In my way of thinking, analysis of the market starts with the S&P 500 index. Think of it as the mothership. You can extrapolate to any other index, sector, or stock from that reference point. It is the most heavily traded equity index globally – and therefore reflects all known information at any given point in time.

The next level of my analysis begins with the price. I strip everything else off my screen. What is the price action telling me? In day trading, my price analysis starts with the daily chart. I think of it as my master chart – and I day trade in the direction of the daily chart (except at pivot points).

If I were to advise someone on getting started for day trading, I would require them to take a course like one of the courses offered by Al Brooks. Mr. Brooks has written three thick treatises on price action. Virtually everything else you see or hear about in technical analysis is a derivative of price. A derivative of price is just that – a derivative. To that extent, any indicator is somewhat secondary in reliability. An indicator is supposed to refine what the price action is already doing and telling us.

I would then want to understand the amount of time spent and the volume occurring at any particular price. I like to frame it in terms of what I call “value,” something I learned from one of my mentors, Jim Dalton. Value is defined as where the S&P 500 spends 70% of its time and experiences 70% of the volume. Often the information is similar for time and volume. The index typically spends the most time and has the most volume around the same price. When it doesn’t, that is important market-generated information. 

The markets are auctions. Price is merely an advertising mechanism when you consider the auction process more deeply. Analyzing where the S&P 500 spends the most time and has the most volume gives context to the price mechanism. Thus, it is more important to know if “value” is rising or falling than price. Is the Point of Control (where the most time is spent or the most volume occurs) rising or falling? Is it at the top or bottom of the day’s price range?

This morning, I am noticing that the S&P 500 price action on the daily chart is overlapping instead of impulsive. In other words, the daily candles overlap each other. Overlapping price action tends to be corrective in nature. Impulsive action – where the daily candle cannot get into the previous day’s range – tends to lead to a trend reversal. We don’t see that yet.

With that premise in hand, all we can say for now is that we are experiencing a mean reversion back to home base – the 21-day Exponential Moving Average. That average sits at about 4070 on the current month’s S&P 500 futures contract. That is a reasonable first target for the correction at hand. We will see how the index develops from there.

Many of my secondary indicators, such as the Rate of Change, S&P 500 Relative Performance to Junk Bonds. Investor Asset Flows, Corporate Bond Spreads, Trading Volume, and Market Breadth are still positive for the longer-term trend. But, as I said yesterday, every large correction starts with a smaller one.

The Navigator Algorithm, which combines the above-described variables and more, is in a sell signal. That is why our swing strategy remains 90% cash and 10% gold. Gold was the only green on the screens yesterday. Everything else was red.

The only question is whether these few days of index retreat are a simple mean reversion or the beginning of the nominal 18-month cycle correction. Likely, we are observing both. However, one more leg higher may still be possible.

Sequentially, you can count the S&P 500 as a Wave 4 consolidation, with a Wave 5 still to come. You can conclude this by looking at the chart of the S&P 500 index above and realizing that this latest advance is longer than the first rally proceeding from the March 2021 lows. If the wave was equal to the first, perhaps it could be considered complete.

This morning, we will be opening in yesterday’s range with a balanced, overnight inventory. We are currently in the middle of the overnight range. The short-term bias remains bearish, and there is no clear indication of direction at the open, so early trade is inadvisable.

Let the market settle in and follow the usual sequence depending on the direction the market first tests (e.g., overnight high or low, yesterday’s high or low, etc.).

The last two sessions have been characterized by sellers in control, with snap-back rallies later in the afternoon as sellers have been reluctant to accept further, lower prices.

Yet, prices are moving away from all-time highs and trading in a “void” of support structures out to the left, with plenty of distance left below to our key moving averages. 

This leaves us little to go on as far as where buyers should regain control. Always focus on the key levels in the 100 handle block when this presents. Focus especially on the 50-point increments.

Overnight activity is fully within yesterday’s range and fully enclosed within the value area. I am carrying forward that overnight prices were not able to make new lows. As such, yesterday’s low will be the key line in the sand today.

Good luck today,

A.F. Thornton