Founder's Trading Journal
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Let’s try a slightly different format for the P.M. notes today. I want the notes to be authentic, but I always tend to filter them and clean them up. I am a perfectionist at my core.

The notes are meant to reflect a page out of my daily trading journal. I set up my day each morning and then evaluate how well the day met my forecast.

The importance of keeping a trading journal cannot be overstated. It helps me refine my process and continue to refine what works and what doesn’t.

So let’s try this more authentic approach and see what you think:

From the AM Notes:

  • Another interesting aspect of inflation comes from money manager surveys wherein a large percentage of money managers still believe inflation is transitory.
  • They are being dragged screaming and kicking into the idea that inflation is sticky and the Fed will get aggressive to stop it.
  • In other words, sticky inflation is still not fully priced into markets, despite what the interest rate markets say.
  • And so, the debate will continue until inflation is fully priced into the markets.
  • And it’s also why Wall Street’s biggest bear, and the author of the monthly Fund Manager Survey, Michael Hartnett, writes that “we remain in “sell-the-rally” camp as the January – February sell-off was the appetizer not the main course of ’22.”

Results:

Today’s positive stock market action confirmed the inflation “transitory” theme. 

Think about it. The market is only down half as much as it was at the February 24th invasion low, yet the fundamentals are worse.

War in Europe is escalating. Interest rates are higher, inflation is more persistent, the Fed speak is more hawkish.

Yet, the NASDAQ 100 and related tech sectors, arguably the hardest hit by the interest rate shock, have Head and Shoulders Reversal patternd forming on their daily charts. The pattern (if it takes) projects a move back to the all-time highs.

No, this is not a screaming buy based on the weight of the indicators. But if we are about to come up through the “middle” of a trading range, we would not expect to find the same confirmation we might see at the bottom or top.

I constantly remind everyone that price action is more important than anything else. The price action does not reflect the current Wall Street negative narrative. 

We practice what we preach – and did some swing buys today.

    From the AM Notes:

    • Yesterday’s put buying increases volatility today. Fully 50% of the SPX, SPY, and QQQ Gamma expires between weekly and monthly expiration tomorrow. 
    • With all the put buying yesterday, we forecast a plus or minus 68-point range from the Open. That is a full 120-point playground for the day.
    • Support is at 4400, then 4375, with resistance at 4420, then 4450.
    This is an intraday 5-minute chart of the S&P 500 Futures. The chart shows that the market stayed within the Sandbox zone and turned from the 4450 resistance announced in the Morning Notes.
    This is an intraday 5-minute chart of the S&P 500 Futures. The chart shows that the market stayed within the Sandbox zone and turned from the 4450 resistance announced in the Morning Notes.

    Results:

    The stock market rose 58 points from the open, just below our 68-point target and within today’s Sandbox (bounded by the red and green shaded areas). But note how we could predict the greater volatility today with the additional Put Gamma added yesterday. Yesterday’s range was about half the range today.

    Ultimately, the market stalled at the 4450 identified resistance, also the Hedge Wall and Volatility Trigger line.  But as predicted, 4400 provided support (the market opened at 4393). The market hesitated at the 4420 First Resistance but punched through to the second level.

    The exact chart you see above was provided to Navigator Day Trading™ subscribers pre-market, only the price was blank and filled in throughout the day as if it were following our morning script.

    The market tends to follow our Morning Scripts more often than it doesn’t. But nothing is perfect, which is why we use stops.

      • With volatility elevated from earlier this month, traders are unlikely to carry many short-dated puts over these next few days and into the long weekend.
      • Therefore very short-dated volatility will likely come for sale (plus the back-to-back expirations). Selling the volatility drives Vanna.
      • The Vanna tailwinds should give us a bullish edge into tomorrow’s expirations, but we think this Put interest removal takes away some market support for next week, particularly Monday.

      Results:

      As expected, the market performed bullishly, with the Vanna tailwinds helping the market climb over 1.3%. The market went nearly straight up from the Open in a positive Gamma / Vanna spiral. 

        Conclusions

        We believe the market is pivoting today, possibly generating Head and Shoulders Reversal patterns in technology (QQQ and XLK), technology-related sectors (XLC), and consumer cyclicals (XLY). A bit looser rendition of the pattern is visible in the S&P 500 (SPY) and the Dow (DIA).

        Growth stocks and technology sectors tend to be interest-sensitive. This potential turn higher likely coincides with interest rates hitting short-term peaks at their long-term resistance lines after the latest parabolic climb. Surely, interest rates are due to pause here, even if they will resume the climb later.

        Take a look at the chart below of various U.S. Treasury securites, courtesy of Kimball Charting Solutions (interest rates are inverted – higher rates as the lines fall and lower as they rise):

        This chart shows the current interest rates (inverted) on the 2,5,10, and 30-Year U.S. Treasuries. All of these rates should pause here and take a break here (and their corresponding bonds should find support).
        This chart shows the current interest rates (inverted) on the 2,5,10, and 30-Year U.S. Treasuries. All of these rates should pause here and take a break here (and their corresponding bonds should find support).

        So What Did Today’s Session Add to the Narrative?

        First, the Founders’ Group executed two Navigator Swing Trader™ buy signals using May 20, 2022, SPY and QQQ at-the-money calls (or buying the cash SPY or QQQ ETF for non-leveraged accounts). We allocated 40% of our portfolios to each position.

        The QQQ buy came around 9:40 AM EST as the QQQ broke to the upside of a reversal pattern at 340.50. We bought the SPY around 11:40 AM EST as it crossed back up and through the WEM low at 439.

        • The hardest part of what we do sometimes is trading against the prevailing Wall Street Narrative and we did so today. Partly, this is because In the new paradigm, stocks and bonds are correlated – meaning they generally will rise and fall together. In the past, bonds would rise on any scare when stocks would fall and vice versa.
        • Today’s equity buys could have been driven by traders anticipating a short-term peak in interest rates. The next Fed Meeting is still two-weeks out – so there is still some runway ahead of us. Two weeks can be a lifetime in these volatile markets.
        • Today’s buys could also have been triggered by Vanna tailwinds or other options expiration-related distortions, meaning we would need to sell the options tomorrow. 
        • We likely will take profits on the options tomorrow, perhaps switching the leveraged accounts to cash ETF porisiton. I don’t want to have the theta premium decay of a three-day weekend anyway. I would rather reposition on Monday.
        • Regardless, the stock market is behaving bullishly for now, and bonds are at long-term support. If these two asset classes pivot higher here, the Founders’ Group will benefit. Stops are already above break-even, so we have nothing to lose.
        • Moreover, and focusing just on the reversal pattern in the QQQ, if the pattern completes, it projects a measured move to the all-time high from last November.
        This chart shows the NASDAQ 100 ETF (QQQ) with a potential Head and Shouders Reversal pattern forming at the 50% rallly retracement inflection point and the Founder's Group's new long entry this morning.
        This chart shows the NASDAQ 100 ETF (QQQ) with a potential Head and Shouders Reversal pattern forming at the 50% rallly retracement inflection point and the Founder's Group's new long entry this morning.
        • Wouldn’t that catch a lot of investors off guard?
        • But if the pattern prevails, I would point you back to our Current Stock Market Thesis.
        • Using the 1970s, the Dow Jones Industrial Index (a potential model for the current stagflation environment), went sideways for years. I have been predicting the current market could emulate a similar pattern and go sideways in a trading range. Perhaps we see that prediction unfold.
        • Whether it does or doesn’t, we will scalp some gains here. Until the stock market sustains new all-time highs, the bear isnt hibernating.
        • A move back to the old highs and then another reversal would confirm my suspicions.
        • We haven’t achieved the sideways pattern yet and we are clearly speculating, but keep it on your radar.
        • For now, our summary narrative remains that we have a bullish tape, at least in the short-term. And it may be confirmed by rates potentially peaking short-term.
        • And we are taking advantage of the fact that the majority of Money Managers are still predicting transitory inflation, and don’t believe that the Fed can, will or even needs to do what they have promised to fight inflation
        • The plan is to take our leveraged profits tomorrow, perhaps retaining cash positions in the SPY and QQQ ETFs. 
        • Tomorrow is the last trading day of this week, and we will reevaluate over the weekend to potentially add leverage back on Monday.

        What do you think? Do you like this new format? Email me directly and let me know your thoughts.

        A.F. Thornton

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