The markets have generated important information the past few days, and it is mostly unsupportive to the bullish case – at least as to what we should be bullish about. My conclusion is that there is little, if any, tolerance for material price exploration below the overnight low in the S&P 500 index this morning without concluding that financial asset markets are failing here. 

This could suggest that the18-month correction is underway, perhaps a bit stealthy at first. At the very least, the behavior suggests that the transition to high inflation expectations is distorting the picture as money moves to more tangible asset classes, leading to a multi-tiered market that may end up driving the financial indexes sideways for awhile. I want to step back if that is the case, as the transition could be very tricky in the initial stages until new trends are solidly in place. 

Both the S&P 500 and NASDAQ 100 indices are hovering in the vicinity of their Weekly Expected Move lows, and the trendline both indices found as support last Thursday. The trendline marks the lows that date back to the beginning of this up-leg in early March. With April retail sales and Fed minutes in play this morning, the market may find its footing – but that is a tough call at this point.

We will open with a true gap lower putting gap rules into play today. As with any gap greater than 10 points or so, gap rules #2 and #4 will rule the day.

NASDAQ prices will open just below the trendline. That is important because for sellers to get and maintain control by holding a trendline break, they will fight the overnight buyers covering their short positions at gains as overnight net overnight inventory is 100% short. Remember that job one in trading is to get inside the collective head of everyone else.

So the open today will be about the opposing forces of the overnight inventory correction versus opening below trend in the NASDAQ 100. Pay very close attention to early activity even if you are not actively trading it.

For the early fade, the usual techniques are valid. Either buy the first one-minute high or buy any cross back up through the open should the opening drive be lower. Target overnight halfback but also keep gap rule #2 in mind as you do so.

The gap-and-go trade playing for the potential trending day is always the most difficult to pull off because there is oftentimes not a good reference for a stop loss – especially with the Weekly Expected Move lows ready to catch the falling prices. Assume that any early fade that is weak can be a short on the cross back down through the opening print.

AF Thornton