Founder's Trading Journal | Archimedes Methodologies

Beginning the New Week

S&P 500 Index Continuous Futures / Previous Close 3924.50 / -44.25 (-1.11%)

Published Monday Afternoon, September 5, 2022

Navigator Swing Strategy™

Navigator Algorithm™ Trends

Navigator Trading Sandboxes™

Sandboxes form our windshield for daily and weekly trading. We derive the Daily and Weekly Trading Sandboxes from levels set by the Chicago Board Options Exchange using the Black-Scholes option pricing model to set the boundaries.

There is a 68% statistical probability that prices will close inside the Daily Sandbox for that day (the Daily Expected Move or DEM). The same 68% probability applies to the Weekly Sandbox for that week (we call this the Weekly Expected Move or WEM).

Working the boundaries can be tricky, as we calculate the probabilities as of expiration (which occurs at the daily or weekly NYSE close). So there is some tolerance for the expected moves to post outside the range boundaries before expiration.

However, suppose the price moves too far beyond the upper or lower boundary. In that case, dealer counterparties must buy or sell futures in the same direction as the boundary violation to hedge their inventory. This protective reaction can both accelerate and exacerbate the move.

Dealers lose many billions of dollars when options expire outside the ranges. When we trade with the dealers, we are with the “smart” money. Think of it as analogous to dealing with the “house” in Las Vegas.

Knowing these boundaries gives traders an edge for several reasons. First, it allows traders to focus primarily on those key levels they are likely to encounter that trading day and week. The trader knows the important levels outside the ranges but does not expect to encounter them often.

Second, the boundary levels can act as important support, resistance, and often reversal points during the day and week. Also, when the price exceeds the boundaries, traders can often trade futures back into the boundary levels as the options approach expiration at the NYSE close.

Founder's Journal and Trading Notes

Below are excerpts from A.F. Thornton’s personal trading journal and notes. The full notes with the detailed trading plan for today and the rest of the week are only available to subscribers. Be forewarnded that the notes can sometimes be offensively blunt, as Mr. Thornton highlights the various political, geopolitical and economic issues influencing financial markets.

References to “the Market” below refer to the S&P 500 Index. The quoted numbers are from the front month E-Mini continuous futures contract. Our primary focus is trading the S&P 500 index using the SPY ETF, options on the SPX or SPY, and S&P 500 EMini and micro futures.

Whether the S&P 500 index is in an uptrend or downtrend has considerable influence on the direction of individual stocks. The Navigator Algorithms™ can serve as an initial screen to help determine whether market head or tailwinds favor long or short trades.

Highlights – The Week Ahead:

The options market prices a 240-point range (3810-4050 this week), which is extremely volatile for a shortened trading week. The trend is down, and the market is in Negative Gamma – so I am watching for downward Gamma spirals.
It is also noteworthy that the WEM low would take us back into full bear market territory and a potential retest of the June 17, 52-Week low. I also remain on alert for European contagion (see below). The potential for earnings downgrades will be the next catalyst for lower prices, as are rising inflation and interest rates. Note that CTAs have $89 billion to unload beginning tomorrow, which is a whole lot of negative index volume.
The daily chart of the broad Wilshire 5000 index immediately above shows that the stock market is in its 1st leg down from the August 15 peak. While it is not clear that this 1st leg has ended yet, the price could soon retrace a micro “4” or perhaps even a short-term “2” wave up before another leg down begins. The point is not to be surprised by an uptick, just don’t count on it.
The most important takeaway for the week ahead is that the market has started the third leg down in the primary bear count (red numbers). The next down move will be a 3 (minor) of a 3 (major), where some of the most significant damage occurs in a bear market. The fact that the 3rd leg down arrives in the most seasonally weak period of the year is unhelpful to the bulls. As the composite, seasonal tendency chart for stocks shows, stocks typically decline between now and September 30, the end of the calendar quarter.

Highlights – Tuesday:

The options market prices a volatile 100-point range (3874.50-3974.5) for Tuesday. If the price is retracing or consolidating, trading can be choppy, and it might pay to trade outside in from the developing Value Area High and Low into the highest volume node (Point of Control or POC). It takes time for such responsive trading ranges to set up, so I plan to be patient after the NYSE open tomorrow. Overnight inventory is net long at this writing, so Globex traders may fade the open to unload profitable overnight inventory.
I am watching the rising trendlines from the March 2020 China Virus crash and June 17 lows. Each line could provide some temporary support. The lines are easy to forget when I am in the weeds and trading down on a 5-minute chart..
I am also paying attention to the support and resistance clusters drawn on the first chart above for pauses and reversals. I am especially watching price reactions at the five and 50-day lines. I will use Thursday’s (9/1) candle as a potential breakout range for the very short term.
All other Key Levels are listed in the table above, except for the levels that aren’t available until the morning.

Global Contagion – Europe Teetering on the Edge:

On Friday, G7 nations announced they had devised a worldwide scheme to impose price caps on Russian oil. (JP Morgan believes $380 Oil Possible If Russia Retaliates).
Russia has now retaliated. Here is the sequence of events that have transpired:
- FRIDAY: Russia will not sell oil to any country abiding by the price caps.
- SATURDAY: Russia cut off all Natural Gas flows to the EU, openly declaring the cutoff as retaliation for sanctions and weaponizing the gas flows. Putin said there would be no more gas until the West removes sanctions.
- MONDAY: OPEC plus announced it would reduce oil production by 100,000 barrels per day in a warning shot across the bow. “The 100k cut won’t impact physical volumes to the market, but it signals that OPEC plus is serious about cuts.
- MONDAY: Europe announced it might suspend trading in power derivatives which is the equivalent of banning short sales in stocks. But this is much worse. The move is tantamount to destroying operating and financial leverage in a $2 trillion economy leveraged on top of less than $20 billion in Natural Gas. Industry players will refuse deals due to the inability to honor contractual promises. If Europe goes forward with the proposal, it is depression-type deleveraging for the EU.
- MONDAY: Europe will create lines of credit and ease credit requirements for operations to continue running. The West in general (and Europe in particular) must do the only thing they can in a commodity crisis, attempt to financially paper it over as long as they can until securing supplies. The papering is inflation morphing into hyperinflation.
- MONDAY: Rationing is back on the table again.
- MONDAY: Crude Oil Futures are up nearly 3% over Friday’s close.
- More headlines are coming out by the hour, but these are the material contagion points so far that affect all of us. This is a very dynamic situation. For a more comprehensive explanation, read: As Europe Implodes, It Plans “Radical Intervention…”

A.F. Thornton

*** At Friday’s close, those who chose to short the last Navigator Swing Strategy™ sell signal on 8/15/2022 at 4302.75 have gained $18,912.50 per Emini futures contract (402.54%) and $2609.00 per SPY put option (392.81%).

Final results will vary depending on the next Navigator Swing Strategy™ buy signal. Futures and options are leveraged instruments that involve high risk, volatility, leverage, and loss. With leveraged futures, you could lose more than your original investment. Past performance does not guarantee similar future results.

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Founder’s Trading Journal