References to “the Market” below mean the S&P 500 Index. The quoted numbers are from the front month E-Mini continuous futures contract. Our primary focus is trading the S&P 500 index using the cash SPY ETF, options on the SPX or SPY, and S&P 500 EMini and EMicro futures.

Whether the S&P 500 index is in an uptrend or downtrend has considerable influence on the direction of individual stocks. The Navigator Algorithms™ can serve as an initial screen to help determine whether market head or tailwinds favor long or short trades.

Good Morning:

• The 4000 level on the S&P 500 and the 50-day line contained further losses yesterday (Monday) and overnight. The millennial roundie level is psychologically important – any material breach of the level invokes program selling.
• Globex traders temporarily bested yesterday’s high, moving the market as high as 4072.75 overnight before settling in the middle of a Doji candle at 4135.25. A Doji candle indicates that the market is balanced today, with bulls and bears having equal power.
• The market will open this morning with an orthodox Gap higher. While not a True Gap, I still keep Gap Rules in mind, as they help me determine the initial market sentiment. 
• The market will open in the middle of the overnight range. Mark the open, and treat any return down through the open as a potential sell signal (see Gap Rules). 
• There are very few positives. I mentioned the potential macro Descending Broadening Wedge pattern that began at the January peak as a potential bull flag, perhaps framed in the context of the 2009 Bull Channel.
• As you know by now, I don’t place much confidence in chart patterns, but I will point them out when I see them. It is difficult to imagine the stock market moving to new highs in the current environment, but it is always tough to determine when the narrative is negative enough for a contrary move.
• And if you are a contrarian, you are in good company because almost no one expects the market to hold 4000. But your core thesis is that the crowd is wrong at turning points.
• At some point, a trading range (narrow or wide) could present on the charts as the market bides its time.
• For example, when I look at the volume profile for the entire bear market (the histogram on the right side of the chart above), the price action does look like a trading range measured from the top to bottom of current prices since the January peak.
• The high volume node (middle) is now at 4140, and volume tapers off as the market approaches the 3639 June low, just as it tapers off as price moves upward to the January 4800 high.
• Perhaps we are already in a range similar to the 1970s. See the “Current Stock Market Forecast” in the Category menu to your right.
• All else being equal, the market should attempt to first test the overnight low at 4026.75 and then yesterday’s low at 4006.75.
• If the levels hold, the market will head north to test the mid-point of yesterday and the overnight ranges, then on to yesterday’s high at 4064 and the overnight high at 4072.75. We moved the buy stop for short positions a few points above the overnight high (See above).
• Key support lies at 4000, then 3966, and then the WEM low at 3950.
• Resistance shows at 4050, 4075, then 4100.
• The WEM is 3950 to 4170 this week, with today’s DEM at 3970 to 4090.
• The market’s reaction at these levels is your first sentiment indicator and telegraphs whether bulls or bears are controlling the tape.
• We are approaching month-end tomorrow, which usually leads to positive fund flows on the last few days of the month and the first few days of the new month. That is, unless 401(k) participants have steered their allocations away from stocks. Who could blame them?
• Typical montly flows may be enough to give prices a temporary floor. Price fell so fast on Friday that it likely needs to catch its breath. 
• If the market continues its downward trajectory over the next few sessions, it is doubly negative considering expected flows. Use any such behavior as bearish sentiment.
• One thing is for sure; this market is unprepared for any good news. What if Russia surrenders unconditionally to Ukraine, as President Orwell requested yesterday? Or, perhaps more likely, the reverse happens?
• The new Founders Live Trading and Chart Room will be open Thursday and Friday this week. Tuesday and Wednesday are month-end, not typically conducive for day-trading. Money managers tend to shuffle their portfolios around to dress them up, leading to less predictable price behavior.
• The Navigator Swing Algorithm remains 100% cash from its last sell signal on August 15th. There are, as yet, no buy alerts.

As always, stay tuned.

A.F. Thornton