Category Founder’s Trading Journal

Founder's Trading Journal Navigator™ Signals for Day Traders Navigator™ Signals for Swing Traders

Pre-Market Outlook

AF Thornton 0 Comment

Overnight inventory is balanced, and we are currently trading inside yesterday’s range. The daily chart implications are an overall triangle balance area starting with the 7/27 (Tuesday) base between 4416.75 (now the all-time-high) and the low at 4364.75. Then we have yesterday’s (Wednesday) inside Fed range day balanced between 4407.75 and 4377.50. Now we have the overnight range inside both Tuesday and Wednesday’s range and bounded by 4403 and 4480.50.

So what we have is a classic three-day triangle into the GDP and employment reports this morning, which included the widely followed price deflator inflation gauge. That may be why yesterday’s Fed day finished smack in the middle of the range and ended up as a yawner of sorts. With the market still inside this range at this writing, we can take Monday’s approximate 50 point range triangle base and roughly project it from the middle of the triangle.

On a break to the upside, we get to a minimum target of 4440, and perhaps eventually to our 4460 Weekly Expected Move high by tomorrow. On the downside, we visit a target of 4340, right below the Weekly Expected Move low at 4346 and close to the 21-day line and mean trading this morning at 4345.

Triangles generally are continuation patterns, so the upside is more likely than the downside. However, an upside break would also take us to the upper three ATR K-Band on the daily chart, an overbought extreme.

On the other side, visiting the 21-day line would not be out of the ordinary either and would complete a two-step corrective pattern off the last rally on the daily chart. But there are other potentially negative chart implications of visiting the 21-day line today or tomorrow to leave for another (hopefully unnecessary) discussion.

I will mention the potential expanding triangle topping pattern that began to form from a 7/2 daily base candle. I don’t think the pattern is legitimate, with an 18-month cycle trough in the middle of it, but I will mention it as a potential carry forward in your narrative. A negative break in the current three-day triangle would force my stops on the Navigator swing trades, a disappointment, to be sure.

Both the GDP and Initial Jobless Claims numbers missed their estimates this morning. That may be good news on the inflation front but less than good news on the economic front. The GDP number missed significantly, coming in at 6.5% versus an estimate of 8.4%. The jobless claims came in at 400,000 versus consensus estimates of 384,000. Continuing claims also are higher than expected at 3.269 million versus consensus estimates of 3.183 million. The GDP deflator came in higher than expected as well at 6% versus estimates of 5.4%. So inflation remains high, but perhaps slowing growth will tame it as predicted by the recent fall in 10-year treasury yields.

At this writing, none of this has managed to move us out of the overnight range, though we are trading in the upper third of the range and near the top. That still gives us no clues about how to trade the open, so it is better to get some price action under our belts before taking positions.

Keep in mind that the weekly open, defining a red or green candle for the week, is 4400.50. That will make the open an important level today. Also, tomorrow is the last trading day of July. The end of the month always results in some window dressing by money managers and sometimes strange market behavior. But there is a positive bias associated with the last few days of the current month and the first few days of a new month.

The bottom line is that Monday’s low at 4364.75 is THE line in the sand. Taking out the ONH at 4403.25 or the ONL at 4380.25 starts the ball rolling in the commensurate direction, then yesterday’s high or low, followed by Monday’s high or low and so on.

I will be using yesterday’s RTH high at 4707.75 as my threshold to look for long trades. As an abundance of caution, I will watch the middle of the range and yesterday’s settlement at 4391.50 as a threshold for weakness to begin presenting for shorts. Whatever the ensuing direction, monitor for continuation.

Good luck today.

A.F. Thornton

Founder's Trading Journal

Epilogue – 7/21/2021

AF Thornton 0 Comment

I was a bit disappointed that we finished in the middle of the range today after the Fed announcement. That puts my guard up just a bit, especially with the sloppy, choppy behavior around 4400 the past four sessions. 4400 also is the weekly open and a big round number. Granted, the market parabolically climaxed at the highs on Friday and Monday and needed a rest. But the expanding triangle visible on the daily chart could be a short-term topping pattern.

Also, just because the 18-month cycle may have troughed on July 19th does not mean that the next 18-month cycle will be bullish. If July is a positive month, that will be seven in a row, which has not occurred since 2010. Notably, 2010 followed a significant bear market low from March 2009, just as we have from March 2020. In 2010, the market peaked its parabolic run off the 2009 bear market low in September and then went into a trading range for a few months.

An 18-month down cycle is my least likely scenario, but I take nothing for granted and want to continue to use the 5-day line as our stop. We do head into potential seasonal weakness in August and September. Eviction moratoriums and Extended Unemployment Benefits expire in a month. There are problems and rumblings in China related to government crackdowns on public companies and a potential real estate and banking crisis. There are rumors that China may devalue its currency – which would not be positive for the U.S. and Europe. In fact, the most likely scenario that would resolve all of the market issues is a trading range of 5% to 10%, like we saw in the fall of 2010.

A trading range would allow for seasonal weakness, support the continued sector rotation, and it could keep the bull market trend alive by sustaining the next 18-month cycle, but at a more reasonable slope. If the July 19th low at 4224 is taken out shortly (not something I anticipate), we would conclude that the 18-month cycle low is not yet in place. If it is taken out in a month or so, perhaps the next 18-month cycle would be bearish.

As you will see from the chart below, today, we sold off from above yesterday’s high but bounced from a small double bottom at the EMA. Then, as anticipated, we entered a trading range before the FOMC meeting, which was a triangle. There was a failed bull breakout and then a weak selloff into the 2:00 pm EST FOMC announcement.

We saw a major bull candle on the announcement, so either a trading range or bull trend was likely for the rest of the day. A weak rally ensued, then reversed from a new high for the session, affirming today as a trading range day.

A.F Thornton


Founder's Trading Journal

New Buy

AF Thornton 0 Comment

The Founders Group added another 10% to our S&P 500 futures position at 4384.50. As always, do your own homework. SPY at the money August or September calls will work as will the shares of the SPY itself.

Our allocation is now 10% XLF calls, 10% XLE calls, and 60% /ES S&P 500 futures.

A.F

Founder's Trading Journal

Mid-Day Update 7/28/2021

AF Thornton 0 Comment

As anticipated, the market is balancing in a triangle pattern so far this morning. The pattern is staying above the key moving averages. That is bullish. A reversal higher head and shoulders pattern is apparent on the 15-min cash chart of the SPX or the SPY. A break above the neckline implies a 35 point move higher to 4440.

Alas, however, there is some bear news. On a 2-hour chart with overnight data, and were the reversal higher pattern to fail, you would see a loosely structured head and shoulders topping pattern of which we would be forming a right shoulder. That might imply a second down leg to a lower low around 4350. Perhaps before reaching that level, we would have a successful retest of yesterday’s low to finish the 5-day cycle tough.

Overall, I am short-term bullish, but the sloppy, overlapping nature of the rally from yesterday’s low looks corrective, not impulsive. Clearly, this could be earnings and Fed trepidation reflecting some indecision. But I cannot exclude the additional down leg possibility.

The market would experience quite a battle trying to invade the territory below yesterday’s low and the 7/14 breakout highs. That should have happened yesterday. Only a negative Fed announcement has the power to drive the market lower at this juncture.

Now you know why I don’t day trade Fed days.

A.F. Thornton

Founder's Trading Journal

Pre-Market Outlook – 7/27/2021

AF Thornton 0 Comment

The market has been extremely bullish, one-time framing higher since the 18-month cycle low on 7/19. That means that we’ve never traded below the prior day’s low in all of those sessions. The market achieved a new all-time high in the overnight session, almost completing the measured move from the breakout range yesterday.

The three key levels today are the new all-time high and overnight high (ONH) at 4416.75, the RTH low at 4397, and the overnight low (ONL) at 4391.75. The overnight low essentially shares the same level as the top of the single prints. Any failure today to cross below that RTH Low keeps the one-time framing going. Crossing below it sets us up for a pullback and could morph into a trading range that balances into the Fed meeting.

The new ATH was made in an overnight session. Carry it forward as insecure. GOOGL, AAPL, and MSFT report after the bell tonight. Together they make up 25% of the NDX. As such there may be some “wait and see” tone to the market today.

With current prices are very close to overnight halfback, there is little to guide us at the open. Higher odds trades will develop later rather than earlier today.

A break of the RTH low would interrupt the one-time framing dynamic, has the potential to attract sellers, or at the very least, could trigger stops. Keep that in mind should the price move towards that point. Target the ONL and top of the single print area and monitor for continuation.

S&P 500 futures are currently down the exact same amount as the NASDAQ 100 futures are positive. That generally doesn’t bode well for any major change in tone.

Good luck today.

A.F. Thornton

Founder's Trading Journal

Mid-Day Update – 07/20/2021

AF Thornton 0 Comment

Looking at the above two-hour candle chart of the S&P 500 Index Futures with 24-Hour Data, you will see that the market has made a symmetrical ABC correction back up to the 5 and 21-day EMAs, also the roundie at 4300 and the measured move off this morning’s break-up from the ON trading range. I rode the Gap and Go trade with two contracts, scaling out of them for almost 59 points. As mentioned yesterday, this volatility can be very conducive to day-trading.

The question now is what to do next. These two-step moves are the hallmark of corrective, as opposed to trending action. If the rally continues higher to maybe a 1.618 move off the “A” to “B” portion of the leg projected from the “B” dip, thereby destructing the symmetry, we can have more confidence in a trend reversal. You can learn more about this by studying Elliott Wave or other materials on corrections.

So this is a critical juncture. I postulated it could take several days to do this, but the market is moving rapidly back to this important level. This could turn out to be a good short, but I would need some confirmation that a turn back down is under way. Internals are very positive today, so an immediate reversal may not be in the cards. I simply want you to be aware of the issue.

When you have a large bar such as the one on the two-hour chart above, it is not easy to be assured that the market is turning down again until the low of that bar is taken out. That would be a poor location to be short from. So I will be watching the lower time frame charts for a turn. The point to get is the importance of the juncture.

Whether or not the intermediate trend has turned down, we could bump along this area until we turn back over for a retest. Incidentally, I forgot to mention that the market also had support yesterday from the WEM low at 4245, so keep that level in mind.

Founder's Trading Journal

View from the Top Down – 7/19/2021

AF Thornton 0 Comment
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.

Bottom Line

We tripped the stop on our 10% position in the XLF (Financials ETF) Friday (6/16), and this was preceded by several Navigator sell signals in the S&P 500 index Thursday (6/15). The XLF was our only swing position, so we are back to 100% cash, but the key question this morning is whether the bulls, once again, will buy the several-day pullback or whether the long-expected, intermediate correction has finally worked its way into the S&P 500 and NASDAQ 100 indexes. 

Arguably, there has already been a stealth correction well underway in many economically sensitive sectors since April – but masked in the indexes by the weighting of a narrow group of large-cap growth stocks. Another rotation from tech and growth back to value and cyclicals could keep the rally alive or at least put the market into a trading range for the foreseeable future. However, we would need to find the bottom of that range in this pullback. 

Sentiment indicators are already showing considerable short-term fear, so I would expect a fairly quick resolution of this first down leg. Unfortunately, that does not tell us where the price will pivot or where we go from there. Watching the Morning Outlook for Day Traders will help you identify the key levels for a turn.

Technical Discussion

Coming from the top of the short-term trading channel on Tuesday (7/13), by Thursday (7/15), the market had closed below the previous day’s close (at minimum a “heads-up” alert). This also generated a preliminary (yellow) Navigator Swing Sell Signal, with further confirmation from a close below the Navigator Algo sell trigger. However, the 5-day line held, if just barely. 

By Friday (7/16), the market closed below the 5-day line, with the weekly bar closing below the prior week’s low for the first time in five weeks (another important “heads-up”). All of this occurred on multiple breadth, momentum, and strength divergences failing to confirm the recent index highs at the channel top, which consummated a selling climax and throw-over at the top of the channel. Our sole position, a 10% position in the XLF, closed below its 5-day line Friday, triggering our stop. This resulted in a small loss and put us back to a 100% cash position in the Navigator swing strategy.

The price action this past week underscored some key takeaways from last week’s View from the Top report. I had pointed out the negative breadth (and other divergences) in a market (using the S&P 500 index as our proxy) that was long overdue for an intermediate correction. The 18-month cycle top still loomed large. At best, though, the cycle bottom has such a time variation that the potential cycle topping zone can only provide some context to what we can currently observe in real time on our screens. 

In fact, I believe that the cycle has been operating stealthily in many sectors since April and may finally be catching up to the major indexes. One expectation I communicated was the unlikelihood of July closing as another positive month, given the statistical probabilities. Naturally, that supposition would need to manifest soon, as we are 2/3 of the way through the month. 

Also, I have been pointing out the Butterfly harmonic sell pattern in the NASDAQ 100 over the past few weeks. As the NASDAQ has been the recent market leader, its breakdown from the pattern would be a negative development for the broad market. 

Finally, I pointed out the rally in defense/risk-off sectors and asset classes, such as treasuries, as eerily similar to signals I observed in January 2020, right before the China Virus crash. While not predicting a crash, I pointed out that the rally in stocks and treasuries basically was a contest. Only one of these asset classes could be right in the current circumstances.

Nevertheless, I also pointed out that the relentless bulls would continue to buy one to three-day pullbacks until such buys stopped working. This morning, we will get a chance to test the bulls, as the market is trading such a pullback right to the 21-day line. The 21-day line typically divides the short-term up or downtrend. It also provides support for the market more often than it doesn’t. After that, more support congregates around the 50-day line.

If you backtrack several months, you also will see that most of our pullbacks this year have been right at this same mid-month period into monthly options expiration and only lasted a few days. Friday was monthly options expiration, in addition to weekly. 

Recall that the June pullback on quadruple expiration Friday left a scary bear bar closing at its low and below the 50-day line, only to see the bear breakdown fail the following Monday. The market followed through and continued the next bull leg up through last week. The bulls will be similarly tested once again today.

Also supporting the bulls, the CNN Fear Greed Index (above) is down to 23, and the CBOE total put/call ratio (below) spiked again on Friday. So sentiment would support a short-term low and turnaround here, though there is no indication whether the 21-day line will be good enough for a pivot point or whether we will need another trip to the 50-day line or some other level. 

And even if the market turns quickly again, there is no assurance that the trend will resume. Recall my prediction in the last writing that a trading range is a highly likely outcome of the bull micro-channels breaking down on various time frames.

A Shot at the Fundamentals

I still ponder the question, why are interest rates falling and economically sensitive stocks weakening? Three issues likely form the heart of this current market dissonance. 

First, inflation is devastating the purchasing power of individuals. My wife has been in Greece for five months, but for a few days when she came home, and all of us had to return when her father took an unexpected turn for the worse. My wife is a very conscientious consumer. Yesterday was her first trip to the grocery store since this past February. Needless to say, she was shocked by the prices.

Inflation is a deadly, ominous hidden tax that angers me to my core and hurts those at the bottom of the economic ladder the most. This administration promised to help those at the bottom, not hurt them. One only needs to look at the price of housing, gasoline, and food to ask the question, how are the current policies working for the poor and middle class? 

If the Fed isn’t in the pocket of the current administration, it will begin the process of reversing its dubious, inflationary monetary policies soon, and the markets may be anticipating the end of the liquidity party.

Second, the extended unemployment benefits end in September. As well, many of the mortgage, rent, and other debt relief programs will expire soon. The transition out of all of these subsidies has to be a concern to current market participants.

Finally, we are experiencing a third China Virus wave with cases increasing daily. As it is called, the Delta strain is apparently quite virulent, highly contagious, and vaccine-resistant. More masks? More lockdowns? More shots? Who knows, but sometimes the fear of something is worse than the something itself, at least for the financial markets.

Any combination of these fundamental factors could be the catalyst for a one to three-month, intermediate correction, long overdue in this market. I patiently await this correction to aggressively deploy capital. I have done this too long to plunge in near a top, no matter how good it looks. We just got stopped out of the XLF, even though we kept the position small and bought it after nearly a 6% correction and double bottom off the trading channel. So just because something is low, does not mean it cannot go lower.

Conclusion

This week, I have shifted my stance from “neutral to bearish” to “bearish.” Really, my opinion does not matter. The change in my position telegraphs that I want to go back into the market on a good downdraft instead of a minor one. I need to see a true correction and pivot on the daily chart to garner my interest in a swing position.

While we should get a short-term turnaround or bounce today or tomorrow, that may be a time to raise cash. Markets rarely form an upside down “V” top. Usually, they will climb back up one more time and either test the old high or fall slightly short of it, if the intermediate correction is finally underway. The evidence is mounting that the trend is (at the very least) transitioning sideways, if not into the anticipated full-blown, intermediate correction.

During this period of unusually high risk these past few months, I have been quite satisfied with day trading, as opposed to holding overnight positions. Watch the Morning Outlook for Day Traders, updating three times daily, for guidance. However, paper trade for a while before you plunge into day trading. Day trading has its own foibles to challenge us.

I am understandably frustrated that stops and sell signals were taking place on the two days I was stuck in airports and on airplanes traveling, though I did my best to drop a few paragraphs to keep you updated. I was on a single, direct plane flight for nine hours on Friday between Frankfurt and Denver when the most critical market violations occurred.

What I find difficult (and have these past few months) is that while our swing-trading sell triggers have been excellent, the need to turn around and reenter on a buy signal almost instantly and in such an overvalued market is not so easy to execute, especially having just exited a few days earlier. If that becomes necessary here, it won’t be easy either. Every step higher in this market involves increasing and considerable risk.

If you still hold some XLF, you can see if we get a turnaround today with the bulls, but I have learned over the years to be rigid with my stops even though we get whipsawed once in a while. The XLF was doing all it should until Friday, when it got caught up in the widespread selling. That was my one fear in taking the position.

Patience is a virtue here. As always, be careful.

A.F. Thornton

Founder's Trading Journal

Brief Comments – 7/15/2021

AF Thornton 0 Comment

I am in an airport and posting from my phone, so this will be brief. As to our core S&P 500 market proxy, while there was some selling in yesterday’s regular session, the value area remained completely unchanged. Prices did not test the overnight low. Today we have an overnight session somewhat weaker which has taken out that prior Globex low but is currently trading above it and just inside of yesterday’s regular session range.  

Given the current price level, Balance Rules will be in play this morning, as will Gap Rules if we open below yesterday’s regular session range. From there, I would evaluate the morning session as follows:

  • The first order of business will be to see if prices open on a true gap or not.  If so, given that overnight inventory is 100% net short (give or take a few ticks), the propensity for short-covering exists. 
  • If we open within range, then there is no true gap, and we should assume that short-covering is already underway.  If so, yesterday’s regular session low will be the important key level to discern if we are trading in or out of balance and will be my bull/bear line in the sand for today.  
  • On any strength, assume yesterday’s POC is the target.  This is the obvious high volume node that should serve as any upside magnet.  
  • Any acceptance below yesterday’s regular session low would indicate a potential for a “look below and go” as per the balance rules. If so, target the Top of the Single Prints first and monitor for continuation. Tempo and tone will have a lot to do with whether or not this happens as will any divergence between Nasdaq 100 and S&P 500.  The market will need both sides to be selling for any real follow through to occur.

AF Thornton

Founder's Trading Journal

Pre-Market Outlook – 7/9/2021

AF Thornton 0 Comment

Flip the script! We are slated to gap open with overnight inventory that is net long, so gap rules are in play, but this time heading north. Opening at these levels is still within yesterday’s gap down. Could this possibly leave a bullish island reversal on the 5-minute RTH chart? That would be a positive for the bulls.

Moving north again, you have the overnight high at 4237, the top of the gap at 4748, and then the old resistance around 4350 or so with the all-time high at 4252.25. I am looking for a trading range as a potential outcome of this week’s break of the bull microchannel, so I am reticent to be long above the recent highs. But there is an equal chance that the bull channel is still up, just wider now. Again, all of that applies if the market continues on the northerly route.

However, with long overnight inventories, look for the gap to potentially fade back to yesterday’s RTH high at 4323.50 on any inventory adjustments after the open. Don’t forget the WWSHD trade if there is no fade. You can buy one tick above the first one-minute bar on the way back up if the fade is faint. 

If the market continues south, on the other hand, then you can look to yesterday’s VPOC around 4309 on down to the halfback at 4301 for support. In a very negative pinch, yesterday’s low at 4280.25 should also provide support. Reference to our collection of other key levels should help if the market ventures even further south – which is doubtful today. Though the market has been horribly inefficient lately, the WEM low at 4300 should hold the downside in place before weekly options expiration on the close.

As always, watch internals for cues. There has been a lot of good trading this week with the wide swings, but that is atypical. A sideways market is overdue on the intraday charts.

Good luck today. I don’t typically trade Fridays unless something jumps off the screen to tempt me.

A.F. Thornton 

Founder's Trading Journal

Pre-Epilogue – 6/8/2021

AF Thornton 0 Comment

Something is Amiss...

These are just some preliminary thoughts about today’s session. I will make the detailed trade illustrations later tonight. The only trade I did today was a short in the S&P 500 futures in Globex, as I was not in front of the screens during regular hours. Nevertheless, I can illustrate some trades I would have taken. Both Tuesday and Wednesday were good roadmaps for today.

We held at the Weekly Expected Move low after dipping below it. But we closed under the 5-day line and right on the Algo trigger, so not quite the full recovery we have experienced the last few sessions. But nothing terrible happened either.

My concern, however, is the rip-your-face-off rally in U.S. Treasuries – e.g., the TLT (ETF Treasury Sector Fund). The TLT has blown through its WEM high for four weeks in a row. The converse of the treasury rally is lower interest rates. Contrast the TLT gains with the breakdown in Homebuilders (XHB) and Transports (IYT) – both economically sensitive and down nearly 3% today. How does that make sense? Why are treasuries rallying so hard and economically sensitive sectors breaking down? Is this just rotation? I am not so sure. All of this points to economic weakness ahead, but why? I need to get to the bottom of this. 

Generally, treasuries and stocks don’t rally together for very long as they have these past few weeks. This is exactly what happened in January 2020 – right before Covid hit. Granted, the NASDAQ 100 and growth stocks have benefitted from the lower interest rates, which makes sense more than economically sensitive stocks breaking down. 

But why are the FAANGMAN+T stocks carrying the market again? Is this simply a reflection of lower interest rates, or Is this a reflection of the new China Virus variant concerns? Why is *President Biden sending people door to door to check on and encourage vaccinations?

I have never seen such an obsession with vaccinating people in my lifetime – especially when the U.S. survival rate for those that get the China Virus is 99.7%. Is this just a control thing? Is it political, some kind of power grab? Is there really a nanochip in the vaccine? Or, more likely, does the government know something about this manufactured bioweapon that they are not telling us – such as it will morph into something far worse than we expect? Did you see Warren Buffett’s warning about worse pandemics to come over the weekend?

The dislocation in the Reverse Repo market is equally concerning. There are too many unused (un-loaned) “bank deposits” in the system, choking the overnight Repo market. This is very complicated stuff – but concerning nonetheless.

I know these are random thoughts, but when things don’t make sense and two markets cannot be simultaneously correct, something is amiss. At these valuation levels, there is not much room for error in the stock market. 

If you have any thoughts, drop me an email at info@bluprinttrading.com.

Anyway, second-quarter earnings are just around the corner.

More later…

A.F. Thornton

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