Category Founder’s Trading Journal

So far, we have had a trading range open—this time in the form of a converging triangle. The triangle wandered around the RTH open, as most do. We have now broken to the upside of the triangle and above the VWAP. But the market is a bit tentative.

This is what rotation looks like. The S&P 500 is being pulled in two directions as the result of the stronger-than-expected employment report.

Institutions are reducing tech and growth stock exposure and substitute financials, energy, transports, industrials, and even small caps. The latter group is coming off a three-month correction, and the former is in the stratosphere. One day does not make a trend, but the sell-off in bonds and jump in interest rates force a reordering of thinking.

We are not likely to see a larger move or breakout until later in the day if we see one at all. The push/pull of the sectors creates a bit of an unresolvable math problem, at least short-term.

On a positive note, the market is holding the important balance range breakout. That is the key to this entire session. Regardless of rotation, the big cap tech stocks have enough weight to take everything else down with them. So the market must close above 4422.75 to keep the trend and breakout alive.

My next update will be after the close. Remember, other than View From the Top Down, my weekly macro view, I will be out next week, so no daily updates.

Have a great weekend.

A.F. Thornton

Heads up. Or should I say head and shoulders up? Take a look at the hourly chart above. If the reversal pattern takes, the measured move is the head projected from the neckline. That would be 51 points from 4417 or a 4468 target.

Strong internals this morning thus far. Obviously, it is not a pattern until it takes. As always, watch for the head fake / look above and fail. But the pattern is encouraging.

A.F. Thornton

The morning has been a sloppy choppy range fest, with a barely discernable wedge into our halfback at 4391 or so. From there, we have a swing-up that could form a reversal pattern. Unless we clear all the noise in either direction, I am on the sidelines today. The pattern had a bearish tilt all morning, but this is the typical activity that follows a spike higher into a bull channel as we saw yesterday. So the behavior is normal thus far, not telling us a lot about what lies ahead.

On a couple of housekeeping notes, I will be out next week taking some time off and finalizing our new web subscription and trading room services. Unless there is an important buy or sell signal, I will only publish the weekly View from The Top Down report. There will be no daily updates.

Yesterday was, indeed, impressive. And I can make many arguments that we should break through the top of the trading range in the next few sessions. If so, 4450 is a reasonable target, about 50 points higher than the current price at this writing. Is that a lot? No. We practically covered that distance yesterday.

The cautionary note is twofold. First, trading ranges are self-reinforcing and not always easy to break in either direction. Second, the market can pop higher from the range, only to reverse in what we call a bull trap. It is also called a final bull flag.

The reason I tell you this is not only to be aware of the risk day trading. It is easy to get lost in the weeds. But as to our swing trading positions, I always worry that anyone following these pages may not enter timely when we do, putting them at a different cost basis. I worry about the same on the exit. You have to stay alert and watch your emails so that you can execute as close as we do on entries as well as exits.

Balance Rules are applicable in this 37.25 point trading range. If we look above the old high at 4422.50 and then reverse, the probabilities are that we go back to the bottom of the range at 4365.25. If we break the downside of the range in that process, the measured move is 4350 or so.

If the volatility on the swing positions is more than you can bear, then exit on any strength today and tomorrow.

Today’s Plan

Overnight trading was inside yesterday’s range but bullishly in the upper third. However, we dipped a bit pre-market on the ADP job numbers, which came in half of what had been expected. There are innumerable signs that the economy is either slowing or anticipating a recession soon. This would not bode well for the market or our current positions, so this is weighing on my mind, at least as to fundamentals.

For downside referenced today, you have the overnight low, of course currently at 4898. I would call penetration of 4395 at the top of the single prints my “nervous line” Yesterday’s halfway point or halfback at 4391.25 is my line in the sand for bull/bear trades.

The main upside reference is the all-time high at 4422.50, but you must get through the overnight high at 4415 and yesterday’s high at 4417 first. So there will be some work if we get up there, including the usual stumble at the 4400 roundie.

However, the guiding principle in day-trading a five-minute chart is the 21-EMA. Under the line, you are looking to short from the line. Over the line, you are looking to go long from the line. You use your patterns and other work to confirm reversals when the price gets stretched too far from the line.

Finally, we may open with a small orthodox gap down. It is not a true gap, so Gap Rules are inapplicable but be aware of it.

Good luck today.

A.F. Thornton

It is hard to complain about the opportunities presented for day traders in the past two sessions. Today was better than yesterday in that it kept our swing positions in the game, but that is for another strategy.

The morning started with the bears driving the market viciously lower into a selling climax. A bull, major trend reversal followed, starting with a couple of bull surprise bars. This gave us a long position with a clearly defined two-step target and an opening range break target right above that. Price tagged both targets almost to the tick. The day ended as an outside-up day in the RTH session since we briefly fell below yesterday’s RTH low and broke above yesterday’s RTH high. I wasn’t as lazy as yesterday, putting 39 points per contract on the board.

There were more trades available than marked above. I skipped the morning short trade. I was too screen fatigued to scalp the bull channel rising into the end of the day. As the rising wedge and channel progressed, I took more of a buy-and-hold approach on the last long trade until we reached the opening breach trade target.

Stepping out to a two-hour chart, I threw a bit of Wyckoff analysis on the trading range. We now have a decent chance of breaking out, though I take nothing for granted. This morning was a shakeout, falling below yesterday’s low and bouncing right back. It would have been better to take out the first low in the range, but this was close, almost to the tick. A flush like this generally acts as a spring for a rally to end the trading range. Supply is finally exhausted, along with the weak hands.

The main fear I have is that this consolidation pattern can also act as a final bull flag. In such a case, we could look above and fail tomorrow, resulting in a bull trap. We need to be on guard for the possibility. Otherwise, we can begin to target the uncompleted measured moves above us, more clearly defined on the daily chart below, and previously discussed in these pages.

I was also pleased to see our swing positions in Energy (XLE) and Financials (XLF) leading the pack for most of the session. We have been betting on a turnaround and rotation into both of these beat-up sectors, but concerns about the economy (in light of the latest Covid scare) could spoil the best-laid plans.

As always, I will stay vigilant.

A.F. Thornton

Priced for Perfection

The Navigator Algorithm system signals appear in the chart above calculated as of tonight with the Globex activity thus far. Note that the “Strength” label continues to flash the yellow warning light. I like to see this at 20 or above. As such, the algorithm has painted a preliminary sell arrow on the chart. This is usually the first warning in the sequence. The bottom line is that I am barely bullish up to the measured move targets right under 4550. We remain in our previous positions, 60% S&P 500, 10% Financials, and 10% Energy. You can be in the cash sectors or options on the SPY, XLF, and XLE.

Having said all of that, and at these levels, the markets are priced for perfection. Some yellow flags in my work are counseling us to be cautious. We need to keep moving our stops up with the 5-day EMA and stay extremely vigilant. Conservative investors should already have their money under the pillow – not in this market.

As communicated Friday morning, the Founders group was stopped out of our S&P 500 futures position Thursday night for a very nice profit. Futures are highly leveraged and must be treated a bit more cautiously than options or cash positions. While we came close to getting stopped out of our remaining positions in the SPY, XLF, and XLE this past Friday on the Amazon earnings miss, the positions held their ground. In fact, the entire session was a dance around our stop line, the 5-day EMA. You can see the details in tomorrow morning’s Pre-Market Outlook.

For the sake of time and brevity, I will flip through the screens from the broadest to the narrowest perspective, referencing the notated charts if you wish to print them. I will be publishing these updated, notated charts nightly on the Website. You will receive a link to view them tomorrow.

Monthly Chart Perspective

1. The Navigator Algo is in extreme overbought territory on the monthly chart with price closing 18% above the mean, 10% above the Algo Trigger, and above the 3-ATR outer extreme K-Band.
2. The spreads are historically high, unsustainable and require nothing short of “perfection” in the economy, interest rates and corporate earnings. The situation is comparable to the 2017 blowoff right before the Fed’s last “Taper Tantrum.” As you might recall, the Fed tried to taper the first Quantitative Easing from the 2008 financial crisis and the market went into a 20% correction. This began a 30-month consolidation, also related to the last administration’s tariff policies.
3. July was the 6th consecutive monthly gain for the S&P cash index. This has not happened in 10 years. Therefore, a 7th bull bar would be even more unusual. Also, we move into seasonal weakness in August and September. Consequently, August should close below its open to form a bear bar and begin some kind of consolidation for at least a couple of months.
4. Note that similar advice would have failed in August 2017, as the market went into a parabolic blow-off stage ignoring any August/Se[tember weakness. Also note that my similar thoughts about how July 2021 would unfold underestimated the market.
5. Also note that it is not unusual for the market to skip a deep cut in the first 18-month cycle dip following a severe bear market and a four-year cycle low such as we experienced at the bottom of the bear in March 2020.
6. Bulls will argue that we have risen out of a 30-month consolidation, with a friendly Fed and a lot of firepower. They will also argue that rotation from one group to the other will keep the market afloat. Yet, that is exactly what can create a lengthy trading range.
7. All of the important measured move targets from the March 2020 low congregate between 4500 and 4600, so I would be hard-pressed to have confidence above those levels. We could easily be stopped out before we get there, but the probabilities are that 4550 or so is our next destination.
8. The year-long rally is either a tight bull channel or a parabolic wedge. Because the rally is so strong, bulls will buy the pullback when it manifests, whether it is a 10% or 20% correction.
9. If the projections are achieved. the market likely will overshoot the top of the monthly micro bull channel, in addition to the 3-ATR K-Bands, increasing the odds of attracting sellers.

Weekly Chart Perspective

1. This past week was a bear doji bar, indicating nearly equal power between bulls and bears as the week closed near its open. The doji could be interpreted as a weak sell signal bar, and the weekly chart is extremely overbought.
2. Yet, the S&P 500 has another “V” reversal pattern on the daily chart and there are similar head and shoulders reversal patterns in the Dow, Russell 2000, and other indexes, not to mention some of their key member stocks.
3. This indicates a high probability of one more push higher into the measured move targets between 4500 and 4600. Beyond that is the 2009 bull top channel line which would require a blow-off of historic magnitude to achieve anytime soon. Achieving the top channel line of the 2009 bull market is not probable without a pullback and some consolidation.
4. The bulls were not able to create a follow-through bar after breaking into new highs from last week’s outside bull bar. We have had a small pullback trend (micro-channel) for 60 weeks, which is unusual, unsustainable, parabolic, and climactic. This mearly confirms what we see on the monthly chart.
5. The bulls have the potential bottoming of the 18-month cycle on their side, which could result in a tight trend upward but at a very mild slope. Of course, the cycle may yet to have bottomed. If it has, the cycle low also may help contain a 5% or more consolidation range depending on where the market finally peaks.
6. A tight bull channel/small pullback trend typically ends with a big pullback. The biggest pullback so far was the 10% selloff in September. A bigger pullback means 15% to 20%.
7. Traders have bought every dip/reversal for a year. They know the odds are that buying one of these dips will fail soon. However, they also know that it still makes sense to buy them until it stops working.
8. When there is a successful trend reversal, there is not a consensus that it will succeed until it is already half over. Until there is a strong, clear reversal, traders will continue to buy every 1 – 2 bar (week) selloff.
9. A small pullback bull trend is a sign of very eager bulls. They are buying small pullbacks because they doubt there will be a big pullback.
10. Even once there is a big pullback (15% – 20%), investors will still buy it, betting that there will be a test of the old high. Consequently, the 1st reversal down will still be minor on the scale of things, even if it is 20%.
11. As set forth above, the next targets for the bulls are the trend channel line and the measured move up around 4550.

Daily Chart Perspective

1. The market held both the 5-day EMA stop and Algo Trigger Line Friday, though just barely. So no sell signal yet, except on an overnight stop that was triggered in the Founder’s Group S&P 500 futures position.
2. Friday could be considered to have triggered a micro double top sell signal, but it is a low-probability sell signal given Thursday’s bull bar.
3. There is also an expanding top with the July 7 and July 14 highs and July 8th and 19th lows, and the Emini is near the top of the bull channel, using the May 7 and July 14 highs. Expanding triangles (broadening formations) are trading ranges but can be topping patterns. While you can legitimately draw the pattern on the chart, I believe that the 18-month cycle low on July 19th negates it. Any new patterns should start after that low.
4. What is more apparent is the “V” reversal bottom in the S&P 500, which is also visible as a head and shoulders reversal pattern on the Russell 2000 (IWM) and Dow Jones Industrials (DIA).
5. Until there is a strong reversal down, traders will continue to buy the dips and bet on new highs.
6. The latest bear bars have tails below and small bodies, which means the bears are not selling into the close of bars. They lack conviction and are unwilling to sell low.
7. Also, there are no consecutive strong bear bars on the daily chart.
8. Until the bulls aggressively take profits and the bears generate sustained, aggressive selling, the bulls remain in control.
9. We will maintain our Navigator swing positions in the S&P 500, Financials (XLF), and Energy (XLE) until we violate our stops, achieve our measured move targets, get a solid Navigator Sell Signal, or see a parabolic climax bar.

Sentiment

The one good thing the bulls have on their side is fear. Fear is associated with troughs, not peaks. Friday’s high put/call ratio screamed fear loudly, kept our strategy in the game, and led to an anticipated short-covering rally into the close. More interestingly, the broader and more diversified CNN Fear & Greed Index currently shows extreme fear.

With such extreme fear, and all the weekend headlines calling for a crash, the probabilities favor the market going higher.

Risks and Conclusions

The current breadth and momentum divergences in the major indices could be a warning of trouble ahead. They could also be reflecting the stealth correction in value and cyclical stocks that should be bottoming with the 18-month cycle and perhaps benefitting from some profit-taking and rotation from technology and growth stocks. We need to see how this progresses from the proposed July 19th cycle low before drawing any definitive conclusions. It is on my radar.

The persistent rally in U.S. Treasury securities also remains a concern. This means interest rates have been falling while inflation has remained persistently high, and we are told the economy is booming. As the old saying goes, “this does not compute.”

In the past, the stock market has followed interest rates down with about a three-month lag. We have to watch this relationship between stocks and treasuries carefully. The treasury rally could be an early warning that institutions are battening down the hatches, preparing for a stock market storm.

Finally (and likely related to the rally in treasuries), the Delta variant of the China Virus is a winner in the game of survival of the fittest. In other words, it is a clever and virulent mutation.

In short (and I am not a doctor), the spikes are more efficient at attaching themselves and invading you. This makes it more contagious. For example, if a person with the first strain infected three people, a Delta strain person would infect six. While there is no evidence that the virus is more deadly, it has infected both already vaccinated and younger people – including children.

So far, symptoms have been relatively mild for the young and some vaccinated people. Treatment modalities have improved considerably. Despite this, fear sells everything from website clicks to cable news, elections, and “government protection.” Reliable information and good advice are scarce.

To determine the size of the problem, we need to keep an eye on the Transport Sector (IYT) and the Travel and Leisure Sector (AWAY) for clues as to how this is affecting consumer choices. These two sectors look like they are at the bottom of a waterfall. They are communicating that the Delta Variant is a problem. Then again, sell the rumor buy the news?

The bottom line remains that we maintain our positions with tight stops in a risky and overbought market, intending to achieve the aforementioned targets while proceeding cautiously.

As always, stay tuned.

A.F. Thornton

I have only made one round trip this morning for about 10-points per contract. The buys are green, the green horizontal bars, and the sells are the red horizontal bars at the trade locations. I am in a second buy off the falling wedge reversal into the double bottom at 4386 at this writing.

We had a surprisingly strong bull microchannel off the open, and I bought the close of the second bull bar. I sold on the climax bar that broke out of the channel. I planned to buy the first retracement, but the bear bar was too big. Where I sold, you could also have shorted. However, I was reticent to short against such a strong bull opening that filled the entire gap down this morning.

From there, we formed a sloppy, choppy falling wedge, typically a reversal pattern to go higher. There were many scalp trades in that region, but I don’t tend to be a scalper.

The area (also identified as one of our key levels today at overnight halfback) provides much indecision because all the 21-period and Algo lines congregate there from the various upper time frames. Traders have been going back and forth, trying to find the path of least resistance.

More importantly, up around 4394 is where the 5-Day Line (our Navigator Stop Line) and the Nav Trigger on the daily chart sit. We want to close above that level today to stay short-term bullish.

By the way, black bars are down bars; grey bars are up bars. Yellow bars are outside bars, and green bars are inside bars.

So I am currently long against the double bottom and wedge reversal. Today likely will end up a trading range so that the morning high might be the target.

One final, important note. The Put/Call ratio is back above .75. The shorts are not getting what they want so far today. Given that the last hour today is the end of the month and week, we usually get a big move anyway. I will be looking for a potential short-squeeze.

A.F. Thornton