Epilogue 7/12/2021

Yesterday, our S&P 500 index market proxy started with a weak bull trend from the open on weak internals. The initial, bull microchannel price action ended on a parabolic wedge that stalled at double the 30-min range, and eventually broke to a new, all-time high in the afternoon drive from an ascending triangle consolidation. 

There were a couple of buys near the open and a classic, initial 30-min opening range buy after the first half-hour that topped at double the opening balance range. From there, you could have taken a number of trades off the 21-EMA line, selling either at the triangle top or at the Keltner Bands or Bollinger Bands.

Often, when the market is trending on weak internals, a good target is double the initial 30-min range, as we saw on this day. The market remains strongly bullish on the daily, weekly, and monthly charts, and the downside likely is limited for at least the rest of the week.

The probabilities are that July will close below the open of the month since we have six consecutive monthly bull market candles on the chart. It is highly unusual to have that many uninterrupted, positive months. 

With July likely to close below the open of the month and after the 11-day microchannel (buy climax) ended last week, the probabilities are that there is  limited index upside for the remainder of the month – and the better focus is likely on stocks and sectors that are still rising. Since there is not a strong likelihood of significant gains or losses

In the near term, traders should expect the bull trend to evolve into a trading range. There were a number of good “scalping” trades throughout the day, as illustrated on the chart above.

A.F. Thornton

Mid-Day Update – 7/12/2021

XLF (Financials ETF) Daily Candles

Another bullish market breakout to add to our collection. So we are status quo for now, but still wondering how the small megaphone pattern will resolve on the daily S&P 500 chart. Will it lead to another break? Or will it be a consolidation to go higher still? Be mindful of the magnets above at 4404 and 4500. 

Internals are mixed, as we broke out of the 30-min clearing range and then doubled it, a widespread occurrence. But with internals mixed to weak, I am not sure there will be much more index upside today.

Meanwhile, our XLF entry was well placed on Friday, as the XLF is the top-performing of all 11 S&P 500 sectors today. XLK (tech) is weaker, in fact barely positive, indicating at least some of the anticipated rotation discussed in this morning’s writings.

Our next discussion will be today’s epilogue after the close. Remember that I will be out Wednesday, Thursday, and Friday traveling back to the States, so there will be no outlooks on those days. If anything of significance occurs, I will send off a quick note from my phone. Continue to use a close for two hourly bars below the daily 5-EMA on the XLF for a stop. The XLF has managed to get through the 21-day line today, leaving only the 50-day line to conquer into clear sailing. The daily 5-EMA sits at 36.63 at this writing.

A.F. Thornton

Pre-Market Outlook – 7/12/2021

The NASDAQ 100 is well ahead of the S&P 500 futures at this writing. For the S&P 500 futures, our main broad-market proxy, there was a new all-time high in the overnight session, just slightly above Friday’s regular session high.

Friday’s regular session left a large wake of single prints from the market’s opening drive which were tested briefly overnight. Continue to carry them forward into today’s narrative. The 4350 area is my bull/bear line in the sand today where a lot of recent, important levels congregate.

Assume that Friday’s reversal of the Thursday weakness is a short term long signal unless the Thursday low (4279.25) is taken out. Note that the selling on that day was not able to even test the rising 21-EMA on the daily. Buyers remain in firm control of the market and traders should continue to do what works until it doesn’t.

The balance of the overnight session range almost matches the Friday value area. This tells us little about how the open will play out. The better trades should develop later rather than earlier in the session. Favor the buy side as long as the prices are above the top of the single prints (4347) from Friday. Watch the NASDAQ 100 closely as it it the obvious leader in relative strength.

The S&P 500 11-bar bull micro channel ended this past week when Tuesday traded below Monday’s low. Bulls typically buy the first pullback in a bull micro-channel, which they did this past week.

There is a 5-day expanding triangle (broadening/megaphone pattern), but no downside reversal as yet. Traders continue to expect higher prices, but there is often a 5 to10-bar trading range after a buy climax, such as manifested  in the overthrow of the recent bull micro-channel.

Look at the April bull micro-channel and aftermath as an example. The bulls will continue to buy every one to three-day reversal down, betting that each reversal will fail and lead to a new high. That is, until it stops working.

A.F. Thornton

View from the Top Down – 7/12/2021

In this Weekly Series, We Examine the Market From a Big Picture, Swing Trading Perspective. We Use the S&P 500 Index as our Broad Market Proxy, and All References to the Market Refer to the S&P 500 Index Unless Otherwise Noted. The Market Remains the Most Significant Variable in Higher or Lower Stock Prices, Influencing 60% to 70% of Individual Stock Price Movement. The Decision to Be Long or Short Based on the General Market’s Direction is One of the Most Important Decisions Investors Will Undertake.

In a word, the biggest problem with the market here, and perhaps the only problem, is breadth. This latest rally is narrow, with the breadth (and even some strength measures) still not confirming the new highs.

This could result in the market rolling over into an overdue intermediate correction. Or, perhaps another rotation from tech into economically sensitive names can help the market broaden out. Your guess is as good as mine, but we know what to look for. Our entry last week into the broad financials group (XLF) is a bet that the market will broaden out, and rates will begin to rise a bit again.

July currently has delivered a small bull bar trading at all-time highs. As previously discussed in these pages, this is the 3rd push higher in a tight bull channel since the pandemic lows. The rally is now rising into a parabolic wedge buy climax, which often attracts profit takers.

July is the 6th consecutive monthly bull bar, which is extreme. The last time we had six consecutive bull bars was in 2011. This increases the chance that July will close below the open of the month. If there is a big bear bar closing near its low, it will increase the chance of two to three months of a sideways to down move.

However, because the rally has been in a tight bull channel, bulls will buy the eventual pullback, even if it is 20%. In this case, I am expecting about a 10% pullback to the 200-day moving average.

While there continue to be weaknesses under the hood of this market, the price action does not yet evidence that the market is ready to correct in a big way.

Last week’s bar was a small bull bar at a new high with a big tail below. The tail below indicates bulls bought the test of last week’s low, but the small body indicates a slight loss of momentum.

Besides the 4404 trading range measured move we have been discussing, the top of the trend channel around 4500 continues to be a magnet above.

Good luck this week. I will be traveling Wednesday, Thursday, and Friday, so there will be no updates after tomorrow until Monday, July 19, 2021.

A.F. Thornton

Mid-Day Outlook – Buy XLF Calls

XLF (Financials ETF) Daily Candles

The action so far today is quite bullish, though the tempo is plodding along. We had a gap-and-go scenario per the gap rules. We have nearly 9 to 1 and 4 to 1 advancers versus decliners on the NYSE and NASDAQ, respectively. On the S&P 500, we have pegged at a net 350 advancers all morning. 

In addition to the strong internals mentioned above, tick distribution has been positive, along with cumulative ticks, and we see new, all-time highs at this writing.

The Founders Group just took a 10% position in the August 20th XLF 36 Calls. The chart is very constructive. Our initial stop will be a close below today’s low at 36.09. This is a swing trade, and we plan to hold the position for more than a day trade. For how long? We cannot say for sure, but we should ride the position to a new all-time high above 38.60.

Don’t go for broke. You can scale in. A close above the 21 EMA would justify adding to the position.

The next update will come over the weekend. Enjoy yours!

A.F. Thornton

Epilogue – 6/8/2021

I did not trade the RTH session yesterday, as I was doing some sightseeing. In such cases, I hate to put points on the board looking in 20/20 hindsight. When I quote trades and points, it is because that is what I actually achieved trading that day. Looking left after a trading session and then saying “I would have done this or that.” Nothing is the same as being there and doing it when there is nothing to the right of your screen. So view the comments today with that in mind.

Yesterday saw a more serious liquidation break than recently experienced, and it helped repair some of the structures below us. The GAP was serious, but having opened so oversold and outside the Keltner Bands, more than likely I would have been looking to get long, at least for a scalp. What followed from the bottom was a weak bull trend with a soft rollover in the afternoon. The afternoon pattern was a broadening formation – which typically means that traders don’t know quite where to go next.

As I cautioned in the morning, it was not wise to get too bearish quite yet. We were transitioning from a bull microchannel, which normally morphs into a trading range or wider channel. So far, that seems to be the current case. Today (Friday) will tell us more. Also, the WEM low did do its job yesterday and contained the damage, so the worst may be over for the week.

There is another pattern you should watch for at turns, often presenting as mirror images of each other in the day session – but can appear in any time frame. Scrunching the last two RTH sessions, I have highlighted the pattern in gray on the chart below: 

I have seen this pattern a lot lately, so watch for it. The pattern often occurs at turns and can trip up traders who think the trend will continue in one direction before it reverses.

A.F. Thornton

Epilogue – 7/7/2021

Yesterday’s script tracked much like Tuesday. We reversed down from a new high at the open but then reversed back up from a parabolic wedge sell climax and waterfall decline that ended at the conjunction of Tuesday’s value area high, the longer-term bull trendline, 5-day EMA, and hourly mean (21 EMA).

We rallied back to the high but entered a trading range for the rest of the day. The trading range was predictable both as a break of the bull micro-channel from the morning and because the price was trying to jump the ’50 handle at 4350, which normally is a bit of a task. Because the day closed near its high and the reversal up was strong yesterday and today, traders will continue to expect at least slightly higher prices going forward.

But after yesterday’s pullback in an 11-day bar bull microchannel on the daily chart, the bulls are probably unwilling to buy aggressively without a week or two of sideways trading. In other words, traders expect higher prices, but not much higher over the next couple weeks.

Targets above continue to be the top of the bull channel on the daily chart, which is around 4,500, and a measured move up to 4,404 based on the 3-month trading range. The bears can get a reversal at any time, but bulls will continue to buy every 1- to 3-day pullback.

A.F. Thornton

Pre-Market Outlook – 7/7/2021

We are set to open inside yesterday’s range, with overnight inventory net long. We are in the top end of the range, and overnight traders had absolutely no success pressing prices lower, forming another poor low keyed off yesterday’s VAH around 4330. The S&P 500 index remains above the 21-day line, so the short-term bias is still bullish.

Yesterday, we sold off in a bear trend from the open with a series of sell climaxes. Because we fell below Friday’s low, we technically ended the bull microchannel. The midday bull trend reversed up from 4305, which was lower than Friday, just above the WEM low at 4300, and a major trend reversal from just below the 5-Day EMA. We closed in the upper half of the day’s range, increasing today’s chance of more sideways to up price action. I would expect to test Friday’s all-time high by the end of the week, if not today.

Since buying climaxes on the daily and 60-minute charts were unusually extreme recently, we could go sideways for a week. Also, wide-range days like yesterday are typically followed by low-range days. Having said all of that, there is no evidence of any weakness overnight or this morning.

There could be a fade at the open, as overnight inventory is net long, and there are still profits to be taken from yesterday’s turnaround. On the other hand, there could be poorly positioned shorts from yesterday that may cover at the open, which will offset the inventory sales. Again, none of this really helps guide us in taking a trade at the open. 

For my part, I will wait for the 30-minute breach and retreat trade or go with a breakout and retest of the all-time-high (also the recent highs from Friday and Yesterday). Still, the first target is only up to around 4357 – so you better have strong internals or dominance by the FANGMAN+T group if you are expecting a successful breakout of any magnitude.

Today’s Plan

I don’t see a clear opportunity for early trade, but there are still potential measured moves above us at 4250 from yesterday and 4400 from the three-month trading range. If we can surpass 4348, the market could move towards those goals. Keep in mind that markets generally have to work to get through the ’50 handle lines. If this market doesn’t, take that as a positive WWSHD signal. We also have a top channel line around 4490 if the market wants to climb Mt. Everest.

Below us are the usual variables and your carryforwards listed on the chart above. To your list, add yesterday’s halfback at 4325.50 and the VPOC at 4319.25. Watch the ’33 handle as it often trips traders in both directions. We are well above all trigger lines and moving averages for now – a very bullish state of affairs. Yesterday’s failed breakdown also puts a mark in the bullish column. 

A violation of yesterday’s low around 4305 would also violate the 5-day line – so that is about the only potential I see of changing the tone from positive to negative. Use a close below 4205 for at least two hourly bars before you pull the negative tone trigger. 

Nothing has changed from a macro perspective. The market is still overdone and ripe for an intermediate correction. Yesterday was a dress rehearsal. All the caveats still apply – which is why I am not interested in swing trades necessitating overnight positions at this time.

As always, be careful.

A.F. Thornton

Epilogue – 7/6/2021

S&P 500 Futures - RTH Data - 5-Min Candles

Tuesday, we saw another “mini” liquidation break. On the whole, the reaction was bullish. Once again, the market sold down to the 5-day EMA and then flipped higher, which has continued overnight. We filled the most recent gap, which also provided support. Friday’s low also held, at least on a closing basis.

The day started with a downside breach of the 30-min range, supported by weak internals. Tick distribution popped below 500 for most of the morning, with cumulative ticks remaining below zero, The S&P 500 A/D line headed straight south to -400 from the open. In other words, internals supported the breakdown of the 30-minute range. The wild card was the positive NASDAQ 100 action, but a lot of that was due to one stock, Amazon. Shorting turned out to be  the right move on the 30-minute breach and retreat trade – at least for the S&P 500.

I collected 29 points per contract on the day, with two fairly easy trades. First, I shorted the 30-minute breach and retreat (see chart above). This is my favorite trade when overnight action gives us no clue about the open. Second, I bought the trendline break back up (also see chart above). When the market is trending, which is only about 20% of the time, trades are a lot easier than range days.

Assisting in identifying the bottom yesterday was an expectation that bulls would buy the first pullback; we were filling Friday’s gap (gaps should provide support in a decline); we were at the 5-day EMA, which has provided support in the latest microchannel; we saw a positive momentum divergence on the low; ticks had already exhausted at -1000; and we saw fewer downticks on the final low. This is all well and good, but never anticipate the low – always wait for a true pivot.

Drawing trendlines and looking for trendline breaks also was helpful. Once you believed that a bottom was in place, drawing in your fib retracements where you are bound to encounter resistance, or even another trend reversal, also was important. Of course, watching price as it relates to the 21-period mean (green line) also helped, as did the Navigator trigger line.

By the end of the day, price was in the third push higher. After three pushes in a trend, it is best to step aside as trades in the direction of the trade get riskier. Also, I generally do not like to trade the final hour as there are often inventory and mutual fund adjustments that are unrelated to price and trend. Trading can be an art as well as a science, so if you want to take a late-day trade that is fine. I also passed on another short trade that presented after the first short in the morning. The theory on that was that pigs get fat and hogs get slaughtered.

I will discuss more in the morning outlook, but the wide-ranging price bar for July 6th should provide some new go / no-go price boundaries. If we break above the bar, the bull phase continues. Below it, you will need to grab your parachute. Also noteworthy, the value (where 70% of the volume occurred) moved slightly lower for the first time in 11 sessions yesterday. It was overlapping with Friday, so not as negative as it could be. Always remember, value is more important than price. We are trying to track where volume is allocated, as much as price. Price without volume (and time spent at the price), can be very misleading.

S&P 500 Futures Volume/Time Profiles

For now, however, 7/6 was nothing more than liquidation break lite – but it does demonstrate my concerns. It could be a shot across the bow, so we need to be careful. On a positive note, it likely scared some weak hands out of the market. That tends to strengthen the underpinnings of price.

A.F. Thornton

Mid-Day Outlook – 7/6/2021

The morning sell-off this morning will wake you up after a three-day holiday weekend. Banks (KBE), Financials (XLF), Energy (XLE), and the like are taking the brunt of the damage. the NASDAQ 100 is diverging north on further strength in bonds. The liquidation break helped repair some structure underneath us, but not nearly enough.

This all reminds me a bit of early January 2020, when bonds were inexplicably rallying along with stocks as has been the case recently. We had similar momentum, breadth, and strength divergences. I said back then, one of these asset classes has to be wrong. This is eerily similar.

The behavior looks like an economy that might be slowing – just like it did before the first China virus arose from Wuhan. I worry a bit about the market already reacting to the Delta Covid-19 variant. The Phizer vaccine is said to be ineffective. Others are saying the Moderna vaccine caused the Delta variant. Then there is the new, Peruvian, Lambda variant. It is thought to be vaccine-resistant. Could this be driving more shutdown fears? Even Warren Buffett recently stated that a worse Pandemic is in our future. He says he is shocked at how complacent people still are about the risks.

As a side note, who chose the Greek alphabet for these new variants? Is it because I am in Greece? [Insert Twilight Zone Theme].

The market just managed to turn higher, but not until we got all the way down to the 5-day EMA around 4305, just above the WEM low around 4300. But the rest of the story now depends on where we close. The 5-day line has called all the turns in the bull microchannel. We shall see, but so far so good. The afternoon drive will tell the tale.

Remember, the most likely course for a breaking bull microchannel is a trading range for a bit.

A.F. Thornton

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