Morning Notes – 8/16/2022

Good Morning:

• We remind subscribers that this week’s Trading Room will be open Thursday and Friday rather than today and Thursday. Friday is this month’s options expiration, and we will use the opportunity to examine option pinning strategies – which have their greatest potential to be realized at expiration.
• Today’s DEM shows volatility at 40 points plus or minus yesterday’s settlement (4298.25). The WEM remains between 4205 and 4355. As mentioned yesterday, the top of the WEM would take the market to the expanding supply and 200-day lines. 
• Nothing has changed from yesterday. It still makes sense to maintain longs against the 5-day line and our proprietary Algo trigger (both currently sitting around 4260). 
• In our strategy, however, we have already taken some profits off the table at yesterday’s close, as we don’t want to give up 40-50 points to ride down to a stop. The market is steep, overbought, and far from normal stop levels. 
• Also, the Navigator Algo continues to paint early warning sell signals on the daily chart as the price wedges into 4325-50. It is still possible for the index to tag the 200-day line before rolling over, but longs are precarious at these levels and must be played very tight. 
• I would not initiate any new long positions here unless you are day-trading and out by the end of the session.
• As the Dumb Money sentiment is peaking, we remain neutral to slightly bearish at these levels. It is likely too early to short, though OTM shorts are starting to price higher (see the rising SKEW index). I would, however, have short trades ready to go at the push of a button. 
• At this writing, resistance today is at 4305, 4325, and 4355. Support is at 4275, 4250, and 4233. As price breaches a level, it reverses polarity.
• Higher remains the so-called “pain” trade. But, as mentioned above, there are signs that the rally may peak imminently. Usually, we dip into Friday’s monthly options expiration, so the relentless buying shows you just how powerful the FOMO has been. 
• I wouldn’t say I like the falling megaphone pattern. If the price has to travel back to the bottom demand line, you would need a couple of parachutes to survive.
• And that becomes the next test of this market. Price has demonstrated the upside potential, but we need to see how it behaves in a setback. What will the catalyst be?
• Notably, for the bulls, the biggest down cycle we typically encounter was the 40-week, coinciding with the June low. The next 20-week is due the first week of October but typically is less powerful than the 40-week. The grand daddy comes in March of next year when the next 18-month cycle is scheduled to trough. That is where it gets interesting.
• Remember, the easy gains are now behind us for the short term. And while FOMO is a powerful draw, don’t get sucked in and let the pros dump you here. 
• You should be very happy if you have been following these pages since the June lows. So my best advice now is to be patient if you want to enter long, and gear up if you want to get short.

 As always, stay tuned.

A.F. Thornton