Category Founder’s Trading Journal

Let’s sell all of our SPY calls this morning into the strength of the market reaction to the CPI report. A lot of this is short-covering, not really voluntary buying and investing.

That leaves us with 5% XLF Calls (Financials) and 10% XLE Calls (Energy). Stay on alert for my signals, recall that our initial SPY target was 4450.

I am anticipating the nominal 40-day cycle making its appearance soon. On that dip, I might be choosing a more economically sensitive index such as the Dow. The Democrats are pushing the $1 trillion infrastructure, along with another $3.5 trillion linked budget package. Where that money is directed will impact the indexes.

Also, there will be a Gap at the open, and Gap Rules will apply. Here are the four most common outcomes to a Gap higher:

Not easy to take some time off, is it? At least the market isn’t going down, that is typically what happens when I am on a plane.

Enjoy your Wednesday.

AF Thornton

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