Morning Notes – 8/22/2022

Good Morning:

• This week’s WEM is 4145 – 4310. The DEM is 4180 – 4280, and the market is already slated to Gap down to the low end of the DEM range. With Friday and today’s volatility, treat the WEM and DEM ranges loosely this week.
• There is a large True Gap down again this morning. Gap Rules are applicable, especially Rules #2 and #4.
• Recall that the market gapped down on Friday, too. So the Gaps qualify as breakaway gaps, which paint a more bearish picture than the usual pullback.
• The Navigator Algo painted sell alerts last week before the downdraft got underway, so the decline is not surprising. Price breached the Algo Trigger line on Thursday at 4286.50 and the 5-day line on Friday at 4256. There is no excuse to be long in this market after all those chances to exit and make a profit.
• With the large Gap down, look to the overnight halfback at 4198.50, Friday’s RTH low at 4220.75, and Friday’s POC at 4230.75 as resistance. Look at the top of the large Gap at 4178.50 and the 21-day line (mean) at 4159.25 as both targets and support. As price breaches a level, it reverses polarity. Acceptance at the lower levels adds to the bearish case. 
• The market will likely pin after the open in a tight range per Gap Rules. But that certainly did not happen on Friday, as the market kept going down, so follow the Gap Rules wherever they may lead.
• With overnight inventory, 100% short and profitable, don’t forget to look for the opening fade.
• As with any large True Gap lower on 100% net short overnight inventory, the first potential move is the fade. Either buy the high of the first one-minute bar or buy the cross back up through the open should the opening drive be lower. Monitor for continuation and target the overnight halfback first, then on to the full Gap fill.
• As always, judge the success or failure of the fade by how far it goes. Again, keep Gap Rules #2 and #4 firmly in mind.  
• How much the market retraces in this first significant pullback since the July lows let us know whether the intermediate bear is over or will resume.
• Recall from last week that the plan is to look for a bounce/low-risk entry point around 4120 if a new bull market is truly underway. Remember “X” marks the spot?
• Increasingly, the market is focusing on inflation again, the Fed’s upcoming Jackson Hole conference, and Chairman Powell’s associated speech.
• If market participants were hoping for the Fed to stop or slow the rate increases, they would likely be disappointed. Market participants forget that the higher the stock market is, the easier it will be for the Fed to raise rates by another 50-75 bps. Remember, the Fed wants to get rates back to normal if the interest doesn’t bankrupt the U.S. Treasury.
• The so-called “pain trade” and “most hated rally ever” appear to be over. It is the longs that are on the run now. Can you imagine those who threw in the towel last week and bought at the top of this rally?
• And then there is that low hum in the background – those annoying World War III and nuclear war prospects with the Russians and Chinese, not to mention the Build Inflation Better bill from the Orwell Administration.
• These are, indeed, crazy times. So bad news might be good news again regarding the next Fed rate increase.
• And, once again, “X” markets the spot around 4120, where all the important moving averages congregate, but this time as support rather than resistance. The market’s reaction there will tell us a lot.
• My thesis has not changed. I am not married to it, but I believe the market is still headed to the 100-year channel mean. The mean is rising from 2500 earlier this year and is likely close to 3000 depending on how much longer it takes the market to tag it.

 As always, stay tuned.

A.F. Thornton