View from the Top

View from the Top

Wednesday Evening - 5/18/2021

Interestingly, I had been expecting the larger, 18-month cycle to begin topping soon, and likely it will. In the process, perhaps I have diminished the importance of the more minor, common cycle corrections that occur along the way. And what those corrections typically do is put in a low and then retest it about a week later. If all is well, the market progresses upward. Sometimes, the broad indexes can even mask the damage occurring under the surface in these minor corrections. Nevertheless, these corrections are minor because the sectors are not correcting in unison – lacking the correlation and capitulation associated with intermediate corrections.

Ask anyone who owns Bitcoin about this dip. At one point this morning, Bitcoin was down nearly 50% from its peak. In any other security, we would call that a bear market. Yet, the cryptocurrency managed to turn around today and finish significantly off its lows.

Holders of the QQQ or NASDAQ 100 index saw a nearly 7% decline at the trough last Thursday. The S&P 500 saw a 5% decline. Those are still rotten apples when you have to eat them.

Yet, in the context of an expected”crash” that was supposed to hit us (as divined by some leading gurus), the recent declines don’t seem so bad. We may even be entering a series of rolling sector corrections reflecting the multi-tiered market forces contrasting inflation and deflation.

Frequently, the countervailing forces result in a trading range market in the major indices that lasts for a while. Often, the market will dip below the trading range to finish the next cycle trough in the sequence – such as the nominal 18-month trough we are expecting to finish in about five weeks.

In the roadmap for day traders this morning, I pointed out the various vital levels and support at hand, especially the Weekly Expected Move lows. The WEM lines have been on the chart since last Friday. I constantly harp on the importance of these levels because they matter nearly every single week. 

How did the NASDAQ 100 and S&P 500 end today? Market Makers pushed the indexes right back to the Weekly Expected Move lows – almost to the penny. As long as the indexes stay between the Weekly Expected Low and High, the Market Makers who sold weekly premium all week get to keep their money. Outside those levels, they can lose and lose in a big way. 

Knowing this, when the market dipped below these levels and hit other important support this morning, a low-risk entry point for longs presented. It was a fabulous day to take that trade. On the S&P 500 alone, the trade was worth $3000 plus per futures contract. I like to trade ten contracts and sell the first five at a lower target to achieve break-even, taking risk out of the trade. Then I ride the other five contracts with a trailing stop and let the market decide when I should get out.

Looking at the big picture then, the bears had control yesterday and today at the open. They should have been able to drive each index down and below last Thursday’s lows. They couldn’t get the job done.

For the Navigator Swing Strategy, the market gapped open and underneath our stops. Traders had every incentive to drive the market down to and below everyone else’s stops sitting under Thursday’s lows. If nothing else, the order flow alone is profitable for them.

In fact, the lows came in higher on the S&P 500, NASDAQ 100, and Russell 2000. And the bottom line is, the bears had their chance and blew it. At that point, I am buying S&P 500 futures in the day trading account, so why take the Navigator stops? Granted, this is the exception to the rule. So I waited for the close and stayed the course.

Now buyers are back in control with a very successful retest under their belts. We shall see what tomorrow brings and I take nothing for granted as the market has had a few surprises in store lately. But today was a good day for the bulls, having been on their heels at the open.

A.F. Thornton

AF Thornton

Website: https://tradingarchimedes.com

A.F. "Arthur" Thornton is an expert in logic, risk/reward quantification, market fractals, pattern recognition and asset class behavioral analysis with 34 years devoted to developing algorithmic and quantitative trading systems. In addition to trading his own capital, Mr. Thornton designs custom algorithmic and quantitative trading systems for a small and exclusive group of exceptionally qualified traders.

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