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It can be difficult to know where you are going if you don’t know where you are. I will be covering this in more detail in the video I hope to finish today. As today is a Fed meeting, I won’t be trading.

I hope you will glean from the monthly chart of the S&P 500 index above that we just bottomed the 18-month cycle on the 19th (last Monday). And because we launched a new, 54-month cycle at the pandemic low in March 2020, the trough is barely noticeable, just like the last two similar spots in 2013 and 2017. The broad market peaked in April and should be bottoming here as long as the low at 4224 on the continuous futures contract, and 4233 on the cash index holds. Since the market has been rotational, we have to move back and forth between the various sectors in and out of favor.

You will also see from the chart above that we are headed for the top channel line of the 2009 bull market. Whether you project the channel line, or the A leg of the ABC pattern leading this market, the projection is roughly 5380. It all depends on how fast we get there, but I expect a less steep slope going forward, with some additional consolidation ranges. A normal slope is an angle of about 15%.

Drilling down to the daily chart above, we can make some short-term projections that should take us to our next target, around 4500. We already achieved our first target at 4404 before yesterday’s dip and retest. I also included a comparison, lower graph showing the percentage of NYSE stocks above their 50-day moving average. It does a better job of capturing the broad market, 18-month cycle trough.

Drilling down one more level to the two-hour chart, we see a bit more detail. Yesterday’s dip came right on schedule for the 5-day cycle. You can see the cycle toping on the lower momentum/strength chart ahead of the dip. The market behaved normally, and volume barely picked up on the dip. Once again, you can see the projected targets from the various recent ranges.

With the Delta China Virus variant rearing its head, it is doubtful that the Fed will raise rates. Most indicators, especially the 10-year treasury rate, are projecting some slower growth ahead, which should satisfy the Fed. Of course, rates could bottom again here, as we see the next rotation from tech and growth back to cyclical and value. A lot depends on this latest China Virus scare.

Again, I will cover this in more detail in the video. But at least this discussion gives you the big picture. The July 19th lows mentioned above are the line in the sand. We have moved the Navigator swing strategy long against this low. We are hoping to pick up a rotation back into financials (XLF) and energy (XLE), but the Delta variant will have a big impact on whether or not that materializes.

AF 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

The Founders Group has taken a 50% position in the S&P 500 Futures at 4374.50 on the test of lateral support, the demand trendline, the 2-day wave dip, the partial Gap fill, hourly 21-EMA, and successful test of the Globex open (it gapped just above yesterday’s RTH high and settlement so good enough for a test of that too). 

This represents the entry associated with the Navigator Algo high-trigger buy signal on the daily chart. I intend to scale in to 100%, and will share that in these pages as we move along. My stop for today is tight – an hourly close below 4370.50.

Again, do not emulate this trade unless you are willing to monitor it closely – and I mean very closely.

September at-the-money SPY calls can also be used for the trade, as can the SPY itself if you are reticent (as you should be) to be leveraged.

Our first target is 4404, with a final target at 4500, the same targets as communicated last week before the options liquidation break.

A.F. Thornton