Pre-Market Outlook - 6/8/2021 | Archimedes Methodologies

Breakout, Double-Top, or More Chop?

The market gods were smiling with forgiveness yesterday. When I confessed my sins on these pages, providence lifted my burdens. So even though I missed the initial moves off the 21-day lines in the indexes last week, the powers above brought the market halfway down Friday’s bar to give me another chance. It was as if a kind hand dropped from the clouds, opening up with the next opportunity.

For the Founder’s Group and the Navigator Swing Strategy, I put us into the NASDAQ 100 at 13,733. I saw a bit more conviction and relative strength there than the S&P 500. The index followed through with a double bottom and positive momentum divergence on the intraday chart. The NASDAQ 100 is moving higher in Globex at this writing. In fact, we are more than 100 points or about $2,000 per contract ahead of our entry, and breaking the neckline of a bottoming head and shoulders pattern that is now reversing higher and should take us up to test the all-time highs, if not higher. We will now use the 5-day stop line as we recently did on our S&P 500 position.

Yet, there is another lesson in these past few sessions that I would like to share. It happens often enough that you might want to place this one in your notebook. It can happen in any time frame. And while I mentioned I am not a pattern trader, I still don’t ignore them. Patterns can help us see the markets in different ways, and even set price projections when the patterns take. A great website for learning patterns and their possibilities is Bulkowski’s PatternTrader.com.

The lesson starts with last Thursday’s labeling of the NASDAQ 100. I had identified a potential head and shoulders topping pattern and labeled it as you will see in the first chart below. Of course, it was a qualified opinion. I often opine in such a way. But let’s face it, I am of no use if I am constantly saying “it might be this” or “it might be that.” And in further confession to the heavenly powers that govern these markets, the pattern did have a negative influence on my decisions last week no matter what I said or how much I was fooling myself.

When we are stopped out on the 5-day line, an Algo sell signal is painting, Tesla and Apple are breaking down, and we are in a large down bar, a topping pattern would merely seem like icing on the cake. I take my stop, head to the beach, and take Friday off, booking the profits and ever confident in my forecast. Thank heavens I didn’t stick around and short the market!

But it is never quite so easy, is it? I have achieved my trading success by combing unrelenting curiosity with constantly questioning the current consensus. Frequently, a topping head and shoulders pattern (or a bottoming head and shoulders pattern) can morph into the same design but smaller and in the opposite direction. This morphing has often happened to me – and it should be in your notebook. I now always consider the possibility.

So there you have it, the reversal’s reversal. Perhaps we will coin that phrase. And with the overnight action breaking out decisively, the NASDAQ 100 seems well on its way to challenging its old high. The pattern projects a move to 14,600, but even if we make it up to the old high at 14,064, the Weekly Expected Move high is at 14,038. That is a rough combo to take out before Friday. Perhaps we could do so next week. Also, remember that even as we break the neckline of the bottoming head and shoulders reversal pattern today, the index could fall back and retest the neckline before it decisively moves higher.

I suppose another item bears mentioning. Last week, the cyclically sensitive sectors such as energy, metals, financials, and industrials seemed to be rocking the universe. Yet this latest move has been all about the interest-sensitive growth stocks, responding to a somewhat unexpected rally in the bond market accompanied by falling 10-year rates. Who would have thought – only a few weeks ago?

Please make no mistake; interest rates will rule sector allocation as we advance and rates will most likely be moving higher. We should let growth do its thing here, but after the cyclical stocks and sectors rest a bit, they are still very much on my radar. Recall my comments from last week, set alerts for these cyclical sectors and stocks around their 21 and 50-day lines, depending on each instruments’ unique behavior. Perhaps the back and forth between cyclical and growth stocks will be with us for some time as the markets move forward.

I might highlight one more element of successful trading if you will kindly indulge me. No matter what happens in trading, you must be willing to jump right back on the horse to succeed. And no question committed students can and will succeed if they are engaged. I am not saying it is easy to do so, but I will constantly harp on this point.

I missed Friday’s move, but I waited patiently for the next opportunity. It came sooner rather than later, but that should not matter. Successful traders (and investors) are market sociopaths. They have no conscience but nearly an automated response to conditions as they present, right or wrong positive or negative.

Today's Day-Trading Plan

Hard to believe, but the S&P 500 futures tested 4215 last night once again and survived. I also noticed that some European indexes, including the German Dax Index, are already trading at new post-pandemic highs, aided by a strong Euro. Actually, at an exchange rate of 1.22 Euros to the Dollar, I am keeping my money in Euros while I am over here. It stings!

At this writing, both the NASDAQ 100 and S&P 500 will open above yesterday’s range and near the candle top. A true gap higher is possible, and gap rules would apply if the true gap presents. Inventory is balanced, so there is no typical incentive to fade a gap – making a gap-and-go scenario more likely. If we make it to the old highs (only a hair above us on the S&P 500), the market will present us with a go/no go situation. Monitor carefully for continuation and be on alert for the bull trap. I don’t know how to tell you to avoid it – but if I had two contracts, I would sell one at the old high and get my stop to break even on the other to keep it as a runner for a continuation of the breakout.

On both the S&P 500 and the NASDAQ 100, don’t lose sight of the WEM highs at 4280 and 14,038, respectively. Even with a true gap higher on the open, the gap won’t be large enough to engender shock and awe, providing less potential for early trade given that there is no overnight inventory imbalance. The better trades might develop later rather than earlier in today’s session.

Upside references and targets are visual and mechanical for all. The all-time highs are the apparent targets on strength, monitoring for continuation after that. On weakness, watch the back-to-back settlements around 4226 on the S&P 500 to see if sellers get more active below them. I would not even consider the short side of anything unless we were below those levels. Continue to carry forward the gap below us we discussed yesterday.

A.F. Thornton,

With Sincere Gratitude to Providence

Pre-Market Outlook – 6/8/2021