Category Navigator™ Signals for Day Traders

I have been posting the technical notes that I keep throughout the day, week, and month. Of course, this practically includes a note on every wiggle of the index. What I will be doing from now on is posting that on a separate website page every day and trying to stay with the most important notes that affected the day and the best trades.

Friday’s Epilogue

Friday started with a True Gap down (open lower than the previous day’s low) driven by the Amazon earnings miss the night before. Gap Rules were in play. Note that I will be expanding the Gap Rules definition to include the four most common chart patterns that appear when Gaps are presented.

The market started unduly stretched below the 5-minute 21-EMA (mean) because it was a huge gap. So, depending on overnight inventory, traders typically attempt to fill the gap by running a test back up to the mean. The test usually fails, and the market can reverse several times before it takes a direction, which can often be sideways or no direction at all on a huge Gap. The playbook is the same whether the gap is up or down.

Friday’s case had two features of note, both mentioned in the Pre-Market Outlook. First, traders were 100% short overnight which left them vulnerable to a short-covering/inventory liquidation rally at the open. Second, while a serious earnings disappointment in a key name, Amazon’s earnings miss did not reflect a systemic problem.

As far as key levels, the weekly open, 5-day stop line, daily Navigator Algo trigger, 5, 15, and hourly 21 lines (means) all congregated as resistance to any rally around 4400, which is a roundie (important psychological level).

As mentioned in the Pre-Market Outlook, the mid-point of the overnight range was 4388 and would be my barometer of strength for the day.

Indeed, the conglomeration of aforementioned magnets became the resistance, and 4388 marked the bottom of the range for the most part.

So the market started with a parabolic micro-bull channel short-covering rally. It nearly filled the gap in the first 30-minutes, stalling at the loose juncture of our magnets and resistance. The tag of the 5-minute EMA on a climax bar was the reversal top.

In this particular Gap scenario, parabolic strength in the first run usually negates the risk of further declines in a downtrend day. Instead, the market typically wedges into a retest of the morning low and gap bottom l by mid-morning (Eastern Time), then makes another rally attempt to punch through the mean.

On large gap days, the retest usually fails, and you end up in a trading range the rest of the day, perhaps with another run at the low and high. As a bonus Friday, the put/call ratio shot up to .80, which is in the extreme fear end of the recent range, setting up the shorts for another short-covering rally before the day’s end. This can be uniquely advantageous on Fridays as the shorts would be reticent to hold over the weekend.

All in all, the day ended up as a trading range with a slight downward slope making it technically a bear channel and a dance around our 5-day stop line. To keep it interesting, the market literally closed on the line. I managed to get five nice trades on the day, four longs and one short, for a total of 35 points per contract. Add this day to your notebooks, as it is one of the four typical patterns we see on gap days.

Today’s Plan

The market is slated to open with a slight true gap (open higher than Friday’s high). If so, that leaves an island reversal from Friday, and Gap Rules will apply today, but in the opposite direction as Friday. If we don’t open outside Friday’s range, gap rules are negated.

Key support should be Friday’s magnets around the 5-day line. A good proxy for this is Friday’s RTH high at 4405, but no lower than the overnight low, and Friday’s CME settlement price at 4394.75. The target is the overnight high at 4422.50, which is a poor high, as carried forward from last week.

So take the usual tack. As overnight inventory is 100% long, look for an initial fade and some profit-taking.

Value has been relatively unchanged for six daily sessions now.  Although we are gapping up a solid clip from the Friday settlement, remember that a true gap is measured by how far it is above Friday’s regular session high at 4405.  By that metric, the gap is very tiny thus far.  We are also right in the middle of the aforementioned value areas. 

For these reasons, the opening trade may not be as clear as you would think.  When deciding if shock and awe is truly a factor on any open, always consider where the current price is in relation to Friday’s high/low, settlement, and the overall overnight range.

Good luck today.

A.F. Thornton

Amazon Missed and The Markets Hissed

Yesterday saw a bull trend from the open reverse mid-day at the top of the trading channel. My chart notes appear above. Amazon is getting the blame for missing their numbers and guiding lower for the third quarter. As it is one of the highest market-cap stocks in the indices, it has a big impact on the numbers this morning.

But that doesn’t explain everything. The market reversed midday, not after the bell. After the bell, it just accelerated. Instead, the market struggles to get from the lower back into the upper half of its longer-term channel. Can it? Will it? That is the question for August.

That brings us to our five-day line stop for the S&P 500 futures Navigator Swing position. The Founder’s Group stopped out last night at 4393.75 for a nice profit. Since there is no overnight stop for calls, I am advising you to hold those positions today. Month-end and the first few days of the month typically have a positive bias. As long as the market holds above the daily 21-line, and given that our stops were triggered in the overnight market, it makes sense to give the market a day to digest everything. When dealing with futures and the accompanying leverage, there are no such luxuries. The market hit an all-time high yesterday, so getting too negative too quickly makes no sense.

Today’s Plan

The market will open with a true gap down, so Gap Rules apply this morning. Overnight inventory is 100% net short, and it won’t take much to spook these traders. While the current 29 handles lower is noteworthy against the backdrop of new highs, there is plenty of context around that price that tells us that it could certainly be far worse.

We are currently 15 points from the ONL at 4370.75, and that ONL has four TPO’s across, telling us that sellers had difficulty getting prices lower past that level. Furthermore, we are opening out of balance with yesterday’s RTH range, but certainly still well within where value has developed over the last four sessions.

Note how the ONH topped out very close to settlement, which was also the multi-session high yesterday. Continue to carry this level forward as it is still in play. Overnight halfback is also making an appearance today as it’s always noteworthy on expanded overnight ranges that are gapping strongly.

When considering early trade, note how far from the ONL we have already come. This reduces some of the shock and awe as overnight inventory is somewhat already corrected. This makes sense as the gap is due to a single stock that impacted the NASDAQ 100, thereby also impacting the S&P 500. This is different from a more systemic catalyst which would have driven futures much lower.

Watch the overnight halfback closely at 4388 as an early barometer of strength. An opening drive that can overtake the line and hold it could easily have overnight shorts on the run. Today is the last trading day of the month and weekly options expiration. So month-end money manager shifts could distort normal price action.

A.F. Thornton

No complaints, the market looks fine going into lunch. Internals have remained strong, with 3 to 1 and 2 to 1 advancers over decliners in the NYSE and NASDAQ, respectively. Tick distribution has been mostly positive all morning. The S&P 500 has, indeed, broken to new all-time highs though I would not say it has set the world on fire, and I would like to see the break become more definitive in the afternoon drive.

We started with a bull microchannel on our five-minute day-trading chart, followed by a common two-step correction back to the 21-period line. That now gives us a lower trendline for the remainder of the day. We have a short-term target of 4440, as mentioned in the Pre-Market Outlook. We may not get there today, as the market is already up quite a bit.

Our XLF and XLE swing trades lead the S&P 500 in relative performance as money continues to rotate back to these areas after three months of correction/consolidation. So far, so good, but my guard is always up.

Having passed the Fed meeting and quarterly GDP report, along with stellar earnings from many key stocks, the short-term bias remains bullish other than contending with the seasonal weakness ahead for August and September.

For now, It would take quite a reversal for July to finish as a red candle, so the trend continues as our friend until she dumps us.

A.F. Thornton

Overnight inventory is balanced, and we are currently trading inside yesterday’s range. The daily chart implications are an overall triangle balance area starting with the 7/27 (Tuesday) base between 4416.75 (now the all-time-high) and the low at 4364.75. Then we have yesterday’s (Wednesday) inside Fed range day balanced between 4407.75 and 4377.50. Now we have the overnight range inside both Tuesday and Wednesday’s range and bounded by 4403 and 4480.50.

So what we have is a classic three-day triangle into the GDP and employment reports this morning, which included the widely followed price deflator inflation gauge. That may be why yesterday’s Fed day finished smack in the middle of the range and ended up as a yawner of sorts. With the market still inside this range at this writing, we can take Monday’s approximate 50 point range triangle base and roughly project it from the middle of the triangle.

On a break to the upside, we get to a minimum target of 4440, and perhaps eventually to our 4460 Weekly Expected Move high by tomorrow. On the downside, we visit a target of 4340, right below the Weekly Expected Move low at 4346 and close to the 21-day line and mean trading this morning at 4345.

Triangles generally are continuation patterns, so the upside is more likely than the downside. However, an upside break would also take us to the upper three ATR K-Band on the daily chart, an overbought extreme.

On the other side, visiting the 21-day line would not be out of the ordinary either and would complete a two-step corrective pattern off the last rally on the daily chart. But there are other potentially negative chart implications of visiting the 21-day line today or tomorrow to leave for another (hopefully unnecessary) discussion.

I will mention the potential expanding triangle topping pattern that began to form from a 7/2 daily base candle. I don’t think the pattern is legitimate, with an 18-month cycle trough in the middle of it, but I will mention it as a potential carry forward in your narrative. A negative break in the current three-day triangle would force my stops on the Navigator swing trades, a disappointment, to be sure.

Both the GDP and Initial Jobless Claims numbers missed their estimates this morning. That may be good news on the inflation front but less than good news on the economic front. The GDP number missed significantly, coming in at 6.5% versus an estimate of 8.4%. The jobless claims came in at 400,000 versus consensus estimates of 384,000. Continuing claims also are higher than expected at 3.269 million versus consensus estimates of 3.183 million. The GDP deflator came in higher than expected as well at 6% versus estimates of 5.4%. So inflation remains high, but perhaps slowing growth will tame it as predicted by the recent fall in 10-year treasury yields.

At this writing, none of this has managed to move us out of the overnight range, though we are trading in the upper third of the range and near the top. That still gives us no clues about how to trade the open, so it is better to get some price action under our belts before taking positions.

Keep in mind that the weekly open, defining a red or green candle for the week, is 4400.50. That will make the open an important level today. Also, tomorrow is the last trading day of July. The end of the month always results in some window dressing by money managers and sometimes strange market behavior. But there is a positive bias associated with the last few days of the current month and the first few days of a new month.

The bottom line is that Monday’s low at 4364.75 is THE line in the sand. Taking out the ONH at 4403.25 or the ONL at 4380.25 starts the ball rolling in the commensurate direction, then yesterday’s high or low, followed by Monday’s high or low and so on.

I will be using yesterday’s RTH high at 4707.75 as my threshold to look for long trades. As an abundance of caution, I will watch the middle of the range and yesterday’s settlement at 4391.50 as a threshold for weakness to begin presenting for shorts. Whatever the ensuing direction, monitor for continuation.

Good luck today.

A.F. Thornton

The big picture yesterday was the potential topping of the 5-day cycle. The line in the sand was Monday’s RTH low at 4297. The market gapped down at the open below all of the key MAs and this line in the sand. Once these levels were breached, you have to presume a bear trend with the next logical target as the recent gap top, also the breakout from the mid-July peaks around 4370ish.

From experience, I also know that the daily 5-day EMA and Algo trigger lines can act as magnets (and support). Yesterday, the lines sat right below 4370, and our triple POC’s from mid-July around 4367.25. As the first 30 and 60-minute ranges closed, I also had the opening ranges, and I could project a double the range target of 4364.75. The market bottomed at that latter target to the tick.

I added to our Navigator swing position at 4368.50 with a four-point stop. I believed this to be near the low of the day. The market ultimately bottomed 3.75 points lower, almost triggering my stop but ultimately bottoming.

As far as day trading in the circumstances, you had the classic breach and retreat short trade. I also periodically shorted and scalped from the 5-minute 21 EMA or meant (blue line above), which is what you due in a micro bear trend. It is a little rough when you have two consecutive falling wedges. But the failure of the first wedge to turn the market was a great WWSHD moment and led to the best short of the day.

I also picked up a nice long trade on the mid-day reversal into the close. If you were unwilling to short, simply waiting for this turn and long trade would have been enough to make your day. Also, by this time, and having reached the target set in the morning, the put/call ratio moving back to .80 should have been a clue that the shorts would likely cover into the close.

If I get time today, I will send a legend with my notes. I am working on a voice-to-text methodology that would make communicating the details easier.

Today’s Plan

The market seems to be reacting positively to yesterday’s post-closing earnings announcements. Today is Fed announcement day, so I won’t be trading and plan to work on the video I have been trying to finish. Usually, the market goes sideways into the announcement. But with the Delta China Virus strain threatening the economy, I don’t expect any changes from the Fed.

As outlined in the interim update to View From the Top Down this morning, the July 19th low at 4224 is THE key line in the sand at the moment. Carry that forward. Shorter-term, yesterday’s low at 4364.75 should also be carried forward as a reference. We are still trading in the vicinity of the 5-day EMA, which continues to be our stop for the Navigator swing trades, but could still present on your day-trading screens.

Overnight, inventory is net-long with an overnight high of 4404.50. We are trading inside yesterday’s range, so no clues for the open. I would keep an eye on 4404.50, where some reference points congregate from the last few sessions, such as yesterday’s regular session high and the VPOC from Monday. I would also watch yesterday’s value area low at 4376.25.

Good luck today.

A.F. Thornton

While I would not bet my life on it, we may have just put in the low of the day when only 52 contracts traded at our old triple POC low around 4368.25. We will see if the next move can break the intraday bear microchannel.

Clearly, the laws of gravity still apply, and this is a much-needed and understandable pullback. The NASDAQ 100 bears the brunt of the losses, as another rotation is underway just as we had anticipated.

Both the XLF and XLE are beneficiaries. The Founder’s Group is bringing those positions up to 10% each on the pullbacks, and we are adding another 5% to our S&P 500 position. This will put our targets at 10% XLF, 10% XLE, and 55% S&P 500.

You can use futures or at-the-money August or September options on the XLF, XLE, or SPY. You can also use the cash ETFs.

I do not expect this sell-off to bottom until tomorrow, but it makes sense to nibble just a bit on this first decline. Stops remain very important, and I would keep stops about 4 ticks below the low we just put in around 12:15 EST on any new positions.

Inevitably, when you are investing at an inflection point, there is less risk to loss and less certainty in the outcome.

As always, do your own homework,

A.F. Thornton

The weekends always provide a respite from the daily grind, as well as some perspective. At the same time, that perspective can cause Monday trading to be a bit strange because investors and traders can change their minds about current positions. They promptly execute the changes on Monday morning. I skip trading on most Mondays as a result. However, they have been good trading days of late, so I had a productive trading day today, following one of my best day trading weeks of the year.

You want to come into Monday morning with an open mind, seeking all relevant trend lines, moving averages, Navigator Algo indicators (proprietary), patterns, cycles, Weekly Expected Moves (WEMs), and other key levels marked on your charts. Having the weekend, you also should have updated your monthly, weekly, and daily charts. To the extend any of those lines, indicators or key levels should present during the day, you want to make sure they are reflected on your intraday chart (I use five minute candles). It is easy to get lost in the minutia of the 5-minute candles and miss the big picture.

In this analysis, I will focus on the regular session (RTH) candles from today only, with some reference to the overnight data. Keep in mind that much as I would like to, I am unable to do this detailed analysis every day as it is quite time-consuming. I will, however, publish it a couple of times a week.

The Narrative

Context is important as well. Everything starts with your ongoing narrative. You should be adding and subtracting from it daily. The narrative is that we have been in the throws of the 18-month cycle correction since April. Different sectors have taken the brunt of the correction . Overall, the correction has barely been noticeable in the S&P 500 index, our key market proxy and trading vehicle.

This muted presentation in the major indices is due in part to the rotational nature of the current market. Also, however, it is the result of the 4.5 and 9-year cycles bottoming at the Pandemic lows in March 2020. Similar to the past, the bullish forces associated with these larger cycles bottoming usually mute the impact of the first 18-month cycle dip that follows.

In the current market, the giddy sentiment and froth peaked earlier in the year with the GameStop trades. From there, the 18-month cycle peaked in April and has been correcting under the surface ever since. Of the major indices, the cycle can best be seen in the Russell 2000 index. The cycle also is visible if you look at the percentage of stocks over their 50-day moving average and other breadth indicators. In my view, the bottom of the cycle occurred a week ago Monday, on July 19th, and that is why we have experienced a rip your face off rally off that low.

You also want to know any key events that lie ahead this week. This week, we have earnings from a number of the key tech/growth stocks, as well as a Fed meeting on Wednesday. Clearly, these events can be catalysts for short-term change, though there is nothing draconian expected. Also, the market had been one-time framing higher for four five trading sessions. At the very least, the market likely will need a few days to consolidate soon. Also, the structure under the market when it is moving this fast is weak, and will need to repair as the market takes its next pause. Day traders, often weak hands, can get caught in bad location, leading to sudden liquidation breaks from time to time. With all of that in mind, we will move on to the chart legend for Monday.

Legend

The numbers below correspond to the same numbers on the chart above.

[1] We had established a trading range Friday afternoon, which is highlighted in gray. Also, the Nominal 2-day wave and cycle dipped and bottomed in the overnight market. A “head and shoulders” reversal pattern coming off the Globex low and climbing up to the New York open marked the cycle low. After drawing in the trading range, you should have all your key levels marked as usual; (i) Friday’s high and low, (ii) the overnight high and low (ONH and ONL), (iii) the open (as soon as it is available), and the other key levels I cover in the Pre-Market Outlook.

[2] At [2], the New York Open, I was already in a long trade from the overnight reversal pattern. It would not have been easy to trade out of the gate at the New York Open itself. There was nothing to really guide us from the overnight session. The first hour was a sloppy, choppy mess.

Note that I am always running two screens, especially at the open. I run one screen with the overnight data off and one with it on. I prefer the overnight data included on my screens, but there is no right way to trade. Clearly, the regular session data is the most important because most of the volume occurs in the day session.

[3] From point [2], traders took the market up to point [3] to test the ONH, also the top of the trading range. This is the typical price exploration pattern we see every day. Traders test both sides of the market to find the path of least resistance.

The market failed at point {3] on a climax high (with the overnight data on it blew through the top K band), triggering a sell to cover my long position. The market also tripped a Navigator Algo sell trigger, a micro trendline break, and followed with a big bear bar down. I had a 10-point gain per contract on the trade.

[4] At [4], and having failed to take out the ONH (overnight high), the market reversed down to test Friday’s afternoon low, also the bottom of the trading range and the Globex Open from Sunday night. Recall that the Open is important as it defines a red versus green candle. We often say that screens go red or green around the world when the opening price in any time frame is breeched.

In this case, you should be setting up for a buy as the market wedged into the low, confirmed by a micro double bottom, a positive momentum divergence, failure to break down below the wedge, and a tag of the 15-minute 21-EMA (mean). A micro trendline break and the Navigator Algo trigger confirmed the buy a few bars later. A miniature expanding triangle also is visible at the low.

[5] Moving off point [4], we get the best long trade of the day, a bull microchannel easily breaking the top of the trading range and setting up a measured move target of 4419 or double the range. The target won’t necessarily be reached before the end of the session but should be drawn on your screen. I sold my long position on the double top, negative momentum divergence, break of the trendline, and Navigator Algo triggers. The trade netted 10 points per contract.

[6] Coming down from point [5], the market tests the halfback (50% level of the day’s range), a somewhat loose retest of the range breakout, and a test of the 5 and 15 minute 21-EMAs or means. The problem here is that while it looks to be a good trade, you have to decide if you want to make a trade over the lunch doldrums in New York and Chicago. By this point, the market’s tempo had slowed considerably. Moreover, the market internals had been somewhat mixed, with tech stalling and money flowing into Energy and Financials as predicted in the View from the Top Down this morning.

{7} By this point, it is clear that the market has moved into a mid-day consolidation and trading range, ending up in a triangle pattern. There is nothing to do until there is evidence that the consolidation is ending. If you took the trade from [6], you would sell on the micro trendline break. I took this trade but only made three points per contract after spreads and costs.

[8] Here, you are now in the zone for the afternoon drive, but the slope is waning, as can be seen in the 5 and 15-minute 21 EMAs. I took a long off the failed breakout below the triangle, also a micro double bottom that bounced off the 5 and 15-minute 21 EMAs, confirmed by a Navigator Algo trigger and break above the triangle.

[9] I am out at [9] for 4 points per contract on the muted bull microchannel trendline break and Navigator Algo trigger. As a rule, I generally don’t trade the last hour unless I have a particular reason, like an anticipated short squeeze.
[10] This is the classic flush trade and bear trap discussed last week, good for a nice long trade into the close. In this case, I passed on the trade.

So there you have it, Monday morning play by play. I hope this detail helps you with your trading. This is how I do it, but it certainly is not the only way to approach day trading.

A.F. Thornton

We have new buy signals on the XLF (Financials) and XLE (Energy) ETFs. You can either buy the ETFs for cash or consider August or September monthly at-the-money calls.

There will be more to follow in the video later today.

A.F. Thornton

Almost unbelievable is about all I can say at this juncture. We already have a 25 point gain in the new swing position. This is what has made swing trading nearly impossible lately. If you did not get in on the signal, you would be chasing the position. This was both a day and a swing trade for me. I am tempted to nail the swing trade as well, but I hope to ride it a couple of days to 4500. And since we only went to a 50% position in the model, I would still like to add to it.

This feels suspiciously like a blowoff to me. The market stalled on the Weekly Expected Move high, which sits at 4395 on the Futures contract, as you can see from the chart above. 4374.50 was a good entry point for the many reasons articulated this morning. I wish the market moved more slowly and gave you more time. But it is what it is.

Market internals actually are somewhat negative for such a big move. The market is being carried by some defensive sectors and the QQQ (Nasdaq 100), which perked up on Snap’s earnings. We are in earnings season, which carries some positive tailwinds. But the narrowness of the rally (breadth has been a problem lately) and the blow-off nature of this run requires us to keep our guard up.

Have a great weekend. The Epilogues will be out soon.

A.F. Thornton