Category Founder’s Trading Journal

Update

So far this morning, we have the Dow hitting a new, all-time high. The Russell 2000 Small Cap Index closely follows and is within hitting distance of a new, all-time high. The S&P 500 is running in third place, with at least 60 points to go. The NASDAQ 100 is miles behind, at least 1000 points off its all-time high.

Interest rates have backed off a little overnight, while oil is hitting 18-year resistance here. This is giving technology a small boost, as well as a few other growth stocks. Financial and energy stocks are taking a breather. One day, of course, is not a trend.

All of this equates to a striking index divergence – and not a typical healthy, syncopated, or correlated equity market. We have to give some allowance for the discrepancies because the cyclical/value sectors and the leading growth stocks are coming off a historic spread favoring growth. Allowing for some spread reversal is not unreasonable. Nevertheless, the behavior is a warning that this correction may continue south after this brief reprieve.

On cycles, keep in mind that the 20-week cycle could bottom (and likely already has), but the next 20-week loop may result in some indexes and sectors achieving new highs and some not. The cycle could roll over below all-time highs in some sectors – perhaps even in the Nasdaq 100 index itself. This sometimes happens in the fourth 20-week sequence that leads to the 18-month low. The chart below outlines the current road map. 

[Clicking on the Image Below will Bring Up the Full Model]

I would normally be issuing a buy signal by the end of the day. The algos are telegraphing the buy signal now, but the price would have to stay above or near current levels by the close to confirm the signal.

The problem is that the algos know how to buy and sell but cannot tell us how far the buy signal takes us. We have to do those forecasts with our other work. If the correction were to continue, then the buy signal would be hard-pressed to capture much gain.

Let’s see what the rest of the day brings, and if I think a buy is warranted for swing traders (meaning we can hold it more than a day), I will telegraph a signal about 15 minutes before the close. Otherwise, our swing trading model needs to stay in cash for now.

A.F. Thornton

Shifting Sands

The markets are continuing to search for a foundation here. The old, stalwart Dow Jones Industrial Index is on the verge of a new, all-time high. Simultaneously, the NASDAQ 100 is continuing to move lower, completing one of those head and shoulders topping patterns we discussed last week. The latter index is heavily influenced by technology and other leading growth stocks. Cyclical names dominate the former. 

The NASDAQ 100 topping pattern is even clearer in the XLK Technology ETF. Our core S&P 500 index is caught in the middle – pulled in both directions and ending up virtually unchanged yesterday.

I will publish some more details later today – but this is a tough market to swing trade due to the complicated index math. Day trading has been fabulous. If the patterns are accurate, the NASDAQ is not done finding a low quite yet. 

Most corrections end in some correlated capitulation – but that has yet to present. One thing for sure, this has been orderly and healthy. The NASDAQ 100 may even tag its 200-day moving average – and this helps work the froth off this market, which may allow the markets to continue the secular trend once the 20-week cycle bottom is firmly planted. Again, I would rather cover the details later today than rush them out this morning. Beyond these few comments, nothing has really changed in terms of the issues.

Day Trading Today

Truly this volatility has been day trading paradise, making up for the fact that much of the gains happen overnight, leaving us crumbs during the New York session. 

We are coming off a very weak close yesterday but now gapping higher by over 30 points. Of course, it is not a true gap, meaning we are not opening above yesterday’s high. However, the S&P futures were up as much as 50 at the Globex high. We are slated to open well within range on overnight inventory that is 100% net long, give or take a few ticks. Current prices are tracking in the middle to the upper third of the overnight range. All of this speaks to trading later rather than earlier.

The value was overlapping yesterday. This is a small bullish carry forward in the sense that it supports the Friday reversal theory. Continue to watch where value develops daily. Remember that price and value are two separate things, the value being more important.

While overnight inventory is skewed heavily net long, we are slated to open within range and value, so gap rules do not apply, and any big moves are likely curtailed a bit. The better trades should develop later in the session rather than earlier. Assume responsive trade within the confines of the overnight range – testing our usual quartet and monitoring for continuation if levels are conquered or not. Of late, there have been good trades on both sides of the equation, both long and short, throughout the day.

    Party On Wayne

    I loved the movie “Wayne’s World.” What I loved even more was how my kids saw the movie as their reference point for much of the history we boomers actually lived. You would have thought the rock group “Queen” was born of that movie. Of course, all of this history came before it was clear that the boomers had ruined the country – which seems to be our major accomplishment these days.

    If you get a chance, read Helen Andrews’s new book ” Boomers: The Men and Women Who Promised Freedom and Delivered Disaster. The book chronicles the tearing down of all of the institutions that had previously stabilized our nation. As spoiled rotten kids of the “Golden Age” of the 1950s and 1960s, what more could we expect? Unearned wealth in undisciplined hands. So it is fitting that we would bankrupt the country as our final act of gratitude. The new “stimulus” bill all but guarantees that. Kind of our last gift to the future! The Fourth Turning – in its most classic presentation.

    Of course, not all of us have gone along with the program. But we are often outvoted, outcheated, or outmaneuvered.  We don’t live for “the cause.” We work hard, try to make a living, and enjoy our families. For us, the ends are just as important as the means. For the guilty parties, the ends always justify the means.

    So the weekend wrought the biggest boondoggle socialist spending bill of our lifetimes – another $2 trillion “stimulus” bill. One thing you learn about Congress, whatever the title of the bill – you can be sure the bill does the exact opposite. Don’t get me wrong; there is a smidgeon of stimulus in the bill. Maybe 10% or so. Otherwise, it is nothing more than a socialist spending spree, bailing out many poorly run states, pension funds, and Marxist constituencies. But who cares, right? The music is still playing, and it is time for another dance.

    Oh, and on the economic front, last Friday saw the largest trade deficit in U.S. history. It turns out that for all the talk about bringing manufacturing jobs home, we still don’t make anything here. In fact, another 750,000 people filed for unemployment last week. About the same number filed the previous week too.

    But don’t worry, according to the monthly employment report on Friday, we added 379,000 jobs in February – mostly in restaurants, hotels, and gyms. Those aren’t new jobs – they are old jobs. By the way, only half of those old jobs exist now.

    There wasn’t any talk of “new” jobs in the monthly report. You know, all those “green” jobs putting together solar panels for the Keystone pipeline workers. Of course, we can buy the said panels anywhere in Asia for half the cost of making them here. And the price of oil? It continues to move higher, unabated. And there is no evidence that drilling is picking up either. Nor will shale mining be likely to return. Can we buy stock in Saudi Arabia?

    As for the markets, you can see from the S&P 500 chart above that you better know how to dance with this crowd. Volatility is off the charts. This week is slated to be no different. The Weekly Expected Move is 100 points in both directions from last week’s close at 3842. So we could tag 3942, just shy of the all-time high this week. Or, we could test 3742 again on the downside. If the 20-week cycle has finally bottomed, then the former is more likely to be the case than the latter. By the close today, we should know if that cycle is finally pointing north again. I bet that it is – on the back of the Congressional spending spree.

    Meanwhile, interest rates are misbehaving, rocketing north of our 1.5% 10-year line in the sand. Repurchase agreements and credit default swaps are experiencing unusual volatility signaling trouble in the credit markets. So the warning signs are already there, but the markets are likely to try one last push before the dominos begin to fall. The rotation math will make selecting the right index tricky.

    Since the 20-week cycle has been running for about 16-18 weeks, you can project out about that far to find the next important low. Given that the next low will coincide with the larger 18-month cycle, it promises to be a low that gets your attention. And given that the 18-month cycle’s influence is often felt early in the last 20-week cycle of the sequence, we need to stay on high alert if we take the next Navigator swing buy signal – which could manifest today.

    Sorry to be so cheery on a Monday morning, but when you are in the middle of the Ocean, and the ship is sinking, it is hard to enjoy the sunrise. I had hoped Congress might grow a brain over the weekend, but it was not to be.

    Day Trading Plan 

    You wouldn’t know it from my rant above, but I am more bullish than bearish this morning, just not for the right reasons. I am looking for pullback buys as long as we stay above the Globex low at 3796. If we can get continuation above Friday’s high at 3850, so much the better. I will monitor for continuation in the usual sequence of 50 point increments.

    Reminding you, a day trading session is about letting the traders test the overnight highs and lows and Friday’s highs and lows to see where the market finds acceptance, and then you monitor for continuation. The chances for reversal of the market’s opening direction are better than 70% out of the box, so don’t get sucked into a rally or decline off the open unless our rules justify it.

    I see Friday’s action as a reversal, and I believe last night’s Globex session confirmed that. As with the start of any new rally, I will look for a follow-through day as confirmation. Acceptance below the Globex low today would call the reversal into question and imply a retest of recent lows.

    Technology looks weak, as does the NASDAQ 100. Reverse rotation is possible as technology stock prices become more attractive, but the cyclicals still command most of the attention. Again, the math gets complicated here. I also know that anything can happen in a Monday session, so I rarely day trade on Mondays.

    A.F. Thornton

    The Elusive 20-Week Low

    If you combine cycles with some context, you can get a reasonable idea of where a given cycle might peak and bottom. Having said that, cycles are somewhat secondary to the primary math of the Navigator Algorithm, which favors price action more than any other factor.

    Of late, most sell-offs have barely lasted a few days, much less a few weeks. So it is a change in and of itself to have the time to contemplate a projected low. 20-week and 40-week cycles are like that. We have more time to evaluate them. As previously discussed, the window for the low goes all the way out to March 15th.

    I don’t see the “reflation” or “reopening” rotation as anything new. Chairman Powell’s testimony yesterday merely confirmed what the markets had already told us. So I ask myself, what did the market really want to hear yesterday? I can only suppose it wanted Chairman Powell to reiterate a vigilant policy to keep the money spigots flowing while maintaining artificially low interest rates. That cannot go on forever, and it would inevitably end badly. 

    Inflation is, after all, the greatest tax of all. It is the insidious tax increase levied by governments throughout history who could not pay the bills and had no political will to handle the matter honestly. Unfortunately that is where we find ourselves. $30 trillion in debt and rising, with no way to pay the piper.

    The market will make its adjustment. I will carefully evaluate the rotation over the weekend for any hints of change. Then the market will move on again. Time wise, the bottom should be close at hand. Price wise, the S&P 500 Index tagged the 20-week future line of demarcation yesterday for the first time since the correction began. Reaching that line usually satisfies the sellers:

    The task now is to confirm the intermediate low when it is firmly planted, and then we can take the next cycle from there. The price has met the minimum 20-week objective, so the question now is will that be enough.

    I am always suspicious of news-driven sell-offs like yesterday, which are more akin to liquidation breaks than fundamental declines. It is a bit more complicated when a liquidation break happens in the middle of a correction already underway.

    Since the NASDAQ 100 led us down, it should be the first index to confirm a low. I will be watching that carefully in the next few sessions.

    Today’s Day Trading

    I don’t typically day-trade on Fridays due to the complications provided by weekly options expiration. However, respecting the S&P 500 index, the Weekly Expected Move high and low are way out of bounds today, so they are unlikely to influence the market. 

    The employment numbers for February were better than expected, at 379,000 versus the consensus at 175,000. Remember, there is a sea change at hand. Good economic news is now bad news for the markets because it could mean more inflation, higher interest rates, and a potentially unfriendly Federal Reserve soon. 

    Yesterday’s regular session represented a breakdown from balance. The low end of the previous balance area had been about 3805. Acceptance above this area puts yesterday’s breakdown into question and has the potential to reverse the current negative tone as more buyers join a rally.

    If the open is faded and there is no further advance into the balance area above 3805, then the bears likely retain control for now. Other key levels are the overnight high at 3782.50, settlement at 3772.25, and the overnight low at 3720.25. Look for the reaction at these levels, and monitor for continuation as the market breaks them either higher or lower, as the case may be.

    A.F. Thornton

    Bond Market Revolts

    In the land of make-believe, everything must be perfect – or there will be no milk and honey. It is a good day to be in cash, as interest rates and the bond market went on a rampage after Fed Chairman Powell signaled a “tolerance” for “upward pressure on prices” and “patience” for the rise in 10-year rates he “admitted” to having “noticed” recently. 

    Clearly, Chairman Powell has enough discretionary income to tolerate higher prices for everything. The average person doesn’t. With those statements, the dream world for the stock market we have enjoyed since last March ended. Remember this day, and remember it well.

    All bets are off now, though the markets will continue to offer us trading opportunities. Why the bond market revolt? Governments have a poor history of containing inflation once it is out of the box. What the market anticipates is a coming change in Fed policy. 

    A smart Fed cannot be so accommodative and will need to reverse course, taking away the punch bowl at this party. A dumb Fed will continue current policies and start the road to oblivion, the one that eventually caused the collapse of the German Mark in the 1920s. 

    Short-rates are already close to zero, so lowering rates further is hardly an option to appease investors. The Fed can “twist” the bond market, selling short-term bills and buying longer-term notes. The Fed can double down on quantitative easing as Australia did over the weekend. But then where does it all end? When does the Fed take the punch bowl away, and at what price?

    Think back to 2018. The Fed attempted a return to “normalcy” by easing its balance sheet and raising rates a couple of times. The stock market went into a 20% correction that August, putting President Trump into a tizzy. The market did not bottom until Christmas eve. The equity markets are more overvalued now than they were then. If the Fed now doubles down on the easy-money policies and continues to print money, where will the market go when the music finally stops? From what level?

    You see, it is damned if he does and damned if he doesn’t. For the moment, thank heavens we still have enough of a free bond market left to wake Powell up. I sincerely hope he takes the red pill. It will be a rocky road into the next Fed meeting, scheduled for mid-March.

    Hat tip to the NASDAQ 100, it saw this moment coming. That is why it has underperformed so significantly these past few weeks, leading the rest of the market down. Hat tip also to oil, up nearly 4% today while everything else is red. You see, oil loves inflation. Gold, not so much. It is down with the rest of the market. Gold raises currency complications – we will need to sort that out in the coming days.

    In the meantime, it is nice to be in cash today. I gave it my best shot catching the volatility of the past few weeks, but I was smart enough to throw in the towel yesterday afternoon. Small profits are better than losses. I bailed yesterday on the WWSHD signal. When what should happen doesn’t.

    Stay Tuned,

    A.F. Thornton

    Merry Go Round?

    My first thoughts this morning were to let me off this “Merry Go Round.” We stopped out of all our positions yesterday, setting the morning low as our line in the sand. In the interim, I had turned a large profit on Monday into a small profit by yesterday. Therein lies the challenge of trying to swing-trade a choppy and volatile market. Day-trading has been easy, if not almost euphoric.

    And it truly has been a veritable Marry Go Round for swing-trading. As you can see from the daily chart of the S&P 500 index below, we have made two wide and volatile swings between 3800 and 3900 in less than a week.  That is just under a 5% trading range. While we have well north of a 100% return year-to-date, I don’t see how any of you can keep up with the trades unless you are parked in front of the computer. Swing-trading normally has fewer round trips, and we have already had more round trips than last year, and last year our return was almost 900%.

    There is a saying for everything in the market. Here, we call it the “choppy top of the bull.” But is this truly the top, as many have called? I would venture that this could be part of the topping process for an intermediate correction. As for the mother of all tops, I still don’t think so. 

    I remain convinced that we merely reached the top of the 20-week cycle – and we are experiencing the bottoming process of a normal and healthy correction. The problem is that the cycle has such a wide time window to bottom – all the way to March 15th. That is why cycles only give us a target zone – the bottoms vary too much in time to trade with precision. But knowing this is a 20-week cycle zone, as opposed to an 18-month, is still helpful in not getting too bearish on the possibilities.

    What we have encountered here is a simple math problem. The market is not dead – it is rotational. While the FANGMAN stocks – a small handful of tech/growth companies – carried the entire market on their backs for most of last year, we now get to experience the reverse effect. They are disproportionately and negatively impacting the indices as profits are taken and rotated into the more cyclical, recovery-oriented stocks. Energy, financials, basic materials, and industrials have all been positive, while tech and communications have suffered the profit rotation. 

    But the aforementioned positive sectors don’t have enough capitalization weight to keep the indices positive. The NASDAQ 100 suffers the most. The S&P 500 does a little better than the NASDAQ 100 but still suffers. The Dow Jones Industrials – the old “price-weighted,” stalwart index – tends to do the best. The Russell 2000 small-cap index does well because it is not weighted at all and has a great representation of regional banks. Having said that, in a pinch, the Russell 2000 will suffer liquidity issues when you need to exit, exacerbating losses. So there you have it – the math problem.

    For a better understanding of the cycles, take a look at the chart below. I have isolated the cycle algorithms that are built into the main Navigator Algorithm:

    Email me at info@bluprinttrading.com if you want a larger, more detailed version of the chart above. It illustrates the dominant cycles’ current position, demonstrating that the 20-week low is due here soon. It could bottom today. 

    The most notable line on the cycle chart above is the dotted yellow line towards the top. The computer creates a composite of all the dominant cycles and then projects the market’s path. As you can see, the computer is projecting an intermediate top soon. 

    An intermediate top is not necessarily the end of the bull market, nor does it predict a crash. It simply projects a peak of the 18-month cycle towards April and a bottom towards the end of the summer. This could end up being a normal correction. I suspect that will be the case, as many other indicators show that we are at the beginning of a new, secular bull market, not the end. Only time will tell, but the market certainly needs to correct.

    That brings me to my last point. We tend to think of the markets in terms of up or down. Yet, the markets spend the vast majority of their time going sideways. I would not be surprised to see the market get stuck in a trading range for a while. As an extreme example, the Dow index traded between 500 and 1000 from 1966 until 1982. Trust me; it happens in both macro and micro time ranges.

    For now, I will attempt to reduce the number of trades as much as possible while still trying to capture some profitable swings. Until the market is clearly trending again, you will have to stay vigilant for alerts to keep up with the strategy. Incidentally, our infrastructure to expand the Founder’s Group (beyond BluPrint’s founders) is beta testing successfully and almost ready to launch. Automatic text alerts are part of that infrastructure.

    Today’s Day Trading Plan

    Yesterday’s late-day structure and close indicate emotional selling and poor location for many shorts. Early trade has the potential for an opening drive higher.

    Should it be lower, I will buy the high of the first one-minute bar or a cross back through the open.

    Rejection back out of yesterday’s range would be less bullish but tricky as we are so far off the Globex low. I would let sellers have their way for a bit before trying to short as high as possible.

    I will be watching how value develops below the settlement at 3813.50 before looking at potential shorts. I will be trading from the framework that most of the overnight players are wrong and will use any weakness to cover. If they don’t, then we have important information to glean from that.

    Note that we still have an unfilled gap. Overnight traders tested the Gap, but that doesn’t count towards repair unless done in a regular session.

    A.F. Thornton

    Update

    The market is running at a slow pace today, with the low this morning holding the keys to the kingdom. As we retest the morning low on the Nasdaq 100 at this writing, the S&P 500 is coming in higher – confirmation that this sell-off is rotational. Tech profits continue to be redirected into energy, financials, industrials, and basic materials. The latter sectors are cyclical, showing investors still anticipating growth. Many of the cyclical stocks remain undervalued.

    Of course, the market could repeat yesterday and still sell-off. If so, our stops are set at this morning’s low for old positions and 8 points below the entries on the new positions. If the sell-off is contained, as I suspect, we are adding to positions at a good level. If we are stopped out, then a larger correction is unfolding. That would mean either the 20-week has not quite bottomed, or perhaps we are starting early into the 18-month cycle. I can make arguments both ways, but still, believe it is too early for the 18-month to begin correcting.

    Australia doubled their bond buys over the weekend, essentially doubling up on their quantitative easing. Bond market participants took the cue positively, hoping the US Federal Reserve will follow suit or give similar comfort. I don’t like all the manipulation – but I don’t make the rules either. What I know is that if 10-year Treasury yields behave, the stock market will behave a bit longer.

    A.F. Thornton

    Update on Stops

    With the XLE and XLF trading nicely positive this morning, there are no concerns on these positions at the moment, and we will continue to use a close below the 5-day exponential moving average on the daily chart as our stop. 

    As to the S&P 500 index, continued selling of key tech stocks are weighing on the index, but we have positive breadth across the NYSE. So I will hold the S&P 500 position, using this morning’s low at 3833.25 as a stop, unless I send out an earlier signal.

    Statistically speaking, there is a better than 70% chance that the low is in for today. So we will see how the rest of the day unfolds.

    A.F. Thornton

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