Morning Notes – 8/15/2022

Good Morning:

• Most of what I observed over the weekend were bears trying to defend their predictions in light of the rally off the June lows. The rally has now retraced a bit more than half of the bear, and the bulls cite the magnitude of the retracement as evidence that the bear is over.
• And I continue to call it the most hated rally ever because sensible money managers who focus on fundamentals don’t want to be in this market. After all, when has it ever made sense to fight the Fed?
• Perhaps for similar and some different reasons, my base case called for a bear market rally too from the June (40-week cycle) lows that would likely peak around 4211. So the market has exceeded my expecations, but the retracement certainly is not out of historical bounds. For the bulls, you might want to look at 1929 as one important example. 
• Having a loose forecast in mind for the market is helpful, as long as you don’t get married to it.
• The point is to set all ego aside; it doesn’t matter what the forecast is or whether it is right or wrong. It would not be a market if there weren’t good arguments both ways.
• As I have been sharing on these pages, it makes sense to stay long unless or until the market starts closing below the 5-day line (and for us, our proprietary Algo Trigger Line) for a few hours or days.
• You also need to know and understand what a reversal (pivot) looks like in conjunction with such closes. There is not much more you need to know to be successful in swing trading.
• This week’s WEM is 82 points, ranging from 4200 to 4360. The DEM has averaged +/- 35 to 50 points from the previous day’s settlement (4281 on Friday). Note that the WEM was exceeded last week on the upside as the bears threw in the towel on Friday afternoon forcing the dealers to buy futures into the close. 
• These ranges hold about 68% of the time, so they are not sacrosanct. You want to be alert for a turn as the market approaches the top or bottom of the range. But you don’t marry the structure either.
• I see an expanding triangle on the charts (see above), with the Navigator Algo already painting sell alerts as price approaches the top line. The count allows for another leg down and a turn near the current price. The distance back to the bottom demand line looks both steep and unpleasant.
• Also, the market has come a long way without a significant break and is overbought by most measures.
• It would take a fairly negative catalyst to push the market down to the bottom of the expanding triangle, but there is no lack of potential triggers to pick from.
• For now, there is support below current price at 4233, 4220, and 4200. Resistance comes in at Friday’s high (4282.75), then 4300 and 4325 (where the market will encounter the falling 200-day line and the top line of the expanding triangle).
• Always remember that as price breaches a level in either direction, it reverses polarity.
• The New York Federal Reserve will kick off this week’s economic reports at 8:30 a.m. ET Monday with a closely watched gauge of regional manufacturing activity.

• In addition, look for the first of several housing-related reports due this week. At 10 a.m. ET the National Association of Homebuilders will release its Housing Market Index for July.

• Other reports to watch this week are housing starts and building permits on Tuesday and existing home sales on Thursday, both for July.

• This is also a big week for retail earnings with Walmart and Home Depot reporting, which should give investors a good look at the health of the U.S. consumer and clarify the impact inflation has on corporate profits.

• The markets will pay close attention to management guidance to assess recent data showing that inflation has peaked – if it has peaked.

 As always, stay tuned.

A.F. Thornton