Founder's Trading Journal

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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

Founder's Trading Journal

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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.

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

Founder's Trading Journal

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I don’t typically trade Fridays due to weekly options expiration, and today is month-end, also a tricky day to trade. Caution is warranted if you move forward.

Yesterday’s regular and last night’s Globex sessions have been instructive in a couple of different ways. First, note that yesterday’s regular session involved a “Look Above and Fail” (see yesterday’s epilogue and extensive discussion of the setup here). With the breakout failing this morning, the balance area low remains in play at 4166.75 today.

Additionally, overnight traders rejected the breakout from balance (again), just as their counterparts had done in yesterday’s regular session. The regular session traders managed a last-minute save into yesterday’s close – but it left a potentially negative “hanging man” candle on the daily chart.

Likely, many traders initiated new long positions above the balance area high yesterday and are now trapped. The breakout likely lured them into believing that yesterday’s all-time high and close above the breakout was solid – expecting the market to start a new leg higher out of the consolidation. These trapped traders may be eager to push the sell button this morning – as the breakout has failed overnight.

Otherwise, overnight inventory is net short, normally resulting in a profit-motived counter-auction (higher) at the open. No attempt at a counter-auction would be further evidence of weakness and the trapped longs.

Keep in mind that almost every short-term trader observes balance breakouts, and they don’t usually hesitate to seize the opportunity presented. Most traders see the same horizontal resistance line and set buy stops just above it. I believe there is strong potential for at least some of these traders who went long late yesterday to be disappointed in a big way this morning.

As mentioned above, the last trading day of April today could bring on added volatility, and traders also have to digest the Amazon gap this morning. Other tech monsters are still reacting to their own reports earlier in the week.

I would use the bottom of the balance area at 4166.75 today as a downside target – and an initial line in the sand. As we are opening within yesterday’s range, it’s not easy to pinpoint an exact entry for a short trade, but I would trade from the framework that sellers could be in control of the tape, at least down to balance area low.

Target the balance area low first. If it is breached, then target the top of the single prints at 4160. Beyond that, target the 4/22 volume point of control at 4127.25. In addition to all that we retain in our narrative, today’s path will tell us a lot about the state of the market going into May. Sell in May and go away? We shall see.

Failing to test the low end of balance would be a more bullish sign and should be carried forward as a WWSHD (When What Should Happen Doesn’t).

Good luck today.

A.F. Thornton

Founder's Trading Journal

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Don't Day Trade Fed Days

Nearly everything in life is a gamble, including trading. The wife always teases me – “are you gambling in there or playing computer games again?” “Anything to avoid a real job.” Well, since the last time I had a real job was April 1987, not much is likely to change.

But as with life, we assess risks and probabilities before forging ahead in trading. We weigh the pros and cons. Maybe I am delusional, but risk-taking is a matter of degree when you are weighing evidence and assessing probabilities.

Today, the Fed will conclude their latest meeting, and Chairman Powell will hold a press conference. Fed policy is somewhat elevated in my weightings at the moment due to inflation expectations. The Fed will announce today’s press release on monetary policy and interest rates about two hours before the close. No change in policy is anticipated, but every word of the press release and Chairman Powell’s back and forth with the press will be dissected.

To make a long story short, unless you are a pure gambler or you have a specific and targeted options strategy, it is unwise to day trade today in light of the looming announcement and press conference – unless you a purely gambling on the announcement. That holds true for any day when major economic reports or other events loom over the market. On Fed days, we typically see a low volume balancing market before the announcement and then some wild volatility after – depending on the content of the announcement.

Moreover, tonight President* Biden will speak to a joint session of Congress and announce various tax proposals. The proposals (which are just that – proposals) could have a big influence on the markets tomorrow. Keep in mind that, as with any negotiation, you typically start higher than where you truly believe your proposals will be accepted. There likely will be some of that tonight.

The Capital Gains tax proposal several sessions ago likely was a high volley to start negotiations. The market had a knee-jerk sell-off that created a buying opportunity. So my advice is don’t panic quite yet, as we see these two significant events pass in the next 24-hours. As well, my advice is to let these events pass before making any material investment decisions as we approach the end of the month on Friday.

Good luck today, I won’t be advising or trading – as it would be pure gambling.

A.F. Thornton

Founder's Trading Journal

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The S&P 500 and NASDAQ 100 have been falling right from the open. As pointed out this morning, the levels at 4172 and 13933 on the S&P and N100, respectively, are critical. If these levels don’t hold, we will dip down into the previous trading range and risk double tops in both indices.

With all the negative divergences on the daily charts at the latest peaks for both indexes, the market might have reached the intermediate peak we have been expecting – and this would favor the short side in day trading.

Let’s see if the levels hold. Otherwise, you may be witnessing the 18-month cycle peak. It is too early to tell this morning, but carry that forward in your narrative.

Founder's Trading Journal

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Navigator Swing Strategy - 100% Cash

This new and focused publication will record my current, intermediate view of the U.S. stock market as defined by the S&P 500 index and interpreted by our proprietary Navigator Algorithm™. It will typically published over the weekend. I will issue various buy and sell signals along the way – as further discussed below. You can extrapolate the information in these pages to most U.S. equity indexes and stocks. I choose the S&P 500 index to represent the U.S. stock market because it is the most heavily traded equity index globally.

When the Navigator Algorithm™ is in a sell signal, going long the stock indexes, sectors, or individual stocks is like swimming up river. Why is this so? Because there are numerous studies that prove 60% of any stock or sector’s return is attributable to whether the market is going up or down. With so much indexing these days, the market’s influence is likely even greater than the older studies would indicate. I like to say that there is probability, plausibility, and actuality. Luck is not in my vocabulary – so why fight the headwinds of probability.

In 2020, the Navigator™ swing strategy focused on being in or out of one S&P 500 E-mini futures contract resulting in a nearly 900% return. This year, I expanded the strategy to include trades in the other major indices and options on some leading sectors, using Sector ETF’s. The returns have been rewarding, and I will have the results back today from the accountants for the first quarter. But to be frank with you, it is too much work. Just the fact that I need accountants – because the stocks, options and futures are in three different places with three different custodians – illustrates the complexities involved.

When one has a successful market model and algorithm such as the Navigator™, indeed we are open to a world of possibilities. One can broaden out to other indices, sectors, and even individual stocks. I have leaned in that direction a bit this year, mostly because I get bored.

However, I also have to remind myself that I don’t live to trade; I trade to live (the wife likely would challenge that statement). The S&P 500 index itself is diversified and safe enough that long ago, I decided that it would be less work to solely trade the index. To enhance returns, I use the leverage offered by options and futures to make all the money I need. That approach has served me well, and I am returning to it for the rest of the year in the swing strategy. It also helps to keep these writings simple and focused on the bottom line. In or out, long or short, those are the only issues.

The chart below is the best illustration of the S&P 500’s cycle location. This particular chart shows the path of the nominal 18-month cycle, the fact that it likely is peaking, and the preliminary correction target.

The peak illustrated above is happening in the context of (i) unprecedented historical valuations, (ii) dumb money sentiment extremes, (iii) nominal cyclicality, (iv) entering negative seasonality, (v) defensive sectors asserting leadership, and (vi) new all-time highs in the S&P 500 unconfirmed by momentum strength, individual sectors, and other indices that should be confirming it. So there you go, it is really that simple.

When all of these variables are coded and weighted into our Navigator™ Algorithm, we have a preliminary sell signal, perhaps allowing one last poke higher in the S&P 500. This would be a perfect week for the index to crest – though my time target still falls soon after the first few days of payroll deduction fund flows in May. To negate these possibilities, we would need to trip the algo trigger and polarity switch reflected in the system status labels at the top of the chart below. Those are the levels that would need to be breached to negate the sell signals – but be aware that the levels are dynamic and move with price higher and lower.

On Wednesday, President* Biden will present all of his tax proposals to Congress. The monsters of tech all report earnings this week, including Tesla after the bell today. Wednesday also will conclude the latest Fed meeting and Chairman Powell’s press briefing. That is a lot to chew on this week, and any one of these events could help the market put the landing gear down.

And then there is that old market axiom – “sell in May and go away.”

A.F. Thornton

Founder's Trading Journal

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The markets just caved (hopefully temporarily) on President* Biden’s announcement of a 43.4% Capital Gains Tax. The current tax is 20%.

Remember, it does not take much of a gain on your home or stocks to put you in Biden’s “rich” category. While it is important to start working down the debt, this tax would wield a devastating blow to all capital assets, from real estate to stocks. This could literally kill the real estate market overnight. Do you have enough grey hair to recall the 1986 Tax Act and what it did to real estate and the Savings and Loan industry?

The proposed tax also has potential to cause anomalous behavior by investors before its passage. The proposed tax could also act as the catalyst for the 18-month cycle peak. I doubt it, but I will keep an open mind.

The ruling class in Washington D.C. right now is the most dangerous I have encountered in my lifetime. They are, in a word, scary.

Condolences to everyone, but there is a reason our Navigator Swing strategy remains 90% in cash and 10% in Gold. We are closing out the Gold position today. Taxes are deflationary.

A.F. Thornton

Founder's Trading Journal

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Founder's Trading Journal

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Thus far, yesterday has all the characteristics of a liquidation break, one we were expecting (today is the 15th – the dead middle of the month). Liquidation breaks shake out the weak hands in the market, making it possible to achieve more progress. Of course, we are not expecting too much more, as the larger cycles will top soon.

The potential for strength today is underscored by short-term traders likely still short from yesterday’s operations. Assume that any price action above the overnight highs (4145.25 for the S&P 500 and 13,945 for the NASDAQ 100) can be a “go with” initiative situation.

As always, monitor for continuation and look for contextual support from strong internals (up/down volume, advance/decline lines, and up/down ticks). I will also trade from the framework that pullbacks into yesterday’s regular session range are more likely buying opportunities than weakness. I don’t think that such pullbacks would rotate all the way back to yesterday’s lows.

While that may be my opinion going in today. any trading below yesterday’s low has potential to change the tone. Given the overbought nature of the larger picture, and the cycles that often dip mid-month, more selling is possible – so don’t anticipate a trade. Wait for buy signals and triggers to confirm the scenario before jumping in on the long side.

Given a large liquidation break that was bought back up overnight, selling below yesterday’s lows is less likely, but cannot be eliminated as a possibility. Value was overlapping to higher yesterday, and selling was not uniform across all sectors. Value is more important than price – ALWAYS. Profits favor the prepared.

A.F. Thornton

Founder's Trading Journal Navigator™ Signals for Swing Traders

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The Founder’s Group has liquidated our remaining S&P 500 and NASDAQ 100 Futures positions, as well as our XLF calls. More on this later today.

Category Founder’s Trading Journal

Navigator Intermediate Swing Strategy

Don't Day Trade Fed Days

Navigator Swing Strategy - 100% Cash

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