Epilogue and Morning Outlook 4/19/2021

The market is an aging beauty, though the trend has been clearly higher. In an unusual move for me, on Friday afternoon, I shorted some out-of-the-money weekly options (expiring this coming Friday on both indexes). I say unusual because I rarely hold anything but swing positions over the weekend. 

I believe that the market is aging because we have been experiencing diminishing volume for some time and recent, rapid liquidation breaks. Higher prices are both cutting off and discouraging activity. In other words, there are fewer and fewer takers as the markets try to climb higher. 

This activity is expected. For context, we have been discussing an imminent peak in the nominal 18-month cycle. Dumb money sentiment is elevated once again. 

On specifics, our algorithms are confirming a top is near as well. Click on and take a look at the above chart and what the Navigator system is telling us. We had an “E” signal for exhaustion a little over a week ago. That signal tends to lead peaks by about a week. We now have an “sOB” signal on the chart signifying that the market is Super Over-Bought. That signal is rare, but what follows tends to be quite unpleasant.

The first red tag on the system status labels reads “Trend Reversal Imminent.” If you look at the faint dynamic channel lines, we are about to tag the uppermost channel. Most importantly, we are sitting right above the Algo sell trigger – it would not take much negative price action to trip it.

We can also infer that the buyers at the table right now are in one of two categories. They are either short-term momentum traders (otherwise known as weak hands), or they are market makers who have to buy to neutralize their portfolios after they sell calls. I call the latter gamma squeezing. After all, how many people do you know that go running to their brokers “hey broker, the market is at the highest price it has ever been in the history of time – get me in now!”

How else do I know who is at the table right now? Momentum traders tip their hand in where they execute. They tend to be location sensitive, buying at various key levels, such as moving averages, half-backs, Fibonacci levels, etc. I know them well because I am one of them, at least as far as day trading goes. 

Institutions do their research and then position themselves as rapidly as possible (sensitive mostly to their trades not moving the market). In fact, more and more these players work in what are termed “dark pools” off the exchanges and hidden from public view. The point is, they are not location-sensitive – like momentum and day traders. The institutions are planning to hold their investments over several years – so a few points here and there are irrelevant to them.

But as far as the day trading and momentum traders go, last week, the market experienced two rapid selloffs followed by equally rapid recoveries. This is often a sign of deteriorating strength. Responsive traders (responding to lower prices) are only becoming active if they can get a deal. The resulting recoveries were not supported by volume – another sign the institutions are absent. 

Short-covering drove the recoveries as well. Traders sensing the deteriorating advance, short the market – but too soon. While they may be right eventually, when they are early as here, they may get stopped out. As they get stopped out, their short-covering fuels even higher prices.

Last night (Sunday night), I focused on Friday afternoon’s weak lows of 4168.50 on the S&P 500 and 13996 on the Nasdaq 100.  The fact these lows did not hold is the first chink in the armor for this morning. 

Then, I shifted my focus is to Friday’s lows – 13954 on the NASDAQ 100 and 4162 on the S&P 500. The S&P has already breached that low, and the NASDAQ 100 is right on top of its low at this writing. Now I am monitoring for continuation to see if there will be acceptance and range extension below these levels. If so, then the value (the range where 70% of the volume occurs) has the potential to move lower, and that can be the first sign that the market is finally topping.

If I had to call it to the day – I would be expecting the market to top around May 8th. So I am looking at the described activities as early markers. I will take some short-term profits on my puts as soon as I see a true pivot higher if that should occur today.

Any acceptance below Friday’s low should shift your bias to negative. If the markets can pivot from this area and hold the lows (maybe after running some stops below), the value can remain overlapping to higher, and we may get a few more days before a final peak. 

The market is getting a blow-off to look to it – as we have seen several times since the March 2020 lows. Keep in mind my previous points – when the market fell after the blow-offs. It erased several weeks of gains in a single session.

Good luck today,

A.F. Thornton

Morning Outlook – 4/16/2021

April showers are supposed to bring May flowers, so does that count for four inches of snow this morning? Living in the Rocky Mountains has its strange moments.

I will put out more details over the weekend, but the Navigator Swing Strategy remains 90% in cash and 10% in Gold. We were so leveraged (and made so much money) coming up to the old highs in both indexes, that we have not felt compelled to jump back in as yet. 

The Gold was a contrary play that appears to be paying off. There has been a subtle shift to risk-off assets in the past 48-hours. Treasury bonds rallied inexplicably yesterday – given we were coming off the highest consumer inflation reported in the past 10 years. If one turns their attention to Ukraine, perhaps the Russian troops mounting on the border could explain the rise. The US is telegraphing a lot of weakness right now to China and Russia. I would not be surprised to see both countries move on Ukraine and Taiwan simultaneously.

Meanwhile, back at the day screens, keep the macro picture and the pending nominal 18-month cycle peak in mind. The back-to-back overnight patterns and continual new all-time highs tell us that momentum buyers remain firmly in control. Don’t fight it – do what works until it doesn’t.

The overnight lows are weak. Should they be tested, assume the potential for lower price action and monitor for continuation. Then think sequentially in terms of key signposts.

I don’t trade Fridays – but best wishes for a prosperous day.

A.F. Thornton

Morning Outlook 4/14/2021

Mailchimp, our primary email publisher, had an outage this morning and was just restored. This delayed our morning forecast from being emailed. However, if you don’t see an outlook before the open in your email, don’t hesitate to check our website at www.bluprintquantitative.tempurl.host. Click the “Morning Outlook for Day Traders” category and the outlook will be there, even if the email forwarding service is down. This is the first time we have experienced this, so hopefully it will be the last. The outlook is published regardless. The original outlook is in italics below. I might as well update it, now that we have some market data behind us.

Overnight distribution is relatively balanced so the issue this morning is whether or not we can trade out of the range on increased tempo and stronger internals in either direction. Both extremes of the overnight range have potential go/no-go breakout implications.

Buyers remain firmly in control. The market is acting exactly as it should when it is deeming accelerating prices to be fair. A liquidation break would be healthy at some point to further strengthen the market. Investor focus will be shifting to earnings now.

If the break is higher, monitor for continuation and look for contextual underpinnings to be confirming. Should it be lower, expect the same if there is to be any tradable follow-through and target yesterday’s points of control.

Your edge is your market-generated information and narrative. Your M.G.I. is comprised of price events that happen and price events that should happen but don’t.

Now for the update. the NASDAQ 100 got the liquidation break anticipated, and this is healthy. It is coming into the top of its recent breakout range at about 13850. If a buy signal otherwise presents for you in this area early enough today, it may be a good place to go long for the rest of the day. We are not there yet, but the decline is accelerating vertically which usually indicates exhaustion. Incidentally, the XLE is looking interesting on the daily chart, with the potential double bottom in place.

The S&P 500 is holding up better, boosted by energy and financials, on the heel of some nice bank earnings this morning. Earnings announcements will have a greater influence as we move forward over the next few weeks, the end to which likely will bring us the nominal 18-month cycle peak. Today smacks a bit of the XLE and XLF climbing at the expense of the NASDAQ 100 – but we will see of that is more than a one-day wonder.

A.F. Thornton


Morning Outlook – 4/13/2021

I would have kept it simple today, as everything continued to be balanced yesterday and overnight. Responsive trade from the overnight highs and lows (and going with a breakout in either direction supported by the internals) would have been the best advice. That advice still holds for the S&P 500, though a sudden surge in the NASDAQ 100 at this writing may tilt the S&P 500 bias in favor of a break out to the upside (see below). I am now looking for sideways to higher in the S&P 500 today.

As I was writing, the NASDAQ 100 pushed above its balance/consolidation range and looked to be where the action is. It is now slated to gap open with a true gap, and gap rules will apply. This gap puts the NASDAQ 100 into the new, all-time high territory. Perhaps the S&P 500 index will follow suit – but so far looks to be significantly underperforming the NASDAQ 100. I will be trading the NASDAQ 100 today as a result.

The NASDAQ 100 breaking to all-time highs adds some excitement to this final leg before the nominal 18-month top sets between now and mid-May. We typically get a dip into mid-month (the next payroll contributions) here, and the 40-day cycle dip is due any time, so continue to keep that on your radar screens. I am still finding lots of good stock swing trades – so it is hard to reconcile the good setups I keep finding with anything other than a minor dip this week.

Yesterday’s action continued to bolster our bullish narrative – so best wishes for a good trading day.

A.F. Thornton

Epilogue – 4/12/21

Both the NASDAQ 100 and S&P 500 Indexes stuck right to my script yesterday, delivering another balanced day and profile inside Friday’s ranges. The best trades were right from the edges as predicted. Holding their own following multiple up days in a row, a balanced day of consolidation adds to the bullish narrative for now. 

But the same cautions abide, as we expect a minor dip into mid-month, and we continue to be on alert for the 18-month cycle peak sometime between now and May 15th. We will know it when we see it.

Morning Outlook – 4/12/2021

I need to abbreviate this morning to stay timely. The most important advice I have this morning is not to get lost in the weeds of your day trade screens. The mid-month dip is due this week, likely to coincide with the 40-day cycle dip due any time. We should get one last flip up from there, and I don’t necessarily expect a new high. Then, the nominal 18-month cycle top should present and end this latest run from March 2020 – and this will coincide with the simultaneous peaking of every cycle of lower degree. 

Think of all of this as an “M” pattern. Don’t lose sight of this upper time frame activity while you are mesmerized in your 1, 2, or 5-minute world. This entire “M” activity likely will be concluded before May 15th, which is the latest forecast I can come up with for the 18-month cycle peak. David Hickson covers the sequence well. If you click on the picture below, it will take you to his latest cycle forecast:

Today, consider the potential for balance which would be healthy. This scenario would have the NYSE session today trade completely within the framework of Friday’s session and potentially even within the overnight session. If so, responsive trade the edges only.

As Friday achieved new all-time highs, there is little to go on for upside continuation. Should there be a breach of Friday’s high, monitor for continuation and look for strong internals to underpin price action before attempting an initiative, breakout trade.

The overnight low is a weak low as it tagged a very nuanced level where it reversed. Assume that there could be a short (given proper context – e.g weak internals) below the overnight low. As with a breakout above Friday’s high, “monitor for continuation” and make sure that context corresponds as the current tone is obviously not favoring sellers right now.

A.F. Thornton

4/9/2021 Epilogue

By Monday, Friday seems like ages ago. Moreover, I have been traveling all weekend, so I will be doing abbreviated discussions this morning, I have two unfinished writings for later today, and will perhaps be shifting to a horizontal position for a few more hours of sleep.

Nevertheless, if you read the Morning Outlook from Friday, we nailed the path. The NASDAQ 100 filled Thursday’s gap. In the process, it nearly tagged the Weekly Expected Move high from above. But the index held, and came back up through the open. Had you taken a long trade from the open crossover up, you would have had a very happy day. As soon as New York closed, and with the weight of the last market makers holding out for hope lifted, the after-hours futures spiked even higher.

The S&P 500 stuck to our script as well. Having already filled its Thursday gap on Thursday, the S&P 500’s task was to hold the Thursday regular session low and it did. Any hope that the market makers could tap the Weekly Expected Move high for some relief was dashed right from the start. It must have been a painful week to be an S&P 500 index market maker. I don’t feel too bad for them though, as they win most of the time.

As with the NASDAQ 100, screens went green when the S&P 500 index came back up through the open, delivering a nice, steady upswing throughout the rest of the day.

All in all, Friday’s action adds to the bullish narrative, as did the entire, spectacular week.

A.F. Thornton 

Morning Outlook – 4/9/2021

Let’s start here:

When day trading, sometimes we tend to get lost in the weeds. We are likely in the midst of a bit of a momentum blow-off, coming out of volatility squeezes and pushing through the Weekly Expected Move highs for the week. In the chart above, I highlight the last two momentum blow-offs since the 2020 March China Virus lows. In one or two days, we erased a couple of weeks’ worth of gains. 

One way to prevent this, especially if you are buried in your day trading screens, is to always set a disaster stop. That way, no matter what hits the tape if you are trading with your microscope, you are covered. There is no level in particular to target – just decide what the maximum loss is you want to take in an unanticipated liquidation break. Obviously, it needs to be wide enough so as to permit normal fluctuation.

Looking at the S&P 500 as our proxy this morning, the Asians explored prices all the way up to 4102.50, but could not hold the level and closed back inside the top of yesterday’s regular U.S. session.

The Europeans then gave it the old college try, but could not even get it as high as the Asians, and are holding near the Asian close at 4090.75 at this writing. As you can see from the first chart above, we remain at the top of the daily trading channel, approaching overbought territory with nominal 40-day and 18-month cycle corrections looming – and indexes operating at various levels of divergences. I have seen healthier environments and will be taking longs cautiously.

Price exploration was even less convincing in Globex for the NASDAQ 100. Overnight inventory is net long, and we are coming in this morning testing the top of yesterday’s gap after rejecting 150 points overnight. A full or partial gap fill is possible. Trading below yesterday’s low and into the gap would change the overall tone to negative, and don’t discount the possibility that the market makers could try to press down to the WEM high to let their weekly options expire profitably. This is why Fridays are not my favorite day-trading days. Screens go green if we come back up through the open. 

Comments are much the same for the S&P 500 index. Overnight inventory is net long, and we are coming in this morning with the price inside of yesterday’s regular session. The S&P 500 already filled its gap yesterday. 

Use yesterday’s point of control at 4086 as your bull/bear bias line. Trading below yesterday’s low would change my overall bias to negative – and could indicate that the 40-day cycle correction is underway. Here too, as with the NASDAQ 100, the market makers could try to press down to the WEM high to let their weekly options expire profitably. Screens go green if we come back up through the open. 

Best wishes for a profitable day. I am sitting today out – it is a travel day for me.

A.F. Thornton

Epilogue – 4/8/2021

The slop fest chop continued through to the close, not an ideal scenario for day traders, right? Well, that depends. Let’s review where we started this morning.

After large gaps at the open such as this morning, Gap Rules caution us that such large gaps often fail to fill on the first day and can be difficult to trade as the markets digest the overnight gains. Moreover, I cautioned that one way to assess the likelihood of a Gap and Go scenario versus chop and digestion is to assess market internals at the open. Today, market internals opened both weak and mixed, almost ensuring sideways price action – otherwise known as balance. The NASDAQ 100, which I will use as my example, gave us a classic, balanced day.

When I write about expectations for balance – this is what balance looks like. When I discuss “responsive” trading, I am referring to trading from either end of the balance range. In other words, traders “respond” to the edge of the range, not hesitating to take long and short positions throughout the day.

Today, you got to observe the potential for responsive trading in a balanced session firsthand. Your assessment skills in early trading can be critical to the outcome. Today, I dropped $300 on my first few trades before making the correct assessment and righting the ship. It goes with the territory.

Knowing you are trading a balanced or trading range session, what can you do if you feel the need to trade? Personally, I prefer to skip these days once assessed – but there are a couple of other choices. 

Looking at the NASDAQ 100 from the market/volume profile angle – you have the classic bell curve. Note that the volume histogram (number of contracts traded) dries up as the price rises or falls. Today, 13733 is where the most volume occurred and the most time was spent, making it the fairest price of the day. Traders were unwilling to expand the range in either direction. 

That is how the auction process unfolded today, and the chart below gives you the proper visual reference. Traders explored both directions but landed in the middle.

Once you see the bell curve forming and you have established the initial range on the minute chart, you fade either end of the range/profile back to the middle. In other words, you trade the range. You can use the value area high and low to initiate long and short trades, as the case may be. Today, the value area (rectangles drawn on the profiles above) was not that wide, but it can be extensive in other sessions. 

You can draw a rectangle around the traditional price chart range and trade it from that perspective, perhaps riding from the range top to the bottom. However, top to middle and bottom to the middle is the safest, most conservative trading strategy. 

Always pay attention to key turn-times throughout the day, as a rally/decline to break the range could start at such times. Monitor for improving internals to assess the likelihood of a break. Make sure you look at a heat map of the S&P 100 to see if the large-cap leaders can overcome a negative advance/decline line. Also, note the yellow line on the traditional chart above. That is the volume-weighted average price, also a key level to cover trades initiated from either end of the range. 

One final way you can trade such days (once the volatility calms down an hour after the open) is to drop down to a 1-min or 2-min chart, then use the Algorithm Trigger for entries and exits, perhaps trading more contracts since the range is limited. Any combination of these methods can filter and take the best trades.

By the way, never underestimate the value of observation. At the end of each day, study a 5-minute chart for the day. Where were the turns? What time? What did the turns look like? What were the internals doing at the time? Before long, you incorporate the information into your brain, and the moves become intuitive.

The range today where 70% of the volume occurred essentially tilted upward from 13700 to 13750. Recall that the market progresses up and down, stalling and fighting at these 50 point increment levels. Always carry that forward. Step back and look at where you are and where the market is trying to go – when the market is encountering support and resistance. The information can be helpful to your confidence.

Perhaps the most important Market Generated Information to add to our bullish narrative today is that the markets held above their gaps, and traders accepted prices there. This helps bury the options market makers before tomorrow’s expiration and could force them to buy more futures as any hope of maintaining price within the Weekly Expected Move range may be dashed.

On the negative side, the volume was light again today, and there are some strange Intermarket relationships I will discuss tomorrow. Also, all the unfilled gaps below us will act as air pockets in an intermediate decline. That is when you need your parachute if you were not lucky enough to timely exit your positions.

Notably, today, gold is in a volatility squeeze, coming off an “h” reversal pattern. I am keeping a close eye on it. A countertrend trade up the channel can be very profitable off a volatility squeeze.

You can see what the squeeze has done for the NASDAQ 100 and S&P 500 over the past week, and perhaps Gold will follow suit. Gold can be a crazy character at times, but it is still worth throwing the line in the water. In the swing strategy, we increased our position in Gold today to 10%. 

Still, we sold the remainder of our equity positions at the open today, anticipating a small cycle pullback into early next week and cognizant of the nominal 18-month cycle looming over us. That cycle could last another month before it peaks, or it could peak next week. We don’t know but carry it forward in the narrative.

Finally, I am a bit perplexed by Oil and Energy (XLF) failing to lift off with the rest of the risk assets recently. With Gold rising, Oil stalling, and a lousy employment report today, my WWSHD (When What Should Happen Doesn’t) needle is spinning.

A.F. Thornton

Morning Outlook – Update

This morning, we discussed that the S&P 500 and NASDAQ 100 indexes would open with a true gap higher, one of many gaps we have seen over the last couple of weeks. You can review the definition of gaps and gap rules here. Gap Rule #4 is particularly applicable to the NASDAQ 100 index today. The NASDAQ opened with nearly a 100-point gap. Bullishly, the gap barely filled, and the index has been able to sustain itself above the gap after two tests. Nevertheless, the index has gone nowhere so far today, essentially digesting the overnight move.

If you click on the chart above to enlarge it, you will see that I simplified the chart, and only the Navigator Algorithm trigger line is visible. Even with the trigger line to guide you, look at each price bars’ range – double or more from yesterday. The pace was fast as well this morning. Cleary, the index currently has no direction as it “digests” the overnight move per Gap Rule #4. Moreover, market internals have been weak today, further suggesting choppy conditions. For example, the S&P 500 advance/decline line has been evenly split all day, with half the stocks advancing and half declining. Unless you trade a 1-minute chart with quick, shallow trades, you will have your head handed to you in a fast market such as we experienced this morning. Never trade chop!

Now, compare the chart from today with the chart from yesterday immediately above. Note the smaller, more orderly, and tradable bars. The only chop was mid-day during New York lunch, which is normal and why I never trade it. Last night, I demonstrated how I made $4,500 yesterday trading one E-mini Nasdaq 100 futures contract in the more favorable conditions. 

Sometimes, you may initiate a trade or two before you realize you are in chop. Don’t sweat it – drop back and don’t fight it. Sometimes, you may get a nice afternoon drive that is smoother, even when the day starts with the chop. Here, it is not easy to forecast the afternoon drive’s direction as yet.

However, knowing the gap rules would have had you considering chop as a distinct possibility this morning. That gives you a nice edge over other traders. Moreover, you know that a short-term cycle should be peaking soon from yesterday’s cycle report. Also, you know that a major, intermediate top of the Nominal 18-Month cycle looms large. Finally, you are aware that the options market makers will fight like hell to push prices back below the Weekly Expected Move high before tomorrow’s weekly options expiration, or they will lose a fortune.

You may not have noticed, but volume has been rather pathetic of late. In lighter volume conditions, do you really want to contend with all the aforementioned headwinds? That is why the Founders Group used the emotion at the open to reduce our exposure further, leaving us with a 10% position in gold only. All of those wide bars and the fast pace this morning indicate a lot of emotional volatility. In my mind, this reflects the emotion of the moment and traders who are unsure as to how much longer they can sustain this rally. 

The volatility can also be an early warning of a peak. At the very least, the wide, back and forth swings tell you that confidence in the direction of the next move is waning. We carry all of this information forward as market-generated information to add to our narrative. 

Why push your luck on the long side today? Perhaps it would be better to step aside here, wait for a pullback on the minor cycle, and/or begin to hunt for a short position. I am not ready quite yet, but I am eyeing the out-of-the-money puts – to get my toe in the water for the 18-month cycle peak.

It is the timing and quality of your trades that count, not the quantity.

A.F. Thornton

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