Category Founder’s Trading Journal

Founder's Trading Journal

Pre-Market 6/25/2021

AF Thornton 0 Comment

Yesterday, the S&P 500 gapped up to a new all-time high. A gap above major resistance often leads to a few sideways days before traders decide if the gap starts a big rally or a bull trap.
Odds favor higher prices (at least next week after moving past the WEM high still acting as an anchor today at 4248.25 on the 24-Hr S&P Futures contract). The WEM high will continue to weigh until options expire at the close. If it doesn’t, that will be vital and bullish market-generated information.

Despite buy climaxes on weekly and monthly charts, there is no credible top as yet. Also, I am keeping in mind that the end of June into early July is seasonally bullish. And this leaves about a 30% chance of a 200-point measured move up, and it could happen quickly. Look at the early April breakout as an example.

Bears are looking for a wedge rally to a higher high double top. The upper wedge line connects May 7 and June 14. Also, a reversal down would be a nested expanding triangle starting April 16 and again May 25. Bears need consecutive big bear bars closing on their lows before traders think that a correction might be underway.

Today’s Plan

The market just jumped pre-market to a marginal, new, all-time high on a report of consumer spending that came in flat. However, a key inflation indicator, the PCE price deflator, posted its biggest gain in nearly 30 years. The market seems comfortable thus far apparently because the figures met expectations.

So we are slated to open with a small true gap higher on relatively balanced overnight inventory. The balanced inventory could put a damper on any fade as there will be no need to adjust inventories at the open.

We still have a lot of nuanced levels below us and market-generated information to carry forward. The structure has been weak on this rally to new highs. It started with back-to-back, double distributions and followed two very squat profile days with prominent TPO/POC’s. All of these are data points that should be noted. Less than half the stocks in the S&P 500 are above their 50-day moving averages at these new highs. Contrast that with April, when 90% were above their 50-day lines.

Results of the recent bank stress tests just came in and they were overwhelmingly positive, underpinning financials this morning. The positive news could be a catalyst for the S&P 500. Keep that in mind as we look for a fade back to the WEM high today. If it happens, it will be because the tech stocks take a rest.

Should the Globex high (now an all-time high) at 4265.25 be taken out, monitor for continuation as there is no technical or profile reference above us – just blue sky.

I won’t be trading today as is typical on a Friday where we are close to the expected move. So there will not be any further reports today either. I will do a more thorough update this weekend.

The key question is whether the S&P 500 can break out decisively and complete a 200 point measured move above us with the weakness the index is experiencing under the hood. We don’t need to answer that today. But we will need to be ready for a pullback buy early next week, if the positive scenario becomes the one we endorse.

A.F. Thornton

Founder's Trading Journal

Pre-Market Update – 6/24/2021

AF Thornton 0 Comment

The Weekly Expected Move (“WEM”) high on the 24-hour S&P 500 index futures is roughly 4250. There is a 70% statistical probability that the market will move to or below that level by tomorrow’s close. The futures are marginally above the WEM level at this writing. We see a number of the 11 sector funds at their expected move highs as well. Volume has been light on the recovery in the past few sessions, undercutting its credibility. Momentum and breadth continue to wain – even in the wake of a nice gain for both the S&P 500 and NASDAQ 100.

The WEMs are “where risk goes to die,” as Don Kaufman over at Theotrade.com often says. It is where buyers and sellers meet. When the levels are exceeded (30% of cases), the gains (or losses) can accelerate as market makers are forced to neutralize their risk. I don’t expect that to happen here – but let’s keep it on the table as a possibility.

More likely, we will continue to see the 4250 level act as a magnet through tomorrow’s close. The S&P 500 index might try to best its all-time high at 4258.25 for the order flow, if nothing else. But I would consider shorting the index on a pivot lower from that or any higher level and covering at least back at the WEM at 4250.

My overall bias remains neutral to slightly bearish. The Navigator swing strategy is on the verge of a buy signal, but it has not triggered thus far. There is a visible reversal pattern on the two-hour chart to move higher if the pattern takes.

Today’s Plan

If it were not for the WEM high looming in our midst, I would be advising that we have a strong gap higher, confirming buyers are still in control. Gap rules are in play, as is the potential for a new all-time high in the regular day session. Recall that the current all-time high occurred in a Globex session. Still, probabilities favor a move back below the WEM 4250 level by tomorrow’s close. Carry that forward in your narrative.

Key levels are important today as, once again, we have a confluence of market profile nuances. On the upside, we have the overnight high at 4254.50 and the all-time high at 4258.25. We have the 4250 level below that, which serves as both a half-roundie and the WEM high. Then we have 4248.25, which has doubled as a high in both a Globex and regular session. We have yesterday’s high at 4246.25. Then we have the prominent TPO/POC at 4239. Then we have a triple hit at 4229.75 as the VPOC from 6/22, yesterday’s low, and the Globex low that preceded yesterday.

The weak structure from 6/21 and 6/22 remains a carry forward but tends to be more important when encountered in a rally. Here, we would only encounter the weak structure in a decline. 

With overnight inventory 100% long, the true gap higher has potential for an early fade. Whether we get it and how much tells us a lot about the strength of the market. 

Should there be a full gap fill, remember that the prominent TPO/ POC at 4239 has higher odds of being tested. Leaving it untested today is a sign of strength and should be carried forward.

Only acceptance below 4229.75 has any potential to change the tone. As always, watch internals for confirmation of breakouts, trends, and strength.

Good trading today!

A.F. Thornton

Founder's Trading Journal

Epilogue – 6/23/2021

AF Thornton 0 Comment

Today ended up as the textbook range day.  On our principal S%P 500 index, we had a slight range expansion on the upside, but matched the Globex low, and of course stayed well above yesterday’s low. Value was unchanged, but the POC moved higher. But for the Weekly Expected Move high, the markets could have gone higher. Overall, the pause likely added to the bull case. 

Responsive trading ruled the day, with the top of the range and gains capped at the Weekly Expected Move highs for the S&P 500 and NASDAQ 100. No surprises.

I had written something quite extensive this morning and somehow lost it. So I will try to rewrite it for tomorrow. The macro picture remains the same as outlined on Monday, with the stealth correction creeping along in most sectors. Technology and the FAANMAN+T stocks are holding the market up. But this will lead to a classic breadth divergence given the positions of the major indices. We even have a butterfly top formation on the NASDAQ 100, but it is not quite yet complete. 

We also have a Dow Theory sell signal on the market, a fairly reliable indicator over the past 100 years. The math took the S&P 500  and NASDAQ 100 a bit higher than expected, but it has not yet changed the larger forces at work. Rotation complicates the picture, but everything will be correlated in the downdraft when the bulk of the correction materializes.

Maybe the 18-month correction will be shallow. We saw this after the 1987 crash and the recoveries in 2003 and 2009. But the latter corrections still approached 10%. Anyway, the price will lead us to the next move. I remain neutral to bearish until we get a solid buy signal. 

Let’s get through the rest of the week. Next week, the Founders Group will shoot at some shorts with a rifle (sectors) rather than a shotgun (the broad S&P 500 index).

Anyway, the day was uneventful, for the most part.

A.F Thornton 

Founder's Trading Journal

Pre-Market Update 2 – 6/22/2021

AF Thornton 0 Comment

It is not too late for the market to take a spill here, but it is not happening. Importantly, 4230 on the 24 Hour S&P 500 Futures index (about 4237 on the cash index) is the max tolerance for a short trade. That is the 78% retracement of the decline which defines the down vs. up trend. With the NASDAQ 100 at new highs, and the S&P 500 cash index already above its equivalent 78% retracement, buyers have taken control.

While this continued rally is unexpected, we have to consider that the math is such on the S&P 500 index that the big cap tech and growth stocks have enough weight to carry the index higher, even though the majority of stocks are declining in the broad market.

The behavior creates the breadth divergences we often see at tops. But I won’t argue with it until we are there. So we are stopping out of our short position for a very small loss, and will regroup tonight after we see the close.

We are approaching the Navigator buy trigger on the daily S&P 500 chart. If the short didn’t work, lets see whether we can trip a buy signal. Again, this is not what I had expected, but I never argue with price. If the reversal pattern is taking, we are only halfway to the minimum target, with 60 S&P 500 points to go. 

The bears had their chance to press their case at the low today and failed. There just are not enough sellers yet to take us lower.

My next update will come before the open tomorrow. There is nothing that is likely to change between now and the close. If there is, I will let you know.

Look at the reversal pattern on the S&P 500 Index Futures chart using 24 hour data and 2-Hr candles. It is hard to argue with what I see, even though it was not my first choice.

A.F. Thornton

Founder's Trading Journal

Pre-Market Update – 6/22/2021

AF Thornton 0 Comment

Looking at our market proxy, the S&P 500 index, the overnight low (also near the Daily 5 and 21 EMAs) held a test for the 24-Hour S&P 500 index futures thus far this morning. We are now at the top end of the range testing yesterday’s high. 

Internals started the day negative, and have improved to mixed. The cumulative tick is turning from negative territory. But decliners still outpace advancers by almost 2 to 1 on the NYSE and 1.5 to 1 on the broad NASDAQ indices. Most of the gain continues to be driven by the big tech names as can be seen from the heat map above.

The market is right at our trigger stop line for the Founders Group unofficial short position from yesterday. A close of the hourly chart above that level will put our short position to bed for a small loss and then we will regroup.

A.F. Thornton

Founder's Trading Journal

Epilogue 6/21/2021

AF Thornton 0 Comment
S&P 500 Cash Index (SPX) - 5-Minute Candles

The trade I set up this morning is illustrated in the chart above. We had two long, day trade entries on the S&P 500 this morning. The first manifested on a cross of the 5-minute Navigator Algo trigger. The second came using the 30-minute breakout range setup I described pre-market. The market has not done much since the sell signal on the cross back below the Navigator Algo trigger on the chart above.

What confirmed these longs were the strong internals today – almost the reverse of Friday. There were 4 gainers for every loser on the NYSE and nearly 2 for one on the NASDAQ. NYSE tick distribution was positive all morning, as was the S&P 500 A/D line, which pegged at about 462 positive out of the 500 members. All of this supported a positive intraday trend day for day traders – carrying to our second target circa the 4200 area.

On the negative side, volume dropped over 40% from Friday’s down day. Admittedly, Friday’s volume was boosted by options expiration, but the drop in volume today is notable.

We would expect resistance exactly where the market rests at this writing if the downtrend has cemented itself. In that regard, I suggested this is a good position to begin shorting if you are a bear (and I am at the moment). We need a definitive close above the daily 21-EMA to argue for new high prices and an end to the pullback/correction. Today’s move back above the 50-day line does cause some bear indigestion, but nobody said this would be easy.

The sharp recovery could also indicate that Friday’s move was a one-off aberration. Recall I said that strange things happen on quadruple witching. It would be a cruel joke if that is the case and the market rocks on. As set forth in “View from the Top” this morning, we have been in a rotational correction since late April, it is not inconceivable that it ended Friday, but the probability is that there is more to go along the lines of the synchronous downdraft we experienced late last week.

As always, stay tuned and I remain open to all possibilities. I will provide a more extensive update as you sleep blissfully tonight. That is the advantage of being half a day ahead of the U.S. on this side of the world.

A.F. Thornton

However

Founder's Trading Journal

View from the Top – 6/21/2021

AF Thornton 0 Comment
24-Hour S&P 500 Index Futres - Daily Candles

Introduction

As always, please permit me to remind you that most analysts (including myself) enjoy pontificating on everything that has occurred on the left side of the charts. The only thing we enjoy more than that is bragging about our good decisions while minimizing any discussion of our bad calls. I do my best not to be one of the latter-described analysts. When I am right, I am right, and when I am wrong, I am wrong, period.

When I am wrong, as all of us should, I figure out what I missed and try not to repeat mistakes. I share those lessons with you as openly as possible. Sometimes, being wrong is not anybody’s “fault,” but simply the consequence of a random, unanticipated event that intervenes. We need to be ready for that too, which is why stops and sound money-management principles are important. In the end, I am always humbled by the fact that there is an even chance of being right or wrong on any call about the direction of the market. So, I can never be sure if I was correct or just plain lucky. That tends to keep both of my feet planted firmly on the ground.

So, please recognize that the discussions on these pages make trading look easier than it really is in real-time. We don’t drive our cars using our rear-view mirror, nor do we trade similarly. We deal with the right side of our charts, not the left side. If you haven’t noticed, the right side is a blank canvas.

We use probabilities and not certainties to make our decisions. Thus, we must always remember that the behavior of price itself as it unfolds in front of us is the best indicator of the future. And we must always keep an open mind to possibilities outside the most likely outcome, staying flexible at all times.

Macro Narrative

We have been in the final stages of the latest intermediate leg of the bull market that began in 2009. This latest run began at the bottom of the China Virus low in March 2020. The March 2020 low was a nest of all nominal cycles of 54 months or less, so it was a very important trough and juncture. At that time and using quantitative analysis, we predicted that the nominal 18-month cycle in the broad market (S&P 500 index) would likely peak around May 8, 2021.

The computer does not distinguish between trading and non-trading days. May 8th was a Saturday, and the S&P 500 put in an all-time high of 4238.25 on Monday, May 10th. While the index slightly bested that high last week, it immediately rolled over into what I now believe to be the more obvious manifestation of the 18-month cycle intermediate correction. In reality, the correction started with Consumer Cyclicals (XLC) and Utilities (XLU) in late April.

There have been many signs that the intermediate trend was waning. We had the formal, Navigator sell signal on the S&P 500 on May 10th, with a second sell signal on the failed rally attempt on June 16th. There were momentum, strength and breadth divergences throughout May and June. Offense/defense ratios failed to confirm the marginal new high. Some risk-on and risk off measures had been weakening. Sentiment had grown complacent, even in the very short-term sell-offs. I have pointed these factors out as they unfolded.

The correction has slowly swept into the 11 Sectors of the S&P 500 Index. The earliest sector to roll over was Consumer Cyclicals (XLY) on 4/19. Utilities were next on 4/21. Industrials (XLI) and Basic Materials (XLB) peaked along with the broad market on 5/10. Health-Care (XLV) peaked on 5/21. Financials (XLF) peaked on 6/3. Consumer Staples (XLP) peaked on 6/4. Real Estate and Energy peaked on 6/10. Communications (XLC) peaked on 6/15, and Technology (XLK) peaked on 6/17, but neither the XLK or XLC has definitively rolled over as yet, remaining above or still in the vicinity of their 21-day means.

In the Founders Group, we had been trying to reconcile the market price action, bond rally, and early rollover of the reflation sectors such as Basic Materials (XLB) and Industrials (XLI) to potential inflation pressures. How does the behavior of these sectors make sense if inflation is out of the box and out of control? I would harken back to my 2021 forecast. I expected inflation to heat up and it did. 

On the one hand, I think the rally in bonds, decline in reflation sectors, and rally in the dollar reflects defensive posturing in the financial markets, just like we confirmed in the SKEW and other indicators last week. However, with the Consumer Cyclical (XLY) sector being the first to peak in late April, one cannot exclude the possibility that the economy (and inflation) are peaking.

The heavy sovereign and corporate debt burden across the U.S., Europe and Japan stifles economic growth. And while the Fed has injected a lot of liquidity into the banking system, that is not the same as “printing money.” The Fed action is only the first stage. The actual creation of money comes when the banks make loans. That is step two in the velocity chain, and it is not happening.

Monthly Chart - Total Loan to Deposit Ratio - Commercial Banks

We have to observe all of the sectors as the correction unfolds. Ultimately, fund flows off the bottom will tell us a lot about future inflation expectations.

Intermediate corrections along the lines of the nominal 18-month cycle can go on for several months and can take the S&P 500 index all the way to its 200-day line. Keep in mind that we are already a month into this correction, as we look in 20/20 hindsight.

The 200-day line sits at 3800 today, slightly more than a 10% correction from the top. The size of such a decline would be quite reasonable in the circumstances. The index won’t likely go straight there but usually zigzags down. Also, the 200-day line will continue to rise as the index works its way down or sideways, depending on the scenario. 

The ideal low should occur in early August, but there is quite a bit of variance in which the low might occur in a nominal 18-month decline.  It is best to let the correction unfold and use our usual measures, including the algorithm, to find the bottom.

Now, is it possible that the correction has yet to start, and we are simply experiencing some higher volatility while the NASDAQ 100 pulls the rest of the market higher? Yes, it is possible, but that is a minimal probability forecast.

Should we expect a crash, as some have forecast since the beginning of the year? Again, that is not the most probable outcome, but we don’t have to know that answer. You should either be in cash at this stage or consider shorting rallies. Obviously, shorting rallies is a strategy for more sophisticated investors. But there is no reason to get caught in a crash if you are in cash and patient.

I would also acknowledge that the divergence in the performance between the NASDAQ 100 and S&P 500 right now is very unusual, to say the least. Some would see an opportunity to short the NASDAQ 100, as it may catch up to the correction rather than pull the market higher. At the moment, I will choose to look at the indices independently. We have nine of the 11 S&P 500 sectors in full-blown correction mode. Tech and Communications are influential, making up a third of the index weight. Also, they have been consolidating since last fall. I won’t exclude the possibility that the two sectors will buck the trend. But I would not (and will not) bet on it.

Stay tuned…

A.F. Thornton

Founder's Trading Journal

Epilogue – 6/18/2021

AF Thornton 0 Comment

Well, now you get to see the outlier. The market (S&P 500) broke to the upside of the falling wedge at about 11:00 am EST and staged a rally but only back to the 50-day EMA line on the daily chart. The market makers tried to push the market through the line unsuccessfully for the rest of the day to attempt to recapture the WEM low at 4188-89.

We came into the last hour around the 50-day line at 4175 and there was still hope to climb the 14 points back to the WEM low. Still, when it was clear about 10-minutes before the close that the market makers were not going to have their way, the S&P 500 dropped 25 points in 10-minutes. 

That was the waterfall I mentioned in my first writing today when market makers all run for the exits at the same time to neutralize their deltas. The only saving line was the half roundie at 4150 – a typical 50-point increment inflection point – at least good for a bounce.

There is no way to sugar coat this – the close was ugly. We closed well below every major intermediate support identified this morning. I find it difficult to argue that the intermediate trend is intact. It appears to have been obliterated in less than three sessions past the Fed announcement.

There will be many stocks to short from here, nearly as systematically as we bought them in the past year. That is my best guess anyway after spending the day in church without my phone or any other monitoring capabilities.

More on Sunday – perhaps even a video.

Stay tuned – glad we are in cash.

A.F. Thornton

Founder's Trading Journal

Epilogue – 6/18/2021

AF Thornton 0 Comment

I closed out another nice trade on the S&P 500 E-mini Futures about 15 minutes before the close – the trade I had mentioned mid-day that once again keyed off the Weekly Expected Move low at 4189. Combined with the middle of the night trades, and I am trading conservatively, 

I captured significant sums today working that same S&P 500 WEM low, sprinkled with a few NASDAQ 100 contracts that I clearly sold too early this morning. Anyway, today was a good day-trading day for me. And go figure, I squeezed out some good gains in what can only be described as a bit of a strange and bifurcated market.

Yesterday, a potential leadership change manifested when the financials turned around after the Fed announcement and press conference. But investors were having none of that today, with more rotation from cyclicals and financials back to tech and other growth stocks. Typically, the day after is a better harbinger of the future than the day of the Fed decision.

Maybe the rotation does make sense, as the NASDAQ 100 had been in a consolidation since last August. The time flies, and cyclical/value names have had plenty of fun in the sun. That is why I need the weekend to take a look at all of this from 30,000 feet. This is the second time in a month that I underestimated the NASDAQ 100. Apparently I was in good company today – but it still ****** me off.

I am not trading tomorrow, nor will there be any outlooks or commentary. First, it is unwise to trade on quadruple witching expiration. Also, Friday is a religious holiday here in Greece and everybody will be in church. When I say everybody – I mean everybody. 

I am told that they will all gossip if I don’t attend – and that is not good in these small villages as gossip is the main industry already. There is a quaint Greek Orthodox church on nearly every corner. They are as prolific as Walgreens at home. 

The beauty of these churches is something to behold. I really enjoy them, and they are quite similar to my Catholic upbringing – at least if I understood Greek. I didn’t understand Latin either. You might recall that the Catholic church split off from what became the Greek Orthodox church in the Great Schism. 

Speaking of a great schism, that is a good description for the NASDAQ 100 (NDX, NQU1, or QQQ) today. The NASDAQ 100 headed north in what almost amounted to a solo climb, while the S&P 500 (SPX, ESU1, or SPY) and nearly everything else headed south. By the day’s end, the S&P 500 and a few of the sectors had improved, at least climbing a small hill and closing near the highs of the day.

The broad market, then, looks like it is already in a correction and waiting for the NASDAQ 100 and growth stocks to join. The NASDAQ 100 is throwing a lifeline out to the rest of the crowd to pull them up. I am not sure who will win. For now and with my bad knee, I will grab a beer and watch from the ski lodge.

I look forward to figuring all of this out and wish you a happy weekend (early).

A.F. Thornton

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