Category Founder’s Trading Journal

View from the Top Down – 8/23/2021

I had a Dream...

Well, it was more like a nightmare. But I need to set the stage first.

I was watching George Noory’s Beyond Belief program on the Gaia channel Friday night. It was Season 17, Episode 7, on “Dispatching Your Spirit Guides.” Mr. Noory’s guest talked about Spirit Guides, Guardian Angels, etc., and how they help us. 

Don’t get me wrong. Some of the subject matter is a little out there. Nevertheless, if I have a spirit guide or guardian angel, I don’t mind a little help once in a while. Who doesn’t?

So, as I went to bed that night, I whispered to the netherworld that I would be receptive to receiving a lifeline every once in a while. Sure enough, I went on to have a very vivid dream that the stock market crashed. Was it an omen?

But the dream eventually turned into a nightmare. There are always those tricky dreams where you are about to fall, or something bad will happen. You wake up relieved, realizing that you were only dreaming. Not this time.

In my dream, I knew the market crashed, and it wasn’t good. But in the dream, I was not allowed to know whether we were in the market or out in cash. That was the nightmare. I had to sit in a chair outside a room and wait to go into a meeting to find out. 

But when I woke up, I finally remembered we were in cash. I was relieved. But then I realized it was a dream, the fact I was in cash was the real world, and the market was ready to go up again. FOMO (Fear of Missing Out) immediately set in. So I will continue to wonder whether the dream was an omen. 

For now, bad news is good news for the markets. Both the sad situation in Afghanistan and the Delta variant have quelled fears of the Fed taking the punch bowl away in their (now virtual) Jackson Hole meeting this week. So the market marches on, but with extremely weak internals and plenty of other warning signs. The party won’t last forever. 

For now, I am content to day trade. The Navigator Algo issued another high trigger buy signal mid-day today. But I am choosing to ignore it for now. It is tough to swing trade this market, especially with options. 

Also, the U.S. Dollar has been breaking out of its downtrend lately, possibly forming a new uptrend from a “W” reversal and bottom. That is not usually good for the stock market in the short term. It might reflect a flight to safety. 

There still is not much clarity on interest rates. They could go either way. On the weekly chart, I see a large pattern for rates to reverse higher. They broke above the mean and a very short-term downtrend on the daily chart, also pointing higher. But the intermediate trend in rates remains down unless the 10-year rate can move above 1.37%. As a side note, higher rates will help the dollar – so the two should move in tandem.

So cash is fine for now. The Russell 2000 and Energy both led the performance corner today. A few weeks back, we were stopped out of our first foray into the XLF (Financials) but hit pay dirt on the next try. So I will keep an open mind on the XLE (Energy) if a second look makes sense. I am more open to sectors that have been corrected or based for a while. But I am happy in cash for now from a swing trading perspective.

Anyway, I need to get back to Beyond Belief, Season 17, Episode 1, “Chakras and Money Flow.” When it comes to our money, I leave no stone unturned.

Stay tuned,

A.F. Thornton

Pre-Market Outlook 8/23/2021

I will put out the View from the Top Down later this week. Suffice it to say that the 40-day cycle dip was completed intraday on Thursday. The NASDAQ 100 and S&P 500 indexes have since risen swiftly and both are within striking distances of new highs this morning. Other than that, nothing is new.

Many warning signs of an intermediate top continue to manifest. But the market is not quite ready to topple. When it does, the initial downdraft will be swift and it may be well underway before the New York Stock Exchange opens. That is among my biggest concerns at the moment.

We will hear from the Fed after the Jackson Hole conference later this week. That could rock the markets, yet I still don’t anticipate that the Fed will taper with the current circumstances in Afghanistan and spreading Delta variant.

Fear continues to be very high as measured by many sentiment indices. Typically, the market does not correct when fear is this high. Of course, there may be exceptions but the market is climbing the wall of worry at the moment.

Another issue weighing on me is that the FAANGMAN+T stocks may be acting like defensive stocks. Let’s face it, their earnings have been rock solid and only seem to benefit from the exigent circumstances of the last 18-months. 

So maybe Microsoft, Google and the like have morphed into the same category as Utilities. They are safe havens. That could explain the narrow breadth still carrying the market – especially given the index weighting of the tech monsters/

We have a gap higher this morning on top of Friday’s bullish activity. Gap rules apply.

The market has crossed back above the mean on the daily chart, a bullish sign

If stronger sellers are going to emerge to turn these charts south, then they need to do it soon. The odds of a reversal back to recent swing lows are diminishing with every uptick.

As always, how much of the gap fills (if at all) is extremely valuable information to carry forward. It will tell you what type of day is likely to unfold.

Note that the ONL (4434.25) is right at settlement with only a few ticks of variance. Assume that low is weak and could be a short point if tested.

The market should favor longs above the ONH (4455) with an ultimate target of the ATH (4476.50), although there is some distance to travel and traders should monitor closely for confirmation.

A.F. Thornton

Pre-Market Outlook 8/20/2021

If we are on the monthly options expiration script, we should hit the low today or Monday and turn back higher and back into the clouds. If the script is changing, then there are other possibilities. We won’t know that for a few days.

The overnight range is inside yesterday’s range, so we will use the overnight high at 4406.50 and the overnight low at 4371.75 as our boundaries today. Holding the 4400 level matters, as we know 4408 is the monthly open and the key to a bull or bear bar for the month. Taking out the top of the spike at 4418.25 would rev up the bull as well. 

If we end up with a bear bar for August, it is likely than one or two more will follow in September and October. That tends to be how it works. 

Then 4389 or so is the halfway point both for yesterday and the overnight range. That could be a bias threshold to work with today. 

Since there is nothing to guide us at the open with an inside global range, let the market settle in a bit before trading.

The macro trend is still positive. This should be a 40-day cycle correction and nothing more. This was predictable as outlined last Sunday. Only time will tell.

Watch the swing low from the 18th at 4347.75. Any action below that and the bears will come out of hiding.

I am out this morning, and don’t typically trade expiration, so the next update will come over the weekend.

Good luck today.

A.F. Thornton 

Mid-Day Outlook

We just finished three hours of short-covering. The market managed to tuck up into the monthly open around 4408, near the 21-day line and slightly above yesterday’s RTH low. Unsurprisingly, this is now resistance and will take some time to conquer if we are headed back north again.

The remainder of the day will tell us whether the market can find acceptance or needs to roll back down and retest the lows. The “ABC” nature of the short-covering rally makes it look corrective to the downtrend underway rather than the first rally in a new leg up.

Let’s see how the rest of the day goes. If you followed the Pre-Market Outlook, you should have more than enough gains to take the rest of the day off.

A.F. Thornton

Pre-Market Outlook – 8/19/2021

Programming issues have been plaguing me since Sunday. I will get everything from yesterday back up on the website later today. Meanwhile, we exited most of our positions last week at the peak, excepting for Energy (XLE). I had set a wider than usual stop to give it plenty of room. One would think XLE would have reacted favorably to Middle East turmoil. We hit our stop about an hour before the close yesterday nonetheless. And perhaps that is one of our “WWSHD” signals (when what should happen doesn’t).

Overnight, the major indices continued lower to tag their 50-day lines. That would have been the end of it in the past few markdowns. However, in June and July, the markdowns did not finish until Monday or Tuesday after monthly options expiration. The monthly expiration is tomorrow (Friday). And we will be gapping lower this morning from the lower third of the overnight range. Overnight inventory is net short.

And the previous corrections started a few days later than this one. Of course, this markdown could be different now that we are in that seasonally weak period of the markets – August through October. Notably, as well, we have now dropped below the August monthly open at 4408, so the monthly candle has turned red, putting a potential bear monthly candle on the board.

Also, we have been in a small pullback bull channel on the weekly chart which normally ends with a large pullback of 10% to 15%. At the very least, the market typically will go sideways for a while. The only question is what the size of the trading range would be. As an example, could we tag the July 19th low around 4200 to form the bottom of the range?

Today, then, is as simple as framing our bias between the overnight low at 4347.45 (the market looked like it was exhausting into that level last night) and the overnight halfback at 4374.50. Above the halfback, I start feeling a tinge of positive bias. Below the overnight low, there are a couple of prominent VPOCS at 4339.75 and 4316.50, but it could also mean a trip all the way down to the 200-day lines, though not likely in one session.

Overnight inventory is certainly net short enough and we are close enough to the ONL to assume that there is potential for a short-covering rally. As always, buy the high of the first one-minute bar or a cross back up through the open should the opening drive be lower.

In either situation, it would be better if the ONL does not get taken out in early trade. Monitor for continuation and target the overnight halfback first. The outcome and tone of any short-covering rally will always give you tons of information that will help you discern the potential outcomes for the rest of the session.

On any fade and then failure, preferably one that cannot even reach the overnight halfback, the cross back down through the opening price is a short trigger.

On an opening drive lower that takes out the ONL, target the first VPOC at 4339.75 and monitor for continuation. Good confirmation that such a move has the legs would be a failure of the NYSE tick to get positive at all during the first half-hour of trade.

Both Gap Rules and Spike Rules apply this morning.

A.F. Thornton

Pre-Market Outlook – 8/17/2021

There was no follow-through overnight to yesterday’s morning turnaround and small pullback rally into the close. In fact, though all of the Globex range is inside yesterday’s range, the S&P 500 has retraced 61.8% of yesterday’s prices and sits near that level at this writing. 

Although we are squarely within yesterday’s range and trading around halfback currently, I believe there is some shock and potential for imbalance to this open as futures are opening well away from the bullish settlement and on 100% net short overnight inventory. Treat it like any other orthodox gap with the caveat that gap rules are not officially in play (not a true gap as we are opening within yesterday’s range). Since we know that the initial move should be to correct some of that overnight inventory, what actually happens will leave us with plenty of information.

This still leaves the possibility that we overshot the rising wedge yesterday and still may dip into the cycle low and options expiration on Friday. But it doesn’t matter. As with yesterday, we need to follow the usual plan and let the market take us where it wants to go.

Our first downside reference will be the Globex low at 4447, with our second reference at yesterday’s low of 4432.50, which is right above yesterday morning’s downside target, and last Thursday’s weak low at 4430. Above, our references are yesterday’s halfback and the overnight prominent POC at 4454.50, then the Globex high of 4472.25, and then yesterday’s high of 4476.50. Halfback at 4454.50 is my key bull/bear bias line for today.

As a side note, on instruments such as the S&P 500 index, both the ’33 and ’50 handles are always key lines, so the downside levels this morning are not surprising. Usually, if the market can hold the ’33 handle, it will get the ’50 handle. If it can hold that, it goes after the ’62 handle, then the ’77 and ’88 handles, etc. At some point, I will do a write-up on the 100 handle block and how the market works it on the way up and down.

With all these levels, monitor for continuation.

A.F. Thornton

View from the Top Down – Interim Update – 8/16/2021

The rising wedge reversal pattern mentioned in yesterday’s weekly report has broken this morning. The Navigator Algo has issued a sell signal. This appears to be the anticipated reversal into the 40-day cycle low. I have set an initial target for the 40-day low at 4200 on the futures. Currently, the futures are trading at 4437.

I have marked the cycle FLDs (Future Lines of Demarcation) on the chart immediately above. The 40-day FLD is the initial target, also currently at 4200 or so. Notice how close it is to the blue line, which is the 21-day EMA. We will see how all of this develops, and I will keep you posted. Keep in mind that this is the initial target. We could certainly go lower as the decline develops further.

The Founders Group is holding on to the Energy (XLE) position until we approach the close today. While the XLE may not hold, you can also imagine that the situation at hand could destabilize the Middle East. With the current administration increasing our dependency on Middle East Oil, oil prices might soon reflect the chaos. I want to see how the price behaves into the close before I decide whether to hold or fold.

Note that we are approaching the 20th anniversary of 9/11. We have no Southern Border at the current time. More than 5,000 terrorist prisoners have just been released from Afghan prisons by the Taliban. This is a lethal combination, and there is nothing to stop terrorists from entering our country.

This morning, China (the CCP) has already posted headlines aimed at Taiwan and Hong Kong, using Afghanistan as their example. The CCP is warning that Taiwan and Hong Kong need to submit to CCP control as there will be no interference or rescue from the United States. Not only is this tragic, but it could also be a strategic nightmare. Keep in mind that most of our computer chips come from Taiwan.

Recall what I have previously communicated about Fourth Turnings. Every such turning in history has resulted in major wars.

The turn of events in Afghanistan over the weekend has profound, global implications, most of which have not even come to light as yet.

Stay tuned,

A.F. Thornton

View from the Top Down 8/15/2021

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             When the Fed Expands the Balance Sheet, the Market Rises and Vice Versa

Golden Anniversaries and Dead Trading Gurus

Let me start by confessing that I am in one of my moods. So you are forewarned. I could not help it, as today is the 50th anniversary of President Nixon taking the United States off the gold standard. I thought it was worth mentioning since the 50th is a “golden” anniversary, pun intended. The U.S. debt of nearly $30 trillion and growing would not be possible without that monumental step taken on a warm Sunday afternoon in August 1971.

And then there are those pesky “unfunded” liabilities. Would they still be possible?

Unbacked, fiat (paper) currencies have been the undoing of every global reserve currency (and world power) in history. As we see today, the people demand more, the politicians deliver, and the central planners kick the can down the road until they can’t. At least gold forced a modicum of discipline. That is why it had to go. It was the cost of the Vietnam War then.

Coincidentally, there are vestiges of the 1970s all around us now. Gas lines, inflation, riots, protests, Marxists – I have seen this movie before. Now Afghanistan is the new Saigon.

The most any reserve currency has lasted in history is about 100 years. Whether you trace the roots back to the Romans, Dutch, British, etc., it all ends the same, and it doesn’t end well.

Try as they might, central banks cannot cancel the economic cycle. By deferring the pain of the Financial Crisis, and now the China Virus, the ultimate price we pay is certain to be much greater. We could face the worst bear market of our lifetime. A depression of the 1930s variety is unimaginable to the modern world, and that is why we are vulnerable to repeating it right on time for the longer-term cycle trough.

The only thing that backs the U.S. Dollar now is confidence – plain and simple. What do we know about confidence? It takes a long time to build but can be eroded overnight. And there is no lack of enemies willing to help us fall. China, Russia, Iran, and even our European competitors, are waiting in the wings to pick up the pieces.

Perhaps the only thing we have going for us is that none of those countries are any more responsible than we are for fiscal reality. It will be a “global” solution with a new, “global” currency to replace the U.S. Dollar when it all comes tumbling down. No doubt we will all be paying a world income tax, too, as our sovereignty gives way to the New World Order. Brace yourselves.

I hope I don’t live to see this, but it is as inevitable as the sun coming up in the morning. Let me ask you, how is your confidence in the U.S. Government these days? How will the world look at Afghanistan’s overnight collapse and surrender to terrorists? What about our government’s fiscal responsibility? Another $6.5 trillion in spending goodies on the table, really? What about the national debt. What about inflation?

Today’s anniversary also got me thinking again about the Fourth Turning. We are in the midst of the Fourth Turning, which is why there is so much consternation and turmoil. It is part of the generational cycle.

To simplify it, we are four generations (roughly 20 to 25 years each) removed from the Great Depression and World War II. In other words, most of us are the spoiled grandchildren of our grandparents and great-grandparents. So we tend to ignore or minimize the risks and realities of life – like avoiding debt, hard work, individual responsibility, frugality, a responsible government, ethics, and the like. I always like to call it “unearned wealth in undisciplined hands.” And so, history repeats as memories fade.

The Fourth Turning that preceded the Depression and World War II encompassed the Civil War. Before that, the turning encompassed the Revolutionary War. This turning likely won’t end until 2030. The precedent is both sobering and grim, and we are barely at the midpoint of the cycle. If you wonder why everything seems so unhinged, the Fourth Turning is your explanation.

The generational cycle also got me thinking about a fairly well-known and deceased market guru named W.D. Gann. As with most dead gurus, he tends to be more celebrated now than when he was alive. Rumors abound that he died with a several hundred million dollar fortune. His son, once interviewed, stated otherwise. His son indicated that Mr. Gann sold trading programs from the trunk of his car.

Nevertheless, Gann’s math and predictions were contemporaneously tested by a reporter for a prominent financial publication in the early 1900s. To the reporter’s astonishment, Mr. Gann’s predictions came true day after day during this “test.” So there was (is) something to the Gann number calculations and predictions. In 1912 or so, he predicted a stock market crash in 2020. That is certainly an attention-getter.

Important for our discussion, Mr. Gann was keen on a 90-year stock market cycle, which I believe is somewhat related to the Fourth Turning. The last 90-year cycle trough was the 1929-32 stock market crash and bear market. The cycle provides a window between 2019 and 2022 for its next trough or bottom. Maybe the March 2020 China Virus crash was it. But what if we were to revisit the March 2020 lows sometime in the next year?

That would be a shocker. Is it probable? Likely not. But when I look around, I cannot exclude the possibility. There is no lack of catalysts.

Taking the micro view, the vaccines don’t work. The government was slow to reveal this, but the evidence mounts daily. The Delta Variant is highly contagious, as are government bureaucrats who enjoy their newfound authoritarian rule. More lockdowns? Maybe. Socialism and Marxism seem to be taking root in our government and previously trusted institutions. The printing presses are out of control, and interest rates seem to be going up right now – which could burst the financial asset bubble.

Taking the macro view, corporate and sovereign debt is beyond historical comprehension. Interest rates are artificially low. How do I know that? Who in their right mind would accept a yield of 3% on “Junk” Bonds? That is what you pay for your secured first mortgage. Who buys this junk? I want to hire the Junk Bond industry’s marketing person. By the way, junk bond prices are not confirming the new highs in the S&P 500 index. That is a bad omen.

With the supply of debt at historic levels, who will buy all of it? What will they be willing to pay? The less buyers are willing to pay; the higher interest rates will climb. The fundamentals of supply and demand tell us that rates will go higher. I cannot tell you if it is now, next week or next year. All I can say for sure is that the fundamentals support higher rates, and they won’t stay low much longer.

For all of this historical debt to work and not crush all of us, the Fed has to stay in control of interest rates. It is the key to avoiding national collapse and bankruptcy, not to mention financial ruin for the rest of us. But there have been times in history where the Fed loses control, and the market takes the helm. That could be underway even at this writing.

It is scary to contemplate that the cheapest asset class on the planet is commodities, even after the recent rally. Likely, the rise in commodity prices is just getting started. What if all the money chasing stocks suddenly shifted to commodities? What would that do to the price of wheat, corn, cotton, and the like? Inflation anyone? Likely so. What will we do if the commodities indices were to go vertical as the NASDAQ 100 has?

Is the stock market rally real anyway? In the chart at the beginning of this discussion, the Fed’s balance sheet is green, and the broad Wilshire 5000 Index is blue. The green line rises when the Fed expands its balance sheet (going into debt). Notice how the stock market then correlates and zooms.

Yet, when the Fed stops growing the balance sheet, and the green line flattens, the market stalls and corrections are deep. When the Fed reverses and starts shrinking their balance sheet, the market starts throwing what is now called a “taper tantrum.’ Do you recall the 20% decline in the latter part of 2018 into Christmas Eve? How about the expanding triangle from 2017 until 2020? It was not fun.

My goal in sharing these thoughts is not to terrify you. First and foremost, be aware. Don’t be a sheep, be a sheepherder. Stay tuned to these pages. My goal is to help you avoid the coming pain. Then I want you to take advantage of the situation, just like our esteemed elite will do. So don’t fret, prepare.

The Stock Market

After three range days last week, the market broke out of the tight consolidation and completed the Head and Shoulders reversal pattern mentioned last Wednesday (8/11) in the Morning Outlook for Day Traders. The market now sits at the top of three pushes and a wedge, usually a reversal pattern. Coincidentally, the 40-day cycle trough is due later this week. So I am expecting at least a minor dip to get underway.

We still have open targets and measured moves above us, ranging from 4480 to 4537. Of course, we would have to conquer the roundie at 4500 too. I mention this because sometimes, the market can throw over the wedge for a few days. If the wedge reversal fails, always remember that failure is a signal too. We might shoot up to the upper targets before rolling over.

If the wedge reversal materializes, we will look to our lower support levels for a bottom, outlined each morning in the Morning Outlook for Day Traders. Major support on the daily chart starts around 4414.25. Lately, the pivot back higher has been found at the 50-day line, currently about 2.5% below us.

Notably, breadth, strength, and momentum are not confirming the latest all-time highs thus far, bolstering the case for falling into the cycle trough. If rotation back to value and cyclicals truly is underway, the shift could help cushion any decline, especially if the 18-month cycle truly bottomed on July 19th. Only time will tell.

Whether it is the Delta Variant, the Fed Minutes coming out on Wednesday, or the Fed Conference in Jackson Hole later this week, there are plenty of catalysts to trigger an even deeper market correction. We will monitor this carefully.

We are only holding an Energy Sector Position (XLE) at a 10% allocation in the Navigator Swing Strategy. It has not really gripped yet but fits the reflation theme. I am keeping a tight rein on it.

We realized very nice profits on our SPY and XLF calls last week. I will reconsider the positions on the dip. However, the Dow Industrials (DIA) may be the better choice if rotation continues to confirm the reflation trade.

The Bond Market and Interest Rates

Perhaps more important than the stock market these days is the bond market and interest rates. Using the Treasury ETF (TLT) as our proxy for bond prices, the bonds look like they could be forming a topping pattern, especially apparent on the weekly chart. The formation process is still underway, so it is not a definitive pattern yet. Nor can the Fed afford to lose control of interest rates. They will do all in their power to keep rates low. To succeed, the Fed needs bonds to rally, or at least go sideways.

The unstable rate environment is one of those times when we need to stay tuned. The weekly chart did manage to find support on the mean last week, so the bond bulls have hope.

Conclusion

The stock market is overvalued, and it can stay that way for a long time – or not. As you will see from the first chart in this discussion, the Fed delivered this overvalued market on a silver platter by expanding its balance sheet. If they even stop the expansion or begin contracting, the market will correct more significantly than we have experienced this past year. The market also will become more volatile. But that is a liquidity issue.

The other significant risk to the market is higher interest rates, and an economic slowdown is sure to follow. Perhaps the new China Virus wave and scare will do the Fed’s job for them, keeping the economy and inflation tame. Further economic dislocations would abate the need for tapering (beginning to slow their balance sheet growth) or raising interest rates.

Thus far, however, inflation seems to have arisen from the virus waves and accompanying supply disruptions. Since we are experiencing a throwback to the 1970s, how about some stagflation too? Remember that fun period of time?

In an environment such as this, we need to take the stock market day by day. That is why I have preferred day trading to swing trading. I am monitoring relative strength and rotation, as well as the cycles. My focus is intense, and the reins will be tight, even on a swing position acquired on a dip.

The hard truth is, one of these dips will keep going and going and going. That is the cruel nature of the market.

A.F. Thornton

Interim Update 8/11/2021

Since I had to work the last two days anyway, here are my notes today. The market never rests, even though I need to from time to time. As always, take it in slowly from left to right.

After the market gapped open, the bears took control. When the index opens that far above the mean, the only question is this: how long will it take to drive the market back to it? Today, the market reversed lower and sliced through the mean, filling the entire gap. The gap-fill bottomed with many other important support levels, and the market reversed higher into the close on a small head and shoulders reversal pattern, forming the head of an even larger reversal pattern. The market ran out of time to complete the pattern. The pattern could resume overnight or tomorrow.

It is noteworthy that the decline was large enough, once again, to force another trading range. The open acted as a magnet late in the afternoon, just as it has on all the range days in the past week. Note that the open drew the market in like a magnet, whether it happened to be above or below the morning action on this and other sessions.

My biggest concern here is the labored progress into a rising wedge on a number of the indices, including the S&P 500 Index:

As with all chart patterns, they do not always pan out. Nor does a break of the pattern ensure a decline any further than where the pattern began.

Nevertheless, this is a reversal pattern into what is normally the peak of the nominal 40-day cycle. I like to be in cash mid-month anyway. But if the decline begins or happens overnight, we can be stuck in our calls. So we sold our SPY calls into the strength at the open today.

We also sold our remaining XLF position. The price has literally gone parabolic, reached its Weekly Expected Move, and it was in a good place to take profits this morning. We can always repurchase it. 

We have retained the XLE position, and it had a nice day too. But it has lagged a bit, so I will monitor its progress for the rest of the week.

Now I am really going to try to take some time off.

A.F. Thornton

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