Category Founder’s Trading Journal

Founder's Trading Journal

Late Day Update and Sell Signal – Charts Added

AF Thornton 0 Comment
Put/Call Ratio Over S&P 500 Index - Arrows Mark Ratio in Similar Position
VIX Volatility (Fear) Index Over S&P 500 Index - Lowest Level Since Pandemic Lows

The Founder’s Group just closed its position in the NASDAQ 100 at 13870.50. My concern is the extreme complacency developed in the past 24 hours – most notably reflected in the put/call ratio. It is at the lowest end of its year-long Pandemic range. 

Typically, the indicator is not as good at picking tops as picking troughs. Still, the current level is exceptionally low today, indicating a disturbing sense of security in all that we see. Every time the ratio hit these levels in the past year, the market topped – at least short term. If a double top does develop, it will seem obvious (in 20/20 hindsight).

Also, we got out as the afternoon drive rolled over at a lower peak than this morning. Sell in the morning / buy in the afternoon is fine. Sell in the morning, sell in the afternoon is not so fine.

Tomorrow, we get the inflation numbers. While there is likely to be no surprise, it may nevertheless be a catalyst for what happens next. I am acting out of a superabundance of caution in making this decision this afternoon. The risk here warrants a more vigilant,  protective strategy.  Also worth noting is the VIX volatility (fear) index hit its lowest level in a year yesterday at 15.15. While the crowd is not giddy, they may well be asleep at the wheel. With the SKEW at record levels as well, tail risk is as high as its been recently.

This decision does not negate any of my previous comments. Likely, the market will break out here. But we had a nice profit in our NASDAQ 100 position, and I can always re-enter.

Sometimes, the return of our capital can be just as significant as the return on our money. Tomorrow may be one of those moments. Again, the odds still favor the break higher. Nevertheless, I am always willing to look dumb as long as I lock in a profit.

Another possibility is that the inflation reports drive a rally that the professionals use to liquidate their positions. Keep that in mind as well – kind of the bull trap I have been mentioning. 

Tomorrow promises to be exciting – assuming we are on the right side of it.

A.F. Thornton

Founder's Trading Journal

Mid-Day Update – 6/9/2021

AF Thornton 0 Comment

Yawn. Sorry to say it. The words are getting well-worn. More balancing action today. What will it take to break the curse? I am not sure, but it is, indeed, getting old.

Responsive trade from the Value Area Highs and Lows is all that is working today in the indexes. Once again, the value area is essentially unchanged from yesterday. Once again, the overnight action inside yesterday’s range accurately predicted more balancing. There is, however, plenty of action under the surface if you look for it.

Growth and tech still lead for now. I am surprised the NASDAQ 100 has not performed better, given that the 10-year rate tucked under the critical 1.5% level today.

We still need a catalyst. Let’s see what the afternoon drive brings. It starts in an hour or so.

Stay tuned.

A.F. Thornton

Founder's Trading Journal

View from the Top Down

AF Thornton 0 Comment
View from the Top in Assos, Cephalonia (also known as Kefolonia), Greece

The market was just plain wrong on Friday...

Can you believe I would even say that? If I thought it, you should run for the hills. Since I am being facetious, it is acceptable to read on. My personal opinion means nothing because the market is never wrong. Perhaps the jury is still a bit out on my trading range scenario until we see if the market decides to break to new highs today – but I missed Thursday and Friday’s turnaround from the 21-day line. Friday’s action was not what I had expected – I expected a breakdown, not up. To be good at trading and investing, our misses can be the best teacher.

So let’s get the hard part done first – the admission of being wwwrrrrong. There, I said it. I was wrong. The words still sting my lips – whenever wrong-headed decisions force me to utter them.  My job is to make sure we are appropriately allocated – in line with the net aggregate opinion of all market participants regarding all subjects on all time frames. Of course, the charts help me as gigantic psychological profiles of the current state of the market or any part of it. But I have to read them correctly. The market is always right because it reflects the net aggregate opinion I am required to discern accurately.

I did three things wrong on Thursday. First, I was lazy in the sense that when our 5-day EMA stop was hit overnight (which was perfectly fine), I figured there would be some time before we needed to get back in the market again – perhaps a few days or a week. Also, I wouldn’t say I like to day-trade Fridays, so I am less attentive.

Second, Thursday’s candle fell exceptionally far for the current context and painted an Algo sell signal intraday. I did mention the potential, fleeting nature of the signal in my writings here, but I must admit that the temporary sign made me overly negative. I should have waited for the Algo sell signal to paint definitively at the close of Thursday’s candle – instead of anticipating it. The signal negated by the time the candle closed – and I should have taken that as a potential WWSHD alert that a buy might be in order. After all, we were on the 21-day line.

Finally, I should have given more confidence to the 21-day line, exactly where the market bounced. Eight out of ten times, the market will find support on the 21-day line. Sure, I mentioned and expected the bounce. But I did not account for a complete reversal of the magnitude we experienced on Friday. I should have been more respectful of that possibility.

The way to execute this would have been to take a position at Thursday’s close, with something like a stop 5 points below the 21-day line. Our job is to find low-risk entry points, and this certainly fits the bill. Whether the market ultimately breaks to new highs or not this week, that would have been a 50-point trade or $2,500 per futures contract. As I always say, that buys dinner with the wife. Here in Greece, where your money goes a long way, that buys dinner with the wife for an entire year.

The NASDAQ 100 bounced off its WEM low Thursday. I should have recognized that this limited the negative influence of tech on the S&P 500. There were a few other clues the market would survive here as well. Breadth had been acceptable, and junk bonds were breaking to new highs. Investor sentiment was at least neutral, and even the bond market was rallying. While the NASDAQ 100 had taken a steep fall in the latest dip, it appears to be capable of recovering to new highs. I did not think the bond market or the NASDAQ 100 could perform as well as it did.

I also mentioned bias. I need to check myself on that issue as it had the most significant influence on my attitude last week. I do have a risk-averse preference at the moment. Inevitably, we need to check our prejudice at the door most of the time to be successful. As an example, junk bonds breaking higher Thursday and Friday is hardly risk-averse behavior.

Markets reverse when people like me think they are right but end up being wrong. I am always looking for things that prove I am wrong. But there is no perfection in the search. When I am wrong, it likely has to do with misreading something, missing something, or bias. I don’t think I missed much here as I look back on my writings. Instead, I got a bit lazy and too negative. However, if I am going to be wrong, I would rather the result be an opportunity loss such as the current case rather than actual, hard-nosed investment losses. 

As we have been discussing on these pages, we have been in a trading range now since early April, sometimes wider and sometimes narrower. We have looked above and failed, as well as looked below and failed several times. Every time we have a consolidation such as this, I have to decide whether it represents net distribution or net accumulation. The difference between the two can be very subtle if it is discernable at all. As of Thursday, I was leaning toward distribution. Now, the opposite appears to be the case, but we will only know for sure with a solid breakout and follow-through on either side.

I did mention I had been expecting a catalyst. The employment report missed on Friday. I suppose the market liked that in a Goldilocks sort of way. The economy is not so hot that the Fed has to put on the brakes, but not so cold that we need to be concerned. 

But the most significant jump on Friday came out when the Biden administration backed off their drive for higher corporate income taxes in favor of a 15% global, minimum, corporate income tax. Janet Yellen made clear to the G20 this weekend that the tax is a worldwide effort to discourage tax haven shopping. We will see if the potential agreement has a negative or positive effect on the markets today. Incidentally, Yellen also said that the U.S. needs higher interest rates and can tolerate higher inflation. That could also be a drag on a breakout today.

This week, the bulls have the ball, and odds favor a breakout of the range rather than a double top. Nothing else has changed much. The run since early March this year is the third push higher from the March 2020 pandemic lows. That is the typical sequence before an intermediate correction of the type we expect on the nominal 18-month cycle. 

The entire rally has been parabolic, and such climaxes can last a lot longer than we typically expect. Based on historical analysis of parabolic runs, it is even possible that a typical, intermediate correction of 10% to 15% may not present at all. The result would be unusual, but we cannot eliminate the possibility.

This latest run since the March 2021 low this year has a bit of a rising wedge shape to it – which is likely to be aggressively sold as it peaks. A rising wedge is a unique characteristic of an Elliott 5th wave (a third push higher in the sequence interrupted by two countertrend corrections). So far, June is an inside bar as to May – which might indicate that June will close below its monthly open. June is one of the weaker months anyway, historically. The first few days of the month should have performed better than we experienced. So there is a bit of WWSHD at play.

While the 1st intermediate pullback from the Pandemic lows will probably last only a few months, it is essential to note that it could lead to a trading range that could last a year or more. The January 2018 buy climax led to a trading range that lasted two years. The trading range that began in 2014 stayed more than a year, despite a strong bull trend.

So I am coming into this week neutral to slightly bullish. I think a break to new highs is more likely than not. The stars have favorably aligned for it. However, given the rising wedge pattern and the number of traders that could get sucked into the new highs, we need to be on high alert for a relatively sudden reversal that could begin the intermediate correction. I will continue to use the 5-day EMA as a stop line, along with the Algo trigger. The Founders Group is 100% in cash right now after a better than 300% year-to-date return.

I will be looking to re-enter the market (at least for a short-term swing) if the opportunity presents itself. As I have continued to point out these past few weeks, it is still a bit premature to get overly aggressive on the short side. The SKEW (premium in OTM puts versus calls) hit historic highs on Friday. So buying OTM puts is very expensive right now due to demand. The SKEW indicates that the institutions are substantially hedged – but it likely makes more sense to sell premium rather than buy it when the time is right.

As always, I will try to do better next time. I do sincerely hate leaving money on the table.

A.F. Thornton

Founder's Trading Journal

Pre-Market Outlook – 6/2/2021

AF Thornton 0 Comment

Things have perked up in the last hour, and we will open with a small gap higher, but not a true gap as we are still well within yesterday’s range. Gap rules are not in play, and the higher odds trades are likely to develop later rather than earlier in the session.

Yesterday’s activity represented a “look above and fail” as per the balance rules. The rule portends potential for rotation to the opposing end of balance which is roughly at 4173. Remember that potential is not certainty and the 5-day EMA is powerful support above that level.

We have a 45-degree line overnight, and 4198 is the wide part. The 45-degree line is at odds with the balance rules thesis that we should move to the low end of balance. The 45-degree line is a sign that sellers have painted themselves into a corner near the lows of the session and creates the potential for an upward reversal in the next session. The 45-degree low at 4191.75 should be viewed as secure. A move up through 4210 (the single prints) would signal strength for long bias.

On weakness, watch the 4198 area to see if we can get any acceptance below there. The odds of moving to the ONL at 4191.75 increase with acceptance below 4198. The low end of balance at 4173 lies as the next support below 4191.75.

As always, don’t discount the potential to hold within balance. This would be signaled by range-bound trading that doesn’t find acceptance above or below any of the key levels listed above. Watch for confirmation from strong internals on a break above, or weak internals on a break below.

A.F. Thornton

Founder's Trading Journal

View from the Top – 6/2/2021

AF Thornton 0 Comment
Arogostoli, Cephalonia, Greece

Well, my view has been different recently – coming from a small island in the Ionian Sea. I have been here for a while and likely will remain another month or so. It has been a sad journey, tending to the untimely and Pandemic-related death of my father-in-law.

Traditions here are pretty different. As one example, the church bell rings in the village when someone dies. I guess I never understood the meaning of “For Whom the Bell Tolls” until now. Then, posters go up all over the village announcing the death and funeral – like the lost and found signs we see on telephone polls at home. The funeral occurs within 24 hours, as there is no embalming. It does not seem enough time to grieve and let go. But it is what it is.

Talking to people on my travels in and around here, the views of most Europeans have been disheartening. They believe that the United States has lost its footing since Trump left office. Some say the country is over as we knew it. It is a perspective unsurprising to someone like me who studies the trends, but it is nevertheless alarming to hear it in person. 

In the U.S., the news media led us to believe that the Europeans disliked Trump and his policies, but clearly, that was an elitist view. Regular people seem to embrace populism similar to the Trump movement in America. The wealth gap is at the heart of the problem here, just as it is at home. Anyway, it is always helpful to get different perspectives. 

When the relics of the Pandemic are in the rearview mirror, we are likely to get a more balanced view of the post-pandemic world. Hopefully, policies will focus on long-term solutions to helping families at the bottom of the ladder achieve lasting progress toward a good and decent standard of living.

So we ended May with a price candle called a “hanging man.” As the name might indicate, it is not a bullish candle. It would portend a few months of consternation ahead, just as we are expecting.

I would put yesterday’s action in the WWSHD (When What Should Happen Doesn’t) category. The first day of a new month should be strong. It wasn’t, save for energy, basic materials, real estate, and financials. Those sectors tend to be late-cycle. Financials are on thin ice, as the critical spread between 10 and 2-year treasury rates has been narrowing lately. The banks make money on the spread, so the preference would be that it widen.

Perhaps more importantly, in the S&P 500 index, we had another “look above and fail” per our balance rules. As pointed out in yesterday’s pre-market outlook, we expected the holiday and Globex traders to fade the gap and take profits (old business) and hoped the new monthly inflows (new business) would buy the breakout above balance. That didn’t happen. But for the daily 5-EMA support, the market would have rolled down to the balance area lows around 4179. That could still happen in today’s session.

That leaves us with a 50 point trading range in the last six sessions roughly bounded by 4180 and 4215. You could also define it loosely by going back to April, with a southern boundary of 4120 and 4220 to the north. What is more certain is the importance of the trendline coming up from the March 3rd low and connecting the lows from May 13th and May 19th. The trendline also tracks the 50-day line reasonably closely at the moment.

As Edwards and McGee pointed out in their seminal work on technical analysis, when a trendline is touched once, it might be chance, twice it might be a coincidence, but three times and it becomes a good pattern.

The Founder’s Group is still focusing on the daily 5-EMA as our line in the sand for the Navigator swing strategy. Partly, that is due to our leverage in the S&P 500 futures contract. For non-leveraged, very long-term portfolios, a close below 4120 would be my maximum tolerance. The 50-day line and the trendline mentioned above congregate there. A compromise might be a close below the 21-day line – smack in the middle between the Founder’s Group line in the sand and the unconditional support at 4120.

For the moment, then, financials, metals/materials, real estate (XLRE), and energy are leading the charge. These sectors help drive the IWM (Russell 2000 ETF) higher. Crypto is still bleeding, perhaps forecasting trouble. Commodities (check out the DBC ETF) hit new highs yesterday – energy undoubtedly boosted the gains. I am still buying Freeport-McMoran (FTC) and PAVE (infrastructure ETF)on dips to the 21 or 50 – as the charts dictate.

I am continuing to keep leverage at a minimum unless I am right in front of the computer.

As a side note, Apple (AAPL) looks like it could be forming a head and shoulders topping pattern. Keep an eye on it. It is hard to imagine the broad market gaining much without Apple.

There is no big move to defensive sectors yet, just the continued rotation from growth to value style stocks and back.

The SKEW index is still historically high, so there is a significant premium to be had for premium sellers. In part, that is causing the trading range to become self-reinforcing. Market makers fight prices above the range to keep the premiums they have sold to retail investors.

Candidly, if you don’t need the money, this is an excellent time to put everything on the shelf and do something else. I am not an enthusiastic buyer, but it is a bit early to get aggressive on the short side.  Again, never discount the possibility of a trading range for the summer, finishing in a fall correction.

A.F. Thornton

Founder's Trading Journal

Pre-Market Outlook – 6/1/2021

AF Thornton 0 Comment

While the market (as measured by the S&P 500) has not progressed much since mid-April, my weekend review found the market internals constructive. As the market consolidates around a center point such as 4200, it builds a lot of energy for an eventual, significant move. Though the direction is not readily discernable, it is reasonable to conclude that the market will move toward the prevailing trend, which currently points higher.

This morning, oil is hitting new post-pandemic highs, and we will see if the higher auction prices are accepted by traders today. That would bode well for the XLE (Energy ETF). While interest rates have been behaving of late, some inflation reports mid-week, not to mention the monthly employment report on Friday, have the potential to rock the boat. Higher rates will benefit the XLF (Financial ETF). If both the XLE and XLF are moving higher, that boosts the IWM (Russell Small-Cap ETF). The IWM has significant exposure to energy and financials.

Meanwhile, the SMH (semi-conductor ETF) has been moving up nicely from a three-month consolidation. Semi-conductors can be an excellent leading economic indicator, just as transports tended to be in the past. Nevertheless, I still think semi-conductors and technology (e.g. the NASDAQ 100) are good candidates for a trading range when they reach their prior peaks. Only time will tell.

Gold, copper, and silver have been moving higher out of consolidations, with gold breaking its recent downtrend. I am keeping an eye on FCX (Freeport-McMoran) as a proxy for copper and GOLD (Barrick Gold) as a proxy for gold. The relative strength (vs. the S&P 500) has been there for FCX but is still somewhat anemic for GOLD. I am not interested in something that does not outperform the market. Gold is also rising at the expense of the U.S. Dollar. The dollar has weakened once again as lower interest rates make it less attractive than foreign currencies. Lower rates are a picture show, however, that is enjoying popcorn at intermission.

Bitcoin has not been around long enough, but I am pondering whether or not it might be a leading indicator in the risk-on/risk-off analysis. Its recent struggles may portend that an intermediate correction will present soon in the financial indices. It had another challenging weekend, remains down 50%, and may have more downside ahead of it. 

Given that we expect an intermediate correction anyway in the 18-month cycle peak, it makes sense to lighten up on risk when presented with good rallies. I am reticent to put on much leverage here and always on guard for liquidation breaks. 

The volume would indicate that we are more likely trading with the weaker hands of the retail crowd at the moment. The institutions may already have hedged their bets. The SKEW – one measure of such hedging activity – index is off the charts – so the demand for OTM puts is at an all-time high – perhaps signaling a “black swan” event ahead. The SKEW has a mixed forecasting record, however, and has remained persistently high all year.

Morning Trading Plan

We will open with a true gap and breakout from a few days of balance, and that puts gap rules in play with balanced inventory from Friday (we ignore yesterday’s Globex holiday session). Of course, old business comes before new business, so there is potential for a fade early which would be the overnight inventory correcting itself (old business). Then there is also potential for rally (either after a full gap fill or partial) because the new business may come in and buy the breakout from balance. Balance rules then also apply – as we are breaking out of the value area highs, which are virtually identical in the last five trading sessions.

On any strength (be it in opening drive or after a fade), target the overnight high at 4228.25 first and then the all-time high at 4238.25. As always, monitor closely for continuation. There could easily be new money coming into the market (new business) on the first of a month that may take us higher.

 Any fade that doesn’t stop at Friday’s high (4215.50) should target the prominent TPO POC first at 4209.50 with the clear understanding that there is potential for a rotation to the lower end of balance (balance rules).

Welcome to June – the time flies.

A.F. Thornton

Founder's Trading Journal

Pre-Market Outlook – 5/25/2021

AF Thornton 0 Comment

Yesterday was impressive with tech and consumer cyclicals leading the charge. However, we have bumped up against the expected moves already on a Monday. These are important lines and difficult to cross as you know. An interesting strategy for the remainder of the week would be to use the lines as a midpoint, and buy a few standard deviations below and short a few standard deviations above. But progress is likely to be limited for the rest of the week.

I will send out a deeper dive tomorrow, but for now it still makes sense to stay cautious, keeping position size and leverage on the lower end of your trading scale given the context of where we are in the cycles.

A.F. Thornton

Founder's Trading Journal

Pre-Market Outlook – 5/21/2021

AF Thornton 0 Comment

The process of learning to invest and trade can be daunting at first. For many of us, it starts out as a search for the holy grail. Book to book, indicator to indicator, guru to guru – you are always just one step away from trading Nirvana. It is not unlike a search for the pot of gold at the end of the rainbow. And yes, mischievous little Leprechauns are everywhere.

For most of us starting out, the answers had better come quickly because our capital is rapidly disappearing. And if you are anything like me, it is not likely the first round of capital on the journey. There is no experience that compares to being forced into margin liquidation. Tuition – as we affectionately reference it. I have been there more than once on my journey – and we will leave it at that.

One complication of the learning process, however, is that your head can be stuffed full of minutia. The next thing you know, you overlook the obvious – the signal buried in the noise.

In the trading world, everything starts with price action. The rest – no matter what it might be or the claims of promoters – is context. The price is doing x, but momentum is waning. Momentum is context. The price is potentially peaking on the nominal 18-month cycle. The cycle is context. Obviously, context can be ranked in its level of importance but that is a discussion for another day.

Periodically, I will strip everything off my charts and just look at price and price alone. Price is the signal – the rest is noise. First I look at the line chart, then a bar chart, and then a candlestick chart. Sometimes I turn the chart upside down just to trick all my biases. Then I add in some volume. For these purposes, I keep it simple.

Over the past year, with the most aggressive Fed action I have experienced in my career, dips (when they occurred) lasted barely a nanosecond. We have seen a lot of “V” bottoms. V bottoms are the exception. The important pivot lows normally involve a two-step process. The market puts in a low, then retests it about a week later. The safest entry is on the retest.

There is no retest on a “V” bottom. Instead, the price just touches and goes – hence the “V.” You end up waiting for the retest with your hat in hand. Any hesitation and the market has already left you in the dust.

If you ignore all the noise, we just experienced the kind of bottom as they used to be. Likely, this will be more to the norm as we carry on from the giddiness of liquidity, Fed-driven markets. So it would be wise to add this one to your notebook.

So let’s examine this bottom in simple terms:

As you will see from the chart above, we bounced where we should on the trendline. There were other supports there as well, but I don’t want to clutter the graph. That is part of this exercise – keeping it simple.

Note the volume spikes below the first low. Volume typically surges like this when traders are churning indecisively at the low. If you look back to some of the other pivot lows this past year, you will see the same phenomenon.

Then we move on to the Tuesday retest, coming right on cue about a week later. Volume spiked again, but this time it spiked less than at the first low. A spike with slightly less volume tells us that the selling intensity was abating. The fact that sellers could not drive the market into the first low was another tell. The index left a long tail (the close was close to the open) on the day, as traders realized that the bears had lost control. From there, it becomes a matter of follow-through. That is where we find ourselves now.

There was another tell confirming the lows – namely fear. In the circumstances, it is a good time to measure trader anxiety. Fear accompanies reliable market troughs.

The first shorthand for measuring that fear is the CBOE put/call ratio. It tends to spike just like the volume. Too many shorts pile on at the lows, just like too many longs pile on at the highs. But it is at the lows, when the ratio spikes, that we can more accurately predict a bottom. I replaced the put/call ratio for volume in the chart below so that you can visualize the point.

The other fear indicator that is useful at important lows is the VIX (volatility index). Volatility peaks at lows, and diminishes at highs. Like the put/call ratio, the VIX tends to be more accurate at picking troughs than peaks. I replaced the put/call ratio with the VIX index in the chart below so you can visualize the point.

All in all, these simple clues gave us a low-risk entry point for longs. If an uptrend is defined as a series of higher highs and higher lows, and a downtrend a series of lower highs and lower lows, then a reversal is when the process ends, as here. We had a short-term series of lower highs and lower lows until Tuesday, when the progression to lower lows ceased. The process ceased at the trendline, one time frame higher, where the series of higher highs and higher lows has maintained the intermediate uptrend.

In Globex last night, we are breaking the short-term downtrend line (see charts above). We need that confirmed in the regular session today. If we can then clear the high bars from last week to the left on the chart, it should be clear sailing to the old highs. From there? Who knows, but the easy trade is over.

With this market, new highs are possible. It would seem that tech is moving again. Somewhat lost in translation is the fact that tech and growth stocks generally have been correcting for five weeks.

Ultimately, it comes down to math in a capitalization-weighted index. The stocks going up must contribute enough to the index to carry it higher. That is why the stalwart FANGMAN+T stocks are so important (Facebook, Amazon, Apple, Netflix, Google, Microsoft, Nvidia, and Tesla). They may be a handful of stocks out of the 500 member index, but they contribute 25% of the weight.

What I will be watching now is the progression of each daily candle. How far is the price invading the previous day’s candle? That tells you something right there. Is the volume supporting price progression?

And what about the nominal 18-month cycle? It requires an entirely separate discussion. But if we bottomed all of the cycles all the way up to 9-years in March 2020, and this is the first 18-month cycle in that series, it is likely to peak late in the curve. Also, the probability is that the correction will not be a crash – but likely something around 15% to 20% at most. The trough is due the first week of July, give or take a few weeks on either side. That is why we can’t trade it.

The peak is not predictable, as with all cycle peaks. And while the trough is more predictable, there is too much variation. Sure, one could say that we are 75% through the cycle and I will just go to the sidelines until the correction finally presents. While it is not my preference, that is a perfectly legitimate approach. For me, the context of the cycle helps me adjust the risk I am willing to take at this point. But it does not keep me out of the market,

Today's Day Trading Plan

Yesterday, the narrative changed, shifting back into a more bullish tone by breaking downtrends on the NASDAQ 100 and S&P 500 futures. As overnight trade is higher this morning, I will latch on to the more bullish stance.

Options expire at the close, which can hold prices more where they are, especially in the afternoon. That is why I typically don’t day trade on Fridays.

The triple candle peaks out to the left (4179.50) mark the next breakout. The level also marks the 10-day point of control. Conquering that level is the next link in the chain, but it might not be achievable on a Friday with the volume concentration there.

On the downside, and there could be some profit-taking at the open on extended overnight inventory, there should be support at the beginning of the single prints at yesterday’s regular session distribution. They begin at 4142.00. I would also keep them in mind as the area where there is potential for change in tone.

Carry forward that the overnight low came right down to the settlement (4153.50) and not further down in range, closer to those prints.

Always remember the market’s affinity for climbing in 50-point increments. If the index level is on the 50 or 100 point increment, it is likely to stall a bit as it works through or finds support or resistance at that level. If nothing else is relevant on the day, traders like to test the overnight high or low and yesterday’s high or low to find the path of least resistance. So go with the flow, and look for confirmation. Strong internals in either direction often telegraph success or failure at the crucial level.s

If I were trading today, I would give the market 30-minutes and see how it breaks from that candle. In an uptrend, I like to buy dips into the 21-EMA on the 15-minute charts for both the S&P 500 and NASDAQ 100. Let’s see if the NASDAQ 100 can maintain its leadership position from yesterday.

Have a great day and a wonderful weekend.

A.F. Thornton

Founder's Trading Journal

Pre-Market Outlook – 5/20/2021

AF Thornton 0 Comment

This morning, my dominant thought is that there are many issues at hand and so little time to discuss them. Suffice it to say; we are dealing with a lot of distortions related to how governments around the world reacted to the Pandemic – shades of “the cure was worse than the illness.” Deflationary pressures related to innovation and productivity are ever-present, perhaps even accelerating. Deflation surely will follow the bursting of the corporate and sovereign debt bubble.

Yet government action, shutdowns, trade deals, and the like have created bottlenecks and shortages, leading to price hikes all over the place – hurting low-income consumers who can least afford it. Are the price hikes temporary? Are they transitory as the Fed would have us believe?

There is only one way to reliably answer these questions, and it is the only thing that matters in trading – follow the money. What are prices and prices alone telling us? Everything else we discuss in these pages is nothing more than opinion and speculation that attempts to give price behavior some context. Frankly, my opinion is wrong often enough that even I would not trade on it. That is why we have objective algorithms and place so much emphasis on Market Generated Information. We call it M.G.I. I even like to refer to it as Magic – because when you consider M.G.I. over the talking heads, it seems to work like Magic.

Asia was on board with the bulls last night, but Europe fed the sellers until about 6 am EST. By the way, nine times out of ten, whatever the S&P 500 futures have been doing overnight, the market will switch direction at that hour. It did so this morning as well.

We will open with the futures mixed again, but with the Nasdaq 100 strengthing over the S&P 500. This is a carry forward of M.G.I. The S&P 500 futures overnight activity is balanced around the settlement, so the odds don’t favor early trading like they did yesterday.

We have nuances above and below that are of note. On the upside, we have the bottom of a small gap where the overnight high stopped. That is a long breakout point for the full gap fill. On the downside, the overnight low is a weak low as it stopped right at halfback, which is a visual and mechanical reference. But do not lose sight of the 4104 Weekly Expected Move low. Market makers have to hold that level until tomorrow’s close.

At a minimum, expect a balancing day and responsive trading. Most days are balancing days with responsive trading. That is the default day trading day. What I want to see is a follow-through from the successful retest low. Don’t lose sight of the fact that the NASDAQ has been correcting for five weeks – the longest stretch since 2012. It may be ready to take a trip back up, at the very least to establish the top of a new trading range.

As always, keep an eye on the 10-year treasury rate – it still holds the keys to the castle.

A.F. Thornton

Founder's Trading Journal

Pre-Market Outlook – Update

AF Thornton 0 Comment

Two critical concepts got you an awesome long trade this morning. Note them, if they are not already part of your toolbox: (i) the CBOE Put/Call Ratio, and (ii) the Weekly Expected Move low.

CBOE Put/Call Ratio

Before the turn higher this morning, and with a sense of panic in the air, the Put/Call ratio not only spiked – it gapped open to .89. That was the highest level since last October, in the range of last Thursday, and an indication that short-term fear was so overdone that a long trade was low risk. In other words, it was your first clue that the market would likely survive here.

Then, you have billions of dollars at stake if the market makers cannot keep the S&P 500 above 4105 by Friday’s weekly options expiration. Even after the first dip last week, deep as it was, the market makers brought the market all the way back to close at the WEM low by the close Friday. You simply cannot underestimate the power of these forces.

You have these two concepts, plus the traditional support of two trendlines and the 50-day line on the S&P 500. Moreover, sellers were unable to push the market back into last Thursday’s low, much less through it.

For day traders doing multiple contracts, I would take profits on half here at 4093, and keep the runners with a rising stop. For the Navigator swing strategy, we are holding our intermediate positions.

A.F. Thornton 

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