The market is an aging beauty, though the trend has been clearly higher. In an unusual move for me, on Friday afternoon, I shorted some out-of-the-money weekly options (expiring this coming Friday on both indexes). I say unusual because I rarely hold anything but swing positions over the weekend. 

I believe that the market is aging because we have been experiencing diminishing volume for some time and recent, rapid liquidation breaks. Higher prices are both cutting off and discouraging activity. In other words, there are fewer and fewer takers as the markets try to climb higher. 

This activity is expected. For context, we have been discussing an imminent peak in the nominal 18-month cycle. Dumb money sentiment is elevated once again. 

On specifics, our algorithms are confirming a top is near as well. Click on and take a look at the above chart and what the Navigator system is telling us. We had an “E” signal for exhaustion a little over a week ago. That signal tends to lead peaks by about a week. We now have an “sOB” signal on the chart signifying that the market is Super Over-Bought. That signal is rare, but what follows tends to be quite unpleasant.

The first red tag on the system status labels reads “Trend Reversal Imminent.” If you look at the faint dynamic channel lines, we are about to tag the uppermost channel. Most importantly, we are sitting right above the Algo sell trigger – it would not take much negative price action to trip it.

We can also infer that the buyers at the table right now are in one of two categories. They are either short-term momentum traders (otherwise known as weak hands), or they are market makers who have to buy to neutralize their portfolios after they sell calls. I call the latter gamma squeezing. After all, how many people do you know that go running to their brokers “hey broker, the market is at the highest price it has ever been in the history of time – get me in now!”

How else do I know who is at the table right now? Momentum traders tip their hand in where they execute. They tend to be location sensitive, buying at various key levels, such as moving averages, half-backs, Fibonacci levels, etc. I know them well because I am one of them, at least as far as day trading goes. 

Institutions do their research and then position themselves as rapidly as possible (sensitive mostly to their trades not moving the market). In fact, more and more these players work in what are termed “dark pools” off the exchanges and hidden from public view. The point is, they are not location-sensitive – like momentum and day traders. The institutions are planning to hold their investments over several years – so a few points here and there are irrelevant to them.

But as far as the day trading and momentum traders go, last week, the market experienced two rapid selloffs followed by equally rapid recoveries. This is often a sign of deteriorating strength. Responsive traders (responding to lower prices) are only becoming active if they can get a deal. The resulting recoveries were not supported by volume – another sign the institutions are absent. 

Short-covering drove the recoveries as well. Traders sensing the deteriorating advance, short the market – but too soon. While they may be right eventually, when they are early as here, they may get stopped out. As they get stopped out, their short-covering fuels even higher prices.

Last night (Sunday night), I focused on Friday afternoon’s weak lows of 4168.50 on the S&P 500 and 13996 on the Nasdaq 100.  The fact these lows did not hold is the first chink in the armor for this morning. 

Then, I shifted my focus is to Friday’s lows – 13954 on the NASDAQ 100 and 4162 on the S&P 500. The S&P has already breached that low, and the NASDAQ 100 is right on top of its low at this writing. Now I am monitoring for continuation to see if there will be acceptance and range extension below these levels. If so, then the value (the range where 70% of the volume occurs) has the potential to move lower, and that can be the first sign that the market is finally topping.

If I had to call it to the day – I would be expecting the market to top around May 8th. So I am looking at the described activities as early markers. I will take some short-term profits on my puts as soon as I see a true pivot higher if that should occur today.

Any acceptance below Friday’s low should shift your bias to negative. If the markets can pivot from this area and hold the lows (maybe after running some stops below), the value can remain overlapping to higher, and we may get a few more days before a final peak. 

The market is getting a blow-off to look to it – as we have seen several times since the March 2020 lows. Keep in mind my previous points – when the market fell after the blow-offs. It erased several weeks of gains in a single session.

Good luck today,

A.F. Thornton