Someone once said that we are only one U.S. Treasury auction away from disaster. Despite the terrible inflation reports of the past few days, the stock market was going along fine yesterday until the U.S. Treasury 30-Year Bond auction yesterday afternoon. Let’s say there was a “coverage” problem. In short, demand was weak, and the Treasury had to discount prices more than expected to sell the bonds.

Bottom line – it took higher rates than forecast to sell the new, 30-year treasuries. Given that we sell most of the bonds to ourselves (something that would make even Bernie Madoff jealous), it turned out to be quite a task to sell anything to the few independent buyers who showed up. That is not a good omen.

Or, I jinxed the market by pointing out that the sellers had not shown up in earnest on Tuesday. Trader’s choice.

And this raises my biggest dilemma. Rates continue to sit on the precipice of a head and shoulders reversal pattern, which forecasts they could double. It is not easy to discern the next move because it is such a broad pattern on the slow-moving monthly/weekly charts. One thing is for sure, though; the yield curve is inverting, which could forecast a recession. But inflation isn’t decreasing either. That presents the possibility of stagflation of the dastardly 1970s variety.

On a positive note, some are celebrating that Jimmy Carter lived long enough to pass the title of the worst President of all time. It does not get much worse than this for the average person. Utility bills will be up 40% this winter over last. Food prices have doubled in many cases. Prices at the pump are up 35%. Rents are up 30% in many areas. Housing prices are up 20% in the last year, as are used car prices. Premiums of 10% to 20% have been added to the price of new cars for “Special Transportation Costs,” if you can even get the new vehicle you desire. And the shortages have only just begun.

I try to be fair. I don’t think the current administration is at fault for demographically driven housing inflation, but I don’t have any good excuses for the rest of their policy disasters. The new infrastructure bill is likely to put fuel on the fire.

Mercifully, the bond market is closed today along with banks as it is Veteran’s Day. Trading will likely be light and manipulable in the equity markets. I usually don’t day trade on dull volume holidays as the hedge funds can play games and rip your face off for no good reason. Be especially careful if you venture forth.

Swing traders should continue to hold cash. Our brief foray into the DBC and IWM yesterday on the five-day line failed, as did the line itself. It was a case where we were thankful for the stops, as the market continued significantly lower and closed on the lows. But overnight activity responded with a session that did not make a new low below the regular session low and is currently trading on a substantial gap higher with about 95% of the range above the settlement.

When the sentiment is short-term bearish, and the Globex session fails to make a new low, that is a good sign for the bulls. It is even better when the market stages a strong rally on net long overnight inventory.

Use yesterday’s halfback at 4552 as your bull/bear threshold for day-trading today. The ONH 4461.50 is your first upside target, then yesterday’s high at 4678 or so. Going south, the first target is the ONL at 4638.75. The next target is yesterday’s low at 4625.25. If that level falls, then the status quo is maintained, and lower prices lie ahead in this pullback.

A.F. Thornton

The CPI was higher than expected this morning, as Kraft-Heinz quietly raised their prices by 20% yesterday. The CPI number does not seem to be driving the market any lower than the overnight range that preceded CPI publication.

Some sellers showed up yesterday, but they were not particularly serious. Our downside plan worked to the letter for day trading.

We are trading close to yesterday’s regular session low. Opening or sustaining prices below it would be unhelpful for bulls. The overnight low at 4656.75 is the key downside reference today. A drop below that level puts 4642 into play. From there, watch each of the virgin points of control and gaps below us for support.

If we head north, the first task is to stay inside yesterday’s range and continue balancing. Watch market internals and tempo for clues. Also, watch the direction of developing value today.

Traders can justify anything here in 20/20 hindsight. What I always think about is how the market could fool most people. Bulls might think the October low is in, and the market should be in party season until April. Then, the market could turn around and put in a new low.

Bears might be giving up after this parabolic run only to miss their chance. The best encouragement I could give the bears is kind of like walking a plank over a steep crevice. If you look down from these price levels, any reasonable trader should get some vertigo.

So, if we can stay inside yesterday’s range, I will hat tip the bulls. Sustained activity on weak internals below the 4650ish area keeps the correction going.

Swing traders should still be holding cash. Recall from last night that DBC and IWM are on the table. I will let you know if we tee them up.

A.F. Thornton

Yesterday’s market traded completely inside Friday’s price action, adding some balance between buyers and sellers. But sometimes, what the market doesn’t do is more important than what it does. The absence of committed sellers is noteworthy, especially at these lofty levels. Until the sellers show up, it would seem that the market is running time off the clock until it sees the Consumer Price Index numbers tomorrow.

The Producer Price Index came in fractionally below consensus this morning. The year-over-year rate still exceeds 8%. But it could have been worse, right? Had the number exceeded expectations, the market would not be happy. As for now, the market is trading only slightly lower at 4695 or so.

Swing traders would be wise to continue favoring high cash positions. The market does not have much room to go higher unless we are going parabolic to create a higher weekly trading channel. Sideways seems the more likely path before we see a dip for at least a few days. Please wait for the range to establish itself before getting brave. Stay neutral – don’t get overly bearish. Bearish is not justified quite yet, if at all.

Day traders can use the overnight high at 4697.50 as today’s gateway to higher prices. The battle here is to capture and hold 4700. The weekly open at 4702 is the switch between the weekly candle going red or green. If the overnight high is conquered, yesterday’s high at 4707.50 is the first target, then the all-time high at 4711.75. Above 4711.75 is no man’s land.

Going south, it gets interesting if we start trading below yesterday’s regular session low at 4687.50. That would qualify as a pivot lower on the cash index and spook buyers. Were we to close below 4687.50, the sellers might begin to wake up. The risk of rapid liquidation breaks increases at these levels and with the weak structure below us. Stops will be important today.

Globex traders pushed the market lower to 4680, but we are back above 4687.50 this morning. Acceptance below 4680 is suspicious. A move below 4667.50 conquers Friday’s low and confirms that corrective action is underway. The first of many virgin Points of Control sits at 4664.25 – a good, first downside target.

Good luck today.

A.F. Thornton

The best part about the recent stock market progression has been the push/pull of the inflation trade. Sometimes energy and materials lead the market along with financials (driven by interest rate pressure). This leadership alternates with technology. Technology leads when there is less pressure on rates due to lower inflation expectations. The result has been mild pullbacks because the sectors don’t correct in unison.

Notably, this week, we get the new CPI number on Wednesday. Even the consensus expects inflation to rise. And we already know that CPI understates the true inflation rate. I fear that the inflation genie is out of the bottle. Good luck stuffing her back in.

For example, government and Social Security retirement funds are given a 5% plus cost of living boost. That is 75 million people with more money to spend. That boosts inflation and accommodates higher prices.

If you believe the statistics, there are 7 million unemployed available for 10 million jobs. That will surely lead to wage pressure.

The Fed has not exactly been aggressive in the inflation fight. Chairman Powell wants to be reappointed in January and won’t cross the Biden administration. The Fed has also caught the “woke” virus, which will skew their mandate to maintain price stability.

Unbelievably, the Biden administration wants to shut down another oil pipeline. They are turning a blind eye to the parabolic rise in energy prices and utility bills. In fact, they are celebrating it.

Then, as I have pointed out, the Millennial generation is moving into its housing stage. Along with illegal immigration, this is causing considerable demand for housing, just as their Baby Boom parents experienced in the late 1970s.

Over the weekend, the headlines have all been about how the stock market is ready to crash due to the parabolic rise from the October low. If I have learned anything these past 35 years, it is that the market rarely follows consensus expectations.

The market definitely looks like it is in a climatic blow-off phase, but I cannot tell you the climb is over yet. I can say that just as it has over the past year, the market has climbed to the top of the weekly channel. Up here, it has tended to go sideways for a bit, then dips slightly into one of the cycle lows.

So I am giving the market two possibilities. First, it could expand the channel with the seeming lack of sellers at hand. Second, it could go sideways and ride the channel at a slower pace and lower angle, as it has done recently. The latter is more likely than the former.

There remains considerable cash on the sidelines – nearly $3.5 trillion in dry powder. That cash has to land somewhere. The return on bonds is negative at this point when inflation is considered.

There is an asset class that has the potential to explode higher. It is commodities (DBA and DBC). Even gold, silver, and gold stocks are on my radar. If money managers even made a small allocation to these areas, they would move as fast and parabolically as stocks. What else makes sense with inflation seemingly climbing unabated?

If I have a major concern, it is the fact that the dollar and bonds are rising together. This supports the crash crowd and their arguments. Normally, bonds and the dollar counter each other. Rising bonds mean falling interest rates. Why would investors buy the dollar when U.S. rates are declining unless it is a “fear’ trade? China still has significant economic problems, particularly in its real estate sector, which could become contagious. Global tensions with China remain high.

Trading Strategies

Swing traders should maintain high cash positions until the next dip and consider allocating to mining stocks and commodities (e.g. the DBA or DBC ETFs). Day traders can use Friday’s low at 4667.50 as a threshold. Any acceptance below that level, say on the hourly charts, supports some corrective action.

The market structure underneath current levels remains poor. There are so many virgin points of control. I cannot count that high. If we get through 4700, so be it. But if 4667.50 fails, we could get back to the virgin Point of Control at 4613 rather quickly.

There is nothing in Globex to guide as at the open. So more reliable trades should develop later rather than earlier.

A.F. Thornton

It was the trader’s choice yesterday. Did the market rally on the Fed’s decision to slow the monetary easing process? Has the battle against inflation finally begun? Or was the market cheering the blow to American Marxism and Communism as the result of Tuesday’s election results? Either way, the market looks both parabolic and climactic. We can ride it. But the liquidation break, when it comes, could be swift and unpleasant.

As measured by the Russell 2000 (IWM), small caps did, indeed, break out on decent volume. If the opportunity presents, buy the retest. Buy any pullback. Target double the 9-month trading range. The ISM manufacturing report came out strong yesterday – and we have the employment report tomorrow. But the risk-on nature of what a breakout in small caps represents is undeniable.

The measured move projected from the past several months S&P 500 trading range (September peak to October low) and the top of the old weekly channel give the S&P 500 an upside target of 4800. I would get off the escalator there, though it is hard to believe it will be a straight shot to the target. As I had suspected yesterday, the failure of the rising wedge to break lower was a WWSHD contrary signal.

Overnight traders were unable to press the downside much, if any. This leaves overnight inventory net long, but we are slated to gap open, if ever so slightly. Small gaps usually fill, and there could be some profit-taking on the overnight inventory at the open. Gap Rules are in play, but I could argue Spike Rules as well.

Use the overnight high at 4662.50 as the gateway to continue the blow-off rally, with the next roundie at 4700 as the near-term target. 4650 is the price to hold. Acceptance below that level on the hourly chart could spoil the fun.

I had some emergency travel arise yesterday, so I will continue to work on a macro presentation once I am settled in today.

A.F. Thornton

Today is Fed announcement day. It is unwise to day-trade today unless you have a specific strategy that centers around the Fed decision. So I am refraining from announcing key levels, except that a sell-off for a few days is likely to follow on any day where we close below the previous day’s low. For sure, though, 4600 is a crucial support level on the daily chart and should hold unless a more extensive correction gets underway. Also, the nominal 40-day cycle dip is on the docket soon, though it may be mild in the context of the current rally and positive seasonality.

This year, the market rallied into the Fed meetings, and a few sessions beyond, before correcting a few days. What is unusual about this Fed meeting is that the market expects the governors to throttle back on bond purchases (Quantitative Easing). That is equivalent to a mild tightening. So why has the market rallied this time?

The most logical expectation is that the economy is slowing, the yield curve is inverting, and that should take the pressure of the Fed, interest rates, and inflation. The Fed’s potential action also is considered anti-inflationary. Inflation may very well be the greatest threat on the economy’s table.

In short, the Fed does not need to do anything dramatic today and has a runway to unwind some of its easy policies. Only time will tell. Success requires a delicate balance – a slowing economy that doesn’t slip into a recession. We used to call this Goldilocks from the famous fable – not too hot and not too cold.

What has been interesting to watch are the four major indices. The Dow, S&P 500, NASDAQ 100, and Russell 2000 have been vying for leadership off the early October lows like a good horse race. Uncertainty in the direction of interest rates has contributed to this contest for leadership. Rates drive sector rotation, and investors/traders have been understandably indecisive in picking the winners.

Keep your eye on the Russell 2000 (IWM) as it is on the verge of a breakout from the nine-month base. That could be very powerful should the breakout materialize. The Russell, Financials (XLF), Energy, Dow, and other cyclicals will benefit from mildly rising interest rates. Technology typically lags in such an environment.

From the bigger picture, note the rising wedges on the NASDAQ 100 and S&P 500 daily charts. Normally, that means a dip ahead. The market has been strong, and not all patterns have followed through successfully and reliably. Nevertheless, note the rising wedge pattern in your narrative. As set forth above, the nominal 40-day cycle dip is due any time and, in an ideal world, would result in a few days of weakness into early next week. A break of the wedge would get the ball rolling.

Expect a balancing market into the Fed meeting. After the Fed announcement or later this evening, I will publish a “View from the Top” macro perspective.

A.F. Thornton

Look for the trading range between 4690 and 4720 to maintain in the next few sessions. Overnight inventory is net short, so that we might see a brief short-covering rally at the open. And yesterday’s price action did not get too far above Friday, with value (where 70% of the volume occurred) overlapping Friday’s volume.

In simple terms, the market slowed down a bit near the roundie (4600). This behavior is not necessarily negative nor unexpected. The Fed meeting starts today, and the announcement on interest rates and whether the Fed continues their bond-buying program (Quantitative Easing) comes tomorrow afternoon.

Perhaps a bit surprising to me is that the market has rallied hard into the meeting and announcement. The consensus expects the Fed to leave rates alone but announce a tapering of the Quantitative Easing program. Normally that would be negative for the markets. One must believe that the insiders know that the Fed will not change its policies, or the market likes the news. Another possibility is that evidence of a slowing economy takes the pressure off the Fed in the short term. So the party might go on for a couple of more hours. Who knows?

Otherwise, this is a good area to pause. We have achieved all of my original targets from the October low. So the upside is blue sky and somewhat undefended.

The first gateway to the north is the overnight high at 4610, which opens the door to yesterday’s high at 4612.75. Finally, 4619.75 is the Globex high from Sunday night. Conquer that, and happy days are here again.

I get a bit more nervous if we give up the roundie at 4600. That level is the true battle here. We have double POCs right below that level which should provide support. If they don’t, I think the idea of a sell-off for a couple of days becomes realistic. I will be using yesterday’s regular session low at 4586.50 as the line in the sand today. I will be short-term bearish below that line.

A.F. Thornton

2:18: So they’re almost home to 458.00. Between 458.15 and 457.79 is the spot.

Aggressive traders can expect a bounce from that spot.

It’s a scalp, not a marriage…

We’re running out of time on the clock, so understand if it goes against you and the time is running out, you either have to take the hit or hold and hope.

The exact reason why trades taken too late come with added risk…

Below 457.79 on candle closes and it’s wrong.

Back as needed.

2:09: Some traders can see the writing on the wall…

They’re either going to reach 458 give or take right into the closing bell, or…

Just float around the rest of the day…

Still watching just in case…

Back as needed…

1:52: The same support and important spot from this morning around 458.00 give or take should be important again if reached…

Should get a bounce unless it happens near the end of day, then anything goes…

1:29: Around, above and below the big phat round number is all they’re doing – at present…

Back as needed…

1:12: Where are they now?

They’re climbing the first-hour breakdown candle toward the high…

Maybe it’s a wedge pattern and they come back down after running said test in the neighborhood of the highs…

However, that high is also the all-time high from this morning…

Therefore, I’m not in the camp of betting they’ll come down into the close with a couple of hours left on the clock…

Just sayin’

It’s quiet and they’ve been in the light volume float mode since the early morning shakeout operation…

Back as needed…

12:42: Update…

They got back to 460 as prescribed… (459.97 high thus far…)

They’ll likely get a little higher but should peter out sooner than later for a while…

Back as needed.

11:03 Staying above 458.70 keeps the bulls working back to the big phat round number of 460.00 or higher, at some point…

Still back after lunchtime…

11:01: They really needed to get to 458 and below for another trade at present…

Now they’re bouncing away, so it’s not the same…

This is the bounce we would have been looking for…

Just didn’t get to my number…

Back after lunchtime or before if something crazy is happening…

10:57: At a spike of 458 it will be showtime again for the bulls to play defense…

Big spot.

10:37: If they drop em’…

They will likely run down and spike through 458.00.

And, if they do there should be a snapback…

Candle closes below 457.60 and the bears are in control and lower prices would be on the docket…

Back as needed…

10:30: No change for now…

They’ll move, but until they’re above one place or below another, it’s a chop shop formation…

Back as needed…

10:24: 458.00 is support.

The candle closes below and the bears pick up the fumble…

460.00 is resistance (give or take…)

In between is a chop shop formation…

10:09: And by the way…

That’s what we call “A Shakeout Operation…”

10:08: Next order of business is back to the magnetic 460.00…

Above and below and back to…

So far, that’s what’s going on…

10:05: Low of 458.20 low against 458 give or take.

Kind of on the line of give or take…

Either way, nice bounce from that area…

They’ve moved em’ quick all of a sudden…

We’ll get some opportunities as the storyline develops…

10:02: 458 give or take is the next spot where if a test is run, there should be a reaction in the other direction…

9:51: Traders long need to book profit along the way…

459.95 is the key…

Above on candle closes and she can run some…

Until she does, tests and rests are on the table…

9:50: Ran down to 459.25 and now lower.

It’s showtime for the bulls to play defense.

Below 458.00 on candle closes and it’s not bullish in the short run…

9:44: In the spirit of no surprises…

They’re doing the thing around 460.00 – back and forth…

Opportunity is scarce…

It’s a floater at present.

Back as needed…

9:36: 459.25 (give or take) should be a bounce number…

If reached on a straight shot…

9:33: Very quiet open…

In patience mode…

Remember, they’ll trade away from and then come back to 460.00…

9:16: We’ll let em’ go for a while at the open…

They’re hanging around SPY 460.00- the big phat round number…

Expect some back and forth above and below…

Remember – it’s magnetic…

EarlyThoughts

Happy Monday…

last week ended with a ramp-up right into the close…

Follow-through is what we’re seeing to start the first day of the month…

We talked about the big phat round numbers and the inverse head & shoulders pattern…

No surprises, they did the thing…

As for the numbers…

The SPY is trading at new all-time highs which is also known as “No Mans Land…”

It’s not a “hop on the bus” scenario…

It’s not a “short the market with both hands” scenario…

It’s a wait to see what happens and what develops throughout the day scenario…

The gap left open from last week is 459.25.

There will be support and a bull-bear battle before they get to the gap…

We’ve got the big phat round number of 460.00 which should be tested sooner than later….

As for Stocks on the Move…

It’s a light day in terms of pre-market activity.

We have no choice but to accept the tape Mrs. Market provides….

The Founders Group just sold its 10% futures position at 4536.25 for a gain of 170.75 points per contract. This is the culmination of the “Cradle Trade” identified back on October 13th, barely a week ago. We have reached the Weekly Expected Move and our original target.

The market has behaved extremely bullishly. Nevertheless, pigs get fat and hogs get slaughtered. I don’t want to be the hog.

Tomorrow is options expiration and I am taking the day off, so there will be no pre-market outlook. The next publication will be Sunday.

A.F. Thornton