Interim Update – 11/11/2022

Good Morning:

• I am still under the weather today, but I hope to be back in the saddle on Monday. We will feature Tom from Bookmap in the trading room today. Tom specializes in trading order flow and is a terrific teacher.
• Indeed, after one of the biggest short-covering rallies I can remember, the Navigator Algorithm gapped into a buy signal yesterday, which technically triggered at 3850 in Globex after the CPI report. 
• A small Gap may also present this morning so that Gap Rules would be in play again. The Gap and Go rules served traders quite well yesterday.
• We came into yesterday’s session in cash, and there was no reasonable way to execute the Navigator Swing buy signal at 3850 in the regular session. Buying in Globex on a CPI report bounce wasn’t prudent either. We had to let the market play out a bit, and the first opportunity to buy on a pullback came mid-day around 3905.
• As I had suspected, more than 40% of yesterday’s short-covering came from the DTE crowd – so it was appropriately painful for them, and maybe a lesson learned.
• On a bullish note, however, investors finally began to add to higher call position strikes, moving the Call Wall up to 4000 and restoring our original target for the 20-week cycle peak to 4100.
• While yesterday’s behavior was a classic, rip-your-face-off short-covering rally, there was a character change similar to the March and June 20-week cycle lows, with investors adding materially to higher call positions.
• As a result, we are confident that there were some real investors yesterday. We will cautiously scale in on hourly chart dips for a swing while carefully monitoring the progress from here.
• Between now and OPEX (options expiration) on 11/18, we look for pinning between 4000 and 4100, along with lower volatility in a positive Gamma environment. The DTE crowd (a new phenomenon) could bring unforecasted volatility.
• Also, yesterday, the MOVE index (bond volatility similar to the VIX for equities) finally began to break, indicating that the bond market is getting more comfortable with the current yield forecast. The break in the MOVE index is another character change.
• As the MOVE index shows, bond yields also plummeted yesterday.
• One has to remain skeptical that there will be follow-through from the short-covering since the CPI report still reflected 7% inflation and barely beat expectations. 
• In my view, the short-covering rally is more likely attributable to a clearer Republicrat victory yesterday, with the House and Senate majorities within reach. Wall Street loves gridlock, as we all should. We are all better off if our illustrious government stops “helping.”
• The traditional market path in a mid-term election year is bullish from here. But these are not typical times.
• Soon enough, the reality of the global situation will set in again.
• Meanwhile, there is a pattern in the market that could take the S&P 500 index back to the August high at 4350. And perhaps that trading range I keep talking about finally sets in from there.
• Meanwhile, the next major trough is the 18-month cycle low in early March 2023. Typically, the forecast low would be lower than September, landing in the 2500 to 3000 zone. Only time will tell.
• Today, the 4000 target level is possible. Above 4000, look for resistance at 4010 (SPY 400), then 4049. Support shows at 3958 and 3946.
• We see 4100 as the top end of the range going into the 11/18 expiration. 

Enjoy your weekend.

A.F. Thornton