Category Founder’s Trading Journal

Morning Outlook – 5/18/2021

I had a few technical problems to work through now that I am at my final destination. Sorry for the delay. Not much has changed in the outlook. Buyers have been in control for three sessions and overnight, but seem to be evenly matched with sellers at the moment.

4179 is the key level on the S&P 500. If buyers can push through that level, they can maintain control as they have the past few days.

Overnight, the NASDAQ 100 was leading the S&P 500, and the overnight action carried the index above the algo buy trigger. But as we often say, the action must be confirmed in the regular session. So far, traders are exploring the strength of the overnight low, we will see if they can bring it back up to test the top levels.

The key to this market continues to be the behavior of the 10-year treasury rate. To me, the chart looks like rates will move higher. Then the question becomes how much of a jump can the tech stocks can successfully handle. If we lose the tech sector, it will be challenging for the rally to hold together.

Stay tuned.

A.F. Thornton

Morning Outlook for Day Traders

I am unexpectedly traveling this morning, so this will be a post from my cell phone. Incidentally, I have passed through both New York and Paris so far this morning and the airports are packed, a stark contrast to a month ago when you could have the airports and planes to yourself. Europe is notable because they have been closed and just re-opened some countries on May 14th.

We had a V reversal at the end of last week with two bull bars stacked on top of each other in the S&P 500. The market turned right where it should and the trend is intact in all four major indices. Notably, tech is still weak and maybe other than Google (GOOGL), there is not much that would interest me in FAANGMAN+T.

In rank order, 10-year rates and the financial sector are the keys to the short-term kingdom. I will put out a macro picture later in the week when I get my feet back on the ground.

Commodities, whether they be metals, materials, agricultural, or energy are all on the move and threaten to displace the stock index quartet in relative strength. Gold is on its downtrend line and could break through (though gold has a tendency to be a heartbreak trade). The DBC and DBA commodity ETFs have now broken long-term downtrend lines – a major trend reversal.

Today, we want to see the S&P 500 stay in the top 1/3 of Friday’s bar at worst and continue higher at best. We are testing around the half-roundie pre-market. The 5-day EMA would be the line in the sand by the close. Otherwise, opening inside of Friday’s range at this writing gives us no early clues to the open.

A small pullback is in the cards after two bullish back to back days, but don’t count on it.

A.F. Thornton

Pre-Market Outlook – 5/14/2021

Just One More Thin Mint...

One of the funniest movies I ever saw was “Monty Python’s Meaning of Life.” Admittedly, I was punch drunk after staying up four days taking law school finals.

There is a scene where an obese man is stuffing his face, and at the end of gorging his meal, he asks for “one more thin mint.” After swallowing it, the man blows up from so much food. It reminded me of how I feel about the market this morning. It may want “one more thin mint” before it finally blows its top.

Yesterday went precisely according to plan. It was an inside, short-covering day. The short-covering was something to behold, as it usually is. But it was almost too good. And I am reminded that an inside day is typically a continuation – not a topping – pattern.

Yesterday, every index either bounced from its 50-day line or trendline – just as the indexes should in a bull market. Not a single one of our quartet, the S&P 500, NASDAQ 100, Dow, or Russell 2000, broke the uptrend. Nor has the overnight crowd been able to drive the indexes further south in the last 24-hours. Each one of these indexes has moved across its channel, allowing for a final, higher wave – perhaps that 5th and final Elliott Wave – to take us up to complete the intermediate top.

And even the declines into Wednesday’s lows were symmetrical, three-wave or what we call “two-step” patterns. Three-wave patterns are corrective of the prior trend, not impulsive as would reflect a trend reversal. There are what we call “head and shoulders” patterns to reverse higher in both the NASDAQ 100 and S&P 500 futures this morning. I even see “V” reversals on the 195-minute charts.

Another item of significance is our old friend 4115 on the S&P 500 Futures. The level provided support for a month before we finally broke through it mid-week. It was our “balance area low,” as we referenced it the past few weeks. This prior support should now be resistance.

The 21-day line sits just above 4115 at 4130. The futures are invading that space this morning. A close above 4130 on the S&P 500 today would be significant.

A close above 4177 would save the proverbial butts of the Weekly Options Market Makers. The Weekly Expected Move low sits right at that level for expiration today. Granted, part of the breakdown Wednesday was caused by these players neutralizing their deltas by selling futures, but there might be a few of them left to help drive the market to that level.

The final underpinnings in the bullish possibility this morning are the spike in the VIX (volatility index), Put/Call Ratio, and volume on Wednesday’s lows. For the most part, these spikes are as high as we experienced around the election last year when we were bottoming the second wave of this China Virus rally after a few months of sideways action. Short-term spikes in volume and fear are associated with a low that will hold, rather than a market about to break lower. 

That does not mean that the low will hold down the road. But it makes a rally more likely than a decline, at least in the short term.

If all of the above leads to a pivot higher here, we can anticipate another algo buy signal today, or more likely on Monday. And we would have to attribute the adverse action this week to a news-related distortion caused by the oil pipeline shutdown and ransom scheme.

You already know the bear case if you have been following these pages. We hit the proverbial brick wall at the current level, then reverse lower, confirming the intermediate, nominal 18-month peak.

Let me also mention another distinct possibility here. We always tend to think of rallies and declines, leaving out the distinct possibility of the market getting stuck in a trading range. If so, we would have the bottom in place now, and we would stall at the old highs and reverse lower again. We could play that ping pong game for a few months, perhaps with a final break as the nominal 18-month trough arrives about six weeks from now. Keep that possibility in your back pocket.

All of this underscores the importance of keeping an open mind to all possibilities, no matter our opinions. In one sense, I would feel better about this latest scenario, having lost some money executing on a buy signal precisely a week ago today. The signal rolled over on the news events and stopped us out Monday morning. Of course, that is why we use stops, as nothing is perfect in life or trading.

Today’s Plan

This morning we have overnight activity that has moved above the highs a bit on inventory that is 100% net long.

As we have a slight true gap higher at this point, the early session may be a tug of war between the inventory that needs to correct and the shock and awe that we are trading above the May 12th high. The morning activity will tell us a lot about the market.

Overnight activity has broken the downtrend of the last four sessions in the S&P Futures. Note that this trendline is very steep. Even with today’s gap, prices are still below the 21-day line.

Also, note the potential “V” reversal in play, and we will see if it takes hold. The measured move is the S&P 500 all-time high. Key resistance levels above are 4115 (prior support), 4130 (21-day line), and 4177 (the Weekly Expected Move low).

Sorry for the delay this morning. I am in the midst of an emergency. Check back later as I will be adding some charts to this discussion.

View from the Top – Interim Report

I could give you an elaborate discussion this morning, with fancy charts and graphs. Or, I can just give you the bottom line. We were in the zone for the intermediate peak of the nominal 18-month cycle. We have been discussing the potential peak for a few weeks. All we needed was a catalyst. We never know what the catalyst will be – that is why we use stops.

This time, some Russian hackers just hacked, captured, and are now ransoming one of our largest oil pipelines – demonstrating our vulnerabilities. It does not take a lot of imagination to postulate what might be next – perhaps part of the power grid? 

This morning, gasoline has popped over $5 per gallon in California.  Add this to all of the rest of the inflation distortions currently underway in the economy. Inflation, without commensurate wage increases, destroys the purchasing power of our most vulnerable, lower-income citizens. The shifting sands have the potential to derail the recovery.

The NASDAQ 100 has now rolled over, taking out its 50-day line. The S&P 500 is rolling over this morning, taking out its 21-day line. With the news of the pipeline ransom mid-day yesterday, money stopped rotating and started exiting the market generally. The price action triggered our stops, taking us back to 100% cash, and that is where we find ourselves this morning.

I think it fair to assess that the 18-month cycle peak has arrived, and the more probable profits likely will be made shorting stocks and rallies for the next few months.

As bad as these events may be, it is time to profit from the ensuing decline.

As always, stay tuned.

A.F. Thornton

View from the Top

Week of 5/10/2021 - Navigator Swing Strategy 100% Long

We triggered an algorithm buy signal last Friday morning at 4208 on the S&P 500 index. Given the consolidation in most indices, they are nearly all firing long out of volatility squeezes, a positive boost to a normal pivot higher from a correction. In this case, we were coming off the 80-day cycle low last Tuesday. From all appearances, this will be the final rally before the 18-month cycle peak begins to influence the markets.

With the indices firing long out of these volatility squeezes, a number of stocks are following suit and breaking out of bases. Viewing a scan last night, themes include travel and leisure, industrial (infrastructure beneficiaries), and retail. Some examples (without recommending the same) include Southwest Airlines (LUV), Williams-Sonoma (WSM), Caterpillar (CAT), and Deere (DE).

Seemingly, technology and growth stocks are suffering from profit rotation into the new “value” themes, as we can observe the NASDAQ 100 lagging the rest of the market. We have experienced this push/pull rotation several times since the new year commenced. You need to adjust your sails accordingly. I also believe that the NASDAQ 100 and growth stocks generally are losing ground as investors lock in substantial trailing profits and capital gains in anticipation of capital gains tax increases.

The Founders Group focused on the S&P 500 futures as our vehicle of choice for now, as the index is the best compromise of the current themes. With the futures leverage, we can achieve all the return we need. Of course, you can use the S&P 500 Index ETF (SPY) as a straight cash investment or options on the SPY as an alternative to the futures, depending on your risk tolerance.

Nothing has changed much in the big picture. Inflation continues to present as the sovereign debt crisis builds to a crescendo. On a positive note, however, many global economies (including Europe) have not even opened up yet, so there is more recovery growth ahead of us.

We will use a 5-day EMA as our stop line for now. I will issue a sell signal if we see a material close below the EMA. My target for the S&P 500 this week will be 4280, at which point I will reevaluate our position. There is a plausible target of 4500 before this last rally leg finishes, but we will see how it goes.

A.F. Thornton

Update on Emails

Sometimes I spend half of my time trying to outsmart software. As well, living in front of nine computer screens can put me in a geeky netherworld.

On mornings, I am in an understandable rush to get the pre-market commentary out – but as close as possible to the open for the overnight analysis to be accurate and timely. In a rush, I often make mistakes, typos, or like this morning – digit errors.

Once the outlook is distributed, I then go back to proof and edit one more time. So if you see a mistake, it is often corrected already, and you can see this by refreshing your browser.

Up to this point, the content snippet in the email has not been correctable – even if the content has been corrected on the website. So I eliminated the snippet today. This email is the new format. Click on the Castle Rock image or the “Click Here for New Post” button to read the update.

Make sure our return email is whitelisted – so nothing gets stuck in your spam folder. Already, my email does not like the new image and spammed me.

A.F. Thornton

Pre-Market Outlook – 5/6/2021

Thursday Morning, 5/6/2021

Nobody came away happy yesterday. For the bulls, we can say that the market did not revisit the lows and held within what is now a bit wider balance range. But the market rejected the gap area, the old balance area, and the 5-EMA. What makes a bull sad, makes a bear happy. So the aforementioned bull negatives are bear positives.

Pin the Tail on 4180

There is the old game, pin the tail on the Donkey (poor Donkey). Here, the game is to pin the tail on 4180, where all the volume over the past few weeks is concentrated.

Options strategists are no doubt selling premium around that level now, perpetuating it. Every day that passes then, the risk of an explosive move increases. Whichever direction the market moves outside the bounds of the balance area, all of those option players will have to scramble to unwind their positions. For now, the balance area is bounded by the all-time at 4211 and the recent low around 4114 – roughly a 100-point range.

For now, the S&P 500 index has support at 4114; also, the Weekly Expected Move low. That likely means that the big move will occur next week. Only time will tell. The recent low is likely an 80-day cycle low – a low of relative importance. However, if a bear market is underway, the cycle will peak early and roll over in what is called “left-translation.” What that means is that if you look at the semi-circle representing the cycle, it has the tendency to peak left of center rather than right of center, as with a bull cycle.

Yesterday’s action gave me no reason to change our intermediate strategy, which remains 100% cash.

Today's Day Trading Strategy

We will be opening inside yesterday’s range, with overnight inventory nearly 100% long, raising the possibility of a negative counter-auction at the open. Key support is the overnight low around 4151.50 and the half-roundie itself around 4150. From there, the key reference would be a retest of the recent low, 4/20 low, and WEM low, which is an area ranging from 4120 to 4110.

A move back up and through the open would be bullish, as would a move back up and through the 5-EMA and back into the balance area above 4167.

Watch internals. It is challenging for the S&P 500 to overcome tech if it continues to weigh the market down.

I would trade later rather than earlier, when the picture may be clearer.

A.F. Thornton

Pre-Market Outlook – 5/4/2021

My best assessment of yesterday is that we got the expected short-covering in the morning, but the market (as represented by the S&P 500 Index) sputtered from there. Essentially, the NASDAQ 100 rolled over, weighing the S&P 500 down, while some of the cyclical sectors provided support, particularly energy. 

There is some WWSHD (When What Should Happened Doesn’t) MGI (Market-Generated Information) potential if we start the first few days of the month weak – with all the payroll contributions unable to take the markets higher. As well, the contributions could be cushioning what would otherwise be a steeper decline. Add that to your narrative.

So we come in this morning with a True Gap down. Gap Rules apply, focusing particularly on Rules #2 and #4. Overnight inventory is 100% net short, leading to a counter-auction (some temporary buying) at the open. We will be opening well out of yesterday’s range and at the bottom of the overnight range.

About an hour ago, the S&P 500 rolled over hard, taking out the bottom of the balance area at 4166 and bouncing off the high region of the single prints I had been mentioning the past few sessions at 4160. This also puts the index below the 10-day volume point of control at 4181, which should have provided support.

The NASDAQ 100 now sits just below its 21-day exponential moving average but just above its Weekly Expected Move low at 13,622. The NASDAQ WEM low is powerful support, along with the ’50 handle on the S&P 500 index at 4150. These levels could damage the indexes and would not violate the concept that both indexes are completing a “4” wave consolidation in Elliott parlance. 

A pivot higher at the aforementioned levels would allow for one more final push in a 5th wave. That would help me reconcile the bullish, ascending triangle pattern I see in retail stocks (XRT) as well as a new move higher in oil and energy stocks (XLE) seemingly underway. The final wave, should it present, looks to be all about the cyclical and value stocks. We will see.

In fact, this sector rotation keeps the S&P 500 afloat. If the S&P 500 stays above its 21-EMA and the NASDAQ 100 below, they can cancel each other out. The NASDAQ 100 (largely tech and growth stocks would still weigh on the S&P 500 index, stunting its progress. Put another way; the anticipated correction will not get seriously underway with a solo; it needs the entire orchestra.

My best advice today is to focus on two factors in the S&P 500 index. First, if there is acceptance in the regular session below the balance area, it does raise the possibility that the consolidation was distribution rather than accumulation. For the buyers with poor location, there will now be overhead supply. The second is how prices will react to the large single print section from 4160 to 4150 from April 23rd and as mentioned above. While overnight activity has just started to test this area, there has been no regular session activity there since traders printed it, and thus it remains in the narrative and play.

Early trade today will tell us a lot about the strength or weakness of the market and whether or not overnight traders have the direction right. As mentioned above, overnight inventory points to an early counter-trend fade, but the overhead structure may curtail it. The bottom of the balance area at 4166 would be the first target on the counter-trend, inventory correction rally higher, and there should be sellers there. If not, then target the overnight halfback around 4171, and eventually the full gap fill and carry forward that stronger sellers are not present.

A gap-and-go scenario will play out one of two ways today. We can get an early fade that will fail where we would expect (see above), or we could have an initial drive lower that puts the single prints into play right away. The short is either at the balance area low or on a cross back down through the open in the first setup. The second setup is always harder to pull off, as there is less reference to where to place a stop.

On the NASDAQ 100, I am always reluctant to fight a Weekly Expected Move low, so I am covering my shorts this morning and direct my attention to the S&P 500.

Good luck today!

A.F. Thornton

View from the Top – 5/2/2021

Castle Rock, Colorado

Navigator Intermediate Swing Strategy

The month of April lived up to its reputation as one of the strongest months of the year. I harken back to late March, when I counseled that April was likely to be strong, as we came off the 20-week cycle low. It was hard to accept that the market could go higher then, but after sputtering just a bit, it finally gripped. All in all, it was a great month.

Having said that, our swing strategy remains 100% cash, as we profitably scaled out of our positions as the month progressed. The market has made little, if any, progress since April 19th. It could be consolidating to go higher, and it almost tripped a buy signal Thursday. But as long as the market remains under the Algo trigger line (see the chart below), I am not interested in any long positions.

Friday (also the last day of April), the S&P 500 index futures closed right on the 5-day exponential moving average. If you are still in the market, the 5-day EMA can be a good stop line. You could use a violation of the 5-day EMA on a closing basis as your line in the sand.

Unless the index can poke above the Algo trigger line on the daily chart (see below), my intermediate bias remains negative, believing that we are close to an intermediate peak – if not already there. 

Even if we are peaking, this does not mean that the market will head straight down, as another minor low might be possible before the 18-month cycle downdraft kicks into high gear. Nor am I predicting a crash – just a normal, expected, and healthy correction of 10% to 15%. It does not really matter what I expect anyway. I am confident the algorithm will bring us back into the market at the appropriate time – whether it is a normal correction or a crash. The most important principle at work here is to avoid the correction – no matter the depth.

What I can say with some confidence is that the risk/reward ratio is unacceptable to me at this level. Even if the Navigator Algo trigger is tripped back into a long trade, it would still be a tough decision to accept a buy signal given where we are. Key stocks rolling over on stellar earnings last week has not helped my confidence.

My hesitancy in calling the peak tonight is that the market (purely from a price perspective) has not violated anything important yet. It just achieved an all-time high only a few days ago. Also, the extreme speculation registered in January and February is starting to get wrung out. Internal dynamics have mostly held up, so a return to neutral sentiment conditions would substantially improve the forward risk/reward profile. We’re still a ways off from that – so I will still resolve all doubts in favor of the Navigator sell signal.

If you have not already raised cash or at least culled your portfolio of weak hands, you may have a day or two left to do so. The put/call ratio spiked Friday, and I believe many shorts will be trapped at Friday’s lows. These shorts will be forced to buy to cover tonight and tomorrow morning. We already see this occurring in Globex tonight (Sunday). I discussed this in detail Friday afternoon here. I would also expect the usual impact as 401(k) and other payroll contributions positively influence the first few trading days of the month.

Here is a 30-year composite of the May roadmap:

We went into April highly leveraged at nice dips with fear high. We made so much money in less than a week that I pulled the reins in fairly quickly. But it is an important illustration of the rewards that come from waiting patiently to strike when the iron is hot.

Our number one job as traders and investors is to protect our capital. That is especially important at these lofty valuations. The statistical probabilities are in our favor, as long as we live to fight another day.

This market could continue higher in a gamma spiral – but I seriously doubt it would end well. We have to accept that there is a lot of change in the air – politically, fiscally, and monetarily – not only here but globally. All the market needs is a catalyst to light the correction – and there is a generous supply of potential catalysts looming. How about Russia invading Ukraine? China invading Taiwan? How about both at the same time? We cannot know for sure what the catalyst will be, but there always is one.

Funny, I am having a deja vu moment as I write this, I remember using those same words, “all it needs is a catalyst to bring it down,” in late January 2020. I even said, “for all we know, the catalyst could be this new virus.” Let’s see if I can win two in a row.

Friends, even Goldilocks, did not liver forever.

AF Thornton

Morning Outlook – 4/30/2021 – 2nd Update

S&P 500 5-Minute Intraday Chart

Taking my own advice, I picked up five micros at 4166 (ok – I was too chicken to go for it and use the minis). I sold them for 10 points right below the downtrend line at 4177. So I achieved a total scalp of 50 micro points at a $250 profit. Hey, it buys dinner out with the wife, right?

The sell-off into the range low (so far) this afternoon involved above-average volume, +1,000 downticks (likely exhaustion), and a spike in the Put/Call Ratio right before the price turned. It looks to be the LOD (Low of the Day), as only 96 contracts (a very low number) traded at the turn. 

We will see what happens as traders retest the low here and into the close. But the spiking of the Put/Call Ratio leads me to believe that traders are shorting the heck out of the “Look Above and Fail” implications and expecting the market to cave today. Quite a bit of that shorting seems to be taking place right around the 4166 range low itself. 

If the market does not deliver, these shorting traders could end up trapped here with poor location, forced to cover at the end of the day, Sunday night, or Monday. Also, if the market holds the low, the market remains in balance with slightly bullish implications for successfully defending its lower boundary. 

Going into the first few trading days of May, we may get another brief pop higher as payroll contributions roll into the market and the shorts panic buy, but it is hard to imagine that there is enough gas left in the tank to take us much higher. We are way past empty and running on reserves. 

CBOE Equity Put/Call Ration
NYSE Ticks

Summarizing then, we have strong selling pressure down to the balance area low, which was our target published this morning. Despite their best efforts and quite a bit of volume, traders have been unable to push the market below the balance range, at least so far. Add that to your narrative. 

The Put/Call Ratio approached the March fear spike level today. That fear spike brought us the March low and ensuing April rally. So I am challenged to say this is it – we are ready to roll over here and now. Something always conspires to muddy the waters. 

All I can say is that we are very, very, close to a peak and intermediate correction of at least 15%, and likely more. Since we are already in a sell signal on the daily chart, even though we have been stuck in this consolidation, I don’t mind watching from the bleachers over the weekend. 

Let’s see what Monday brings, and go from there. Have a great weekend!

A.F. Thornton

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