Battling to Retain 4000

Good Morning:

• Futures gapped down in Globex, pinning around 4000 most of the night. Unrest in China, plus all the other global troubles, put traders in Asia and Europe in a bad mood. Gap Rules are likely to apply this morning, though I wrote this an hour and a half before the NYSE Open.

• Today, major resistance remains at 4050-4060 (SPY 450). Support shows at 3960.

• 4000 remains a “fair value” pivot area for the S&P 500, given a large amount of balanced gamma (i.e., calls + puts) tied to that strike.

• For today and tomorrow, look for more pinning at 4000 as we see traders “buying dips” and “selling rips” around this “strike spike” with most of the current open interest. The WEM range for the week is 3967-4100.

• We have Fed speakers all week, including today. Also, new monthly economic reports come out as we step into December on Thursday. Volatility is likely to pick up towards the end of the week.

• I have included the Monthly and Weekly charts above with notations. We are 11 months into this bear. We don’t want to be lulled into complacency on the seasonal tendency for stocks to rise from the OCtover lows. Bad things still happened from here in the last two bears, as you can see from the monthly chart above.

• And, needless to say, the current rally is getting “long in the tooth,” as the saying goes. Fear and Greed sentiment is back to bullish (which is bearish). It is not extreme, but the bullish level counsels us to be careful here,
• Still, the market is holding up remarkably well if we simply look at the price.
• The latest rally does not have a lot of volume backing it, and the next 20-week cycle low comes in February 2023. While this rally checked the boxes for a trade, it does not look like a solid bottom or end to the bear as yet.
• I am not with the crash crowd, unless there is a black swan catalyst. But I believe we will set the market back down for some kind of retest of the October lows in  February/March time frame. If so, this bear would look more like the typical mid-cycle pause (though about twice the normal percentage dip) we encounter in most mid-term election years.
• And that would be notable too. We are in the middle of the four-year cycle. And that would mean that the biggest part of this bear, or its cousin, still lies ahead. The four-year cycle correction is the largest we typically encounter and the penultimate low would come sometime in 2024.
• So the meat grinder will be on for a while, regardless of what the market does in the short term.
• Since we are already 1/3 of the way through the 20-week cycle and “dancing near the exit,” caution is warranted. We carefully watch our stop and trigger lines as they could beat the algo to a sell signal.
• Note that the rally has taken a bearish, rising wedge shape, and we are in the third push, which typically ends this first leg,
• I still think we will tag the 200-day line and previously mentioned price targets beginning around 4075, but we cannot take anything for granted.
•  I will tee up the new day trading algo to beta test it in the room later this morning. Tomorrow is the day we trade it. Be there or be square.

A.F. Thornton