 500 now.

As with any large true gap, the early focus will be on the fill, complete lack of fill, or partial fill. Every one of those scenarios will tell us a different tale about how much conviction overnight sellers have. Gap rules #2 and #4 should be at the forefront of your mindset when navigating this open.

On the S&P 500, pay close attention to the May 4th swing low at 4188, as it was the last pullback low before the market made a higher high. The level also represents the last cycle low, the violation of which confirms the top. This level has already been breached on the NASDAQ 100. If there are no buyers at the level on the S&P 500 index, that is further market-generated information regarding the weakness at hand.

As usual, with a large gap, assume the potential for fade early in today’s session. Either buy the first one-minute high or cross back up through the open should the opening drive be lower. Taking out the overnight low and moving back into the overnight range can also be a strategy. Monitor for continuation and context.

Gap and go scenarios from gaps this large are relatively rare. That means that they usually play out along the gap rule #4 and spend most of the session digesting the overnight move. That would be bearish in the bigger picture, but offers little opportunity for day timeframe futures traders. Those looking for short-term opportunities should know that Individual equities often trend better.

Trying to “buy the dip” or pick a bottom in the circumstances can be treacherous at best. Sometimes, it can be wise to sit out a few sessions and let the market telegraph more certainty.

Good luck today.

A.F. Thornton

View from the Top – Sell Signal

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

View from the Top – Interim Stop Alert

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.

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

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 – 5/5/2021

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

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