Founder's Trading Journal
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Navigator Algorithms – 100% Cash

Pre-Market Outlook

Translation

We thought the market was too high, so we took all our profits in December and had been waiting to buy stocks when they went back on sale again in a correction. There were just too many dumb people excited about the market to make us comfortable.

The stock market looks like it is finally coming back down to earth, selling off a bit yesterday. It is a bad omen to have such a lousy day in the markets on the first day of the New Year, but so be it. Let’s face it; there is always something to worry about.

We think the market might sell off some more, and there might be some good deals out there on our favorite names when it settles down. So we are not going to be the first back in.

Let’s give the market some time to convince us that the correction is over. Then we can deploy our cash and repurchase everything cheaper. The elections and certification over the next few days could also influence the mix we would want in a 2021 portfolio. The 3600 level on the S&P 500 index looks like a good level to target for now – but we need to stay flexible.

Navigator Core Algorithm Status

ETH Daily ES - Where We Are

We went into the first trading day of the year yesterday in a 100% cash position, having identified and acted upon risks associated with the rising index wedge patterns, momentum divergences, and various breadth indicators. Additionally, broad investor sentiment indicated a frothy market with significant attendant risks as the Dumb Money Confidence Index remained stubbornly high into year-end. We had also been in cash for several weeks, operating on an early Navigator sell alert in December and allowing me a few days on the sidelines for a year-end vacation.

After a vicious sell-off yesterday right to the mean on attendant high volume, the daily trend is now neutral to negative. The Navigator Algo dashboard (appearing above) indicates that the uptrend is stalling, price strength is waning, and all stop triggers remain in short mode. It would take a close above 3723 to initiate short-covering (or long entries) at a minimum. 

Yesterday, after briefly tagging an all-time high at 3773, the S&P 500 index nose-dived into support at the half-roundie (3650), then flipped higher to close at 3696, slightly above the mean (3684), trendline support (3684), and the Weekly Expected Move low (3673).

Also, keep in mind that all of this price action rejects the megaphone top channel lines we had been keeping our eye on over the past few months.

ETH Daily ES - Where We are Headed

Normally, the Weekly Expected Move low at 3673 should contain the damage for the full week, as options market makers defend the price ahead of this Friday’s weekly options expiration. If the low is materially breached, the selling will accelerate as the options market makers are forced to sell futures to neutralize their portfolio deltas. So today will decide whether yesterday’s sell-off was another “weak hand” minor liquidation break or the start of an intermediate correction. I tend to favor the latter interpretation, but we will let the market tell us in the next few sessions.

In the daily time frame, the key issue today will be whether the mean will hold at the 21-EMA, retest yesterday’s low, and/or continue below the mean to further support at the 50-day SMA. Notably, the daily price mean shares an approximate coincident low with the Weekly Expected Move low at 3673. In a veritable sign of weakness, the S&P 500 moved right to the Weekly Expected Move low on a Monday on the very first trading day of the year, eating up the entirety of its 84 point downside range.

Cyclically, yesterday’s price action breached the nominal 20 and 40-day FLDs, indicating that a nominal 80-day cycle reset likely is underway, and we are slightly more than halfway to a projected minimum low around 3600.

RTH 30-min ES

The 30-min ES is trading below the mean, with a buy-stop around 3695. Until that changes, it will likely be advisable to look for short-trades from the mean, using the 5-minute chart for entries and exits. In other words, follow the 30-min short from its mean at least until a test of yesterday’s low is resolved. We do the opposite if the 30-min can join the daily price chart and climb above its mean.

Narrative

Dominant market themes include a vaccination supported, broader-based economic recovery now supported by the stimulus package. We remain in the strong seasonal strength period for stocks, which occurs from October through April. Tech profits continue to be rotated into prior, underperforming sectors. Although Congress recently took some of the punchbowls away from the Fed in main street lending, Fed policy remains favorable. 

Election issues loom, still seeming to favor seating the Biden administration. Critically, however, markets like divided government. If the Democrat party gets full control of the government with today’s Georgia Senate races, the market will need to adjust to a projected scenario of higher taxes and regulation. Perhaps that realignment has already started with this market hiccup right out of the gate for 2021.

Investor sentiment remains a concern. Excessive optimism abounds as manifested in record margin debt, confidence surveys, options speculation, stocks vs. GDP, and record IPO issuance. 

The frothy sentiment exposes weaker hands, keeping the index vulnerable to almost daily news liquidation breaks – and that may be all this early January sell-off is/was. Yesterday’s negative price action did little to move the sentiment needle. There is some solace in the CNN Fear/Greed index returning to neutral at 52. The Put/Call ratio closed at .60, in the upper end of its recent range, but not yet demonstrating an extreme level of fear.

In an astounding move, the New York Stock Exchange decided late yesterday to defy President Trump’s recent executive order. They are now refusing to delist three Chinese telecom companies associated with the Chinese Communist Party, the Chinese Military, and Chinese Intelligence. Besides their nefarious affiliations, these companies shield their finances and do not comply with listed company audit rules.

Comrades, this is not a positive development. Given the CCP’s broad and growing influence in the U.S., We may all need to brush up on our Mandarin. Oh, and did I mention that President XI put the Chinese military on alert for war yesterday? Let’s hope this is related to the 100th anniversary of the Chinese Communist Party and not anything less desirable.

 

Volume Profiles

As identified yesterday, the key day-trading issue would be whether traders will accept auction prices above the three-day balance area high of 3750. When prices looked above and rejected, the price drifted back to the balance area low. Yesterday, the balance area low was around 3714.

I had also identified the vulnerable gap area between 3714 and 3700 in several past writings. Generally, prices move fast through gap areas if the gap fails to provide support. A rapid fall through the gap area also manifested yesterday. 

We are now back into December’s balance area range between 3623 and 3700 or so. The 10-day Point of Control (volume at price) peaks out at 3694 and tapers off from there almost symmetrically in both directions. The value area high is approximately 3700, with the value area low at 3650. Think of those two levels now as the battle lines for day-traders. 

These battle lines are not atypical. The S&P 500 index, from the most basic, macro perspective, tends to migrate in 50-point increments using the 50 (e.g., 3650) and 100 (e.g., 3700) handles as battle zones in its travels north and south. 

Key Economic Reports

Yesterday saw reports confirming construction spending a bit higher, but in line with expectations. Today, ISM Manufacturing’s Purchasing Managers Index will be reported. The forecast is for the index to come in down slightly from last month but still at a positive 56.6. The OPEC meeting today could also exert some influence on the markets. 

Morning Plan

Overnight inventory is balanced to slightly net long, and we are slated to gap down (not a true gap) and open in the third quartile of yesterday’s range, also at the 10-day Volume Point of Control. Accordingly, there is not much market-generated information to guide us this morning, and it will be better to trade later than earlier today. Be patient and let the market show its hand.

Yesterday’s settlement was 3692. As the Shadow Trader often phrases it – “screens go green” for everyone worldwide above the settlement. If we continue to lower finding acceptance at or below yesterday’s price low of 3652, this would likely attract more sellers. We may then move lower to the projected 3600 price target, perhaps testing the 3596 swing low from December 21st.

Any counter-trend rally with legs will have to take out the overnight high at 3705 and move aggressively into the single print areas approaching 3733. We would need to be convinced of real buying versus short-covering to trigger daily chart Algo buy signals up in this range. 

Acceptance of price back up in the range above 3714 makes the reverse of yesterday’s price action possible. Having rejected lower prices, there is the potential to move back to the top of the value area around 3750.

We often think of markets in terms of up and down trends. Yet, markets often move sideways. A quick visual of the daily S&P 500 index price chart shows a sideways trend since November, with a slight, upward tilt. Currently, the range is about 100 S&P 500 points, pegged between 3650 and 3750. With volatility contracting into a tight squeeze, a big move could lie ahead. Unfortunately, we cannot forecast which direction the move will take. If yesterday is any indication, down appears more likely than up.

Either way, we will stay alert and flexible.

A.F. Thornton

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