Navigator Algorithm – 100% Cash – Looking to Deploy a Buy Signal.
It is about 8:30 AM EST. I have to mention the time because it looks like they are trying to start a pre-market rally as I write this, on the heels of reported personal spending down, an inflated GDP report, and personal income up less than expected. Get used to it – the bad news is now good news for the market. It takes pressure to raise rates off the Fed.
It is Friday, and weekly options expire at the close. At this writing, we were at the WEM low at about 4277 or so. The market has managed to hold the level all week. As I always mention, market makers stand to lose billions if the market closes below the WEM low today.
That weighs in favor of a successful retest of Monday’s low at 4212.75 if traders must test it or we need to flush the stops below it today. The WEM low can be the magnet to draw the market back up before the close. It doesn’t always work, as we saw last week. When the context is proper (and it is today), buying into a flush is the penultimate low-risk trade.
Remember, this business is all about the risk to stop. If you buy into a flush below the logical point for a stop, you define a slight loss if the market fails to recover. Context is important when you do this, and the context here is good.
I am observing interest rates. Short-term rates are rising faster than long-term rates, as you can see on the chart of 13-week rates below:
The yield curve is flattening. An inverted yield curve (short rates higher than long rates) presages a recession. We have already seen an inverted Eurodollar curve.
There are a lot of shorts sitting at the lows of the last few sessions. Each low has been higher than the previous low in the day sessions. These shorts have bad location and are likely to run for cover today if the market stays above yesterday’s regular session low (4298.75) once again by the close. The market could likely defy the recent pattern of morning rallies followed by afternoon declines today, so be careful. It would be best if you were not short here anyway. The market tends to fool the most people it can.
On the other hand, if the shorts make money today, they will stay the course. But as I pointed out last night, there are signs that the decline is losing power. I am at the point where I believe that this first corrective phase has run its course. So I am uninterested in shorting and would favor longs if the Navigator Algorithm is inclined to deliver the buy on a daily chart pivot. I made respectable gains between Monday and Wednesday going long.
Day Traders
Like yesterday, there is nothing to glean about the open from our overnight cousins. The overnight high (4361 or so) is close to halfback and would be my bull/bear bias threshold today. With such volatile markets, I usually take a broader view of where bulls or bears take control.
If the market spends much time below 4361 or drops below yesterday’s regular session low at 4298.75, then a full retest of Monday’s spike low at 4212.75 is possible. I am of the mind that this bear flag will fail to deliver such an opportunity, and the market may very well rally from the open, spook the shorts, and not look back for a while.
But the beauty of what we do is that we know what to watch. We don’t have to be married to any particular scenario. Hard as it is, we should not have a strong opinion anyway. Open mind traders are the most successful traders. I like to start with my “theory of the case.” I guess it is the lawyer within me. I am willing to alter my theory with more evidence. This business is about probabilities – not certainties.
Watch the NASDAQ 100 for relative strength this morning. It might give us an early clue to the bottom. Apple blew the socks off their earnings report last night. If Apple does not follow through with gains today, that is a negative signpost overall.
Monday’s swing low at 4212.75 is the most critical level on the charts right now. As long as the market doesn’t materially breach that level, assume that the market is continuing to hammer out a bottom.
A.F. Thornton