Morning Notes 6/3/2022

Good Morning:

• Resistance remains at the 4200 Call Wall, with support at 4155 (SPY415), 4127, and then 4100.
• The gravity line remains at 4211. Remember that sustained acceptance above that level adds to the bullish case.
• Volatility is compressing now that we are above the trigger, so the move for today projects 44 points plus or minus the open.
• Liquidity is still low (see the volume discussion below), so outsized moves are possible. The below-average liquidity explains why the realized volatility has exceeded implied volatility lately.
• The street is, once again, well-hedged. Put buying has dried up, and the SKEW is extremely low, perhaps clearing the way for higher prices.
• However, downside protection is still relatively cheap if one wants to hedge ahead of the 6/15 Fed meeting.
• As I shared with one of our subscribers yesterday, I wake up these days wondering whether a systemic collapse, the beginning of the Biden Depression, or something worse is on the table. My wife doesn’t call me the “Doomscroller” for nothing.
  
• Fortunately, I am usually wrong about these things – so let’s hope this is not the one time I am right.
  
• And the stock market may already be counteracting my irrational fears. Yesterday, it retested the mean and bounced, precisely what the index should do if a significant low is in place.
• And we remain in a Navigator Swing Buy signal.
• As you will see from the chart above, the Navigator Algo painted preliminary buy signals (yellow arrows) at the literal low on 5/20, with another painted the next day on 5/21. Then it painted an all-clear green arrow on the cross of the 21 on 5/27.
• Our Swing Trader subscribers have been making a killing in this run. Consider a subscription; you will be happy you did.
• As a result, the bottom that began forming a little less than two weeks ago looks similar to any significant low I have seen in my career, except that volume support is not ideal.
• Each day, the volume on bear candles still uncomfortably exceeds the volume on bull candle days.
• Nevertheless, fear gauges remain elevated, and the progression off the low is constructive, so the market has room to run higher.
• Aside from that, over the past four trading sessions, the S&P 500 remained in a 100-point balance range bounded by 4075 and 4175.
• If the index breaks higher, the balance range projection predicts another leg up to at least the 50-day line at 4275 or so.
• If you look back at the charts presented over the past week, that is where this bear retracement leg should end, assuming the index is genuinely completing an expanded flat “2” wave.
• But even accomplishing the move to 4275 still leaves ambiguity. Both bulls and bears have a leg to stand on, even at 4300 or so.
• For example, you can observe the potential formation of a head and shoulders reversal pattern with the neckline at 4300.
• This pattern could take the stock market even higher, while traders are getting all beared up again in the next dip, which ends up merely being the right shoulder of the pattern.
• And what would be the bull case? Besides most stocks having lost half of their value recently, the market could be anticipating a Fed pivot or perhaps a resolution of the Ukraine conflict.
• The point is that there is always a catalyst to take the market higher, especially when the darkest days dawn.
• Remember, the bad news is good because we don’t want the Fed to keep raising rates.
• Overnight traders have erased about half of yesterday’s gains at this writing.
• Let’s see if yesterday was a fluke, or whether we can keep this rally moving today.
• Recall that the WEM this week is 4050 to 4250. For once, it would seem we end up somewhere in the middle.

A.F. Thornton