NASDAQ 100 and Gold Poised to Move

This is an update to Sunday’s outlook with the morning day-trade plan included. In my own Biden moment, I mixed up Zimbabwe’s currency for Lebanon. I have also added some brief commentary about the Tiger Cub hedge fund blowing up with a $20 billion margin call – leading to 30% plunges in ViacomCBS and Discover stocks last week on forced liquidations.

So we have a four-day trading week ahead that will end with Good Friday, a holiday for the US Markets. We are coming into this week 80% invested, with positions in the S&P 500, NASDAQ 100, XLF (Financials ETF), and XLE (Energy ETF). Nothing in Globex last night has me questioning our positions pre-market. Weekly options are forecasting a plus or minus range for the S&P 500 of 60 points (a total 120 point top the to the bottom range), with the NASDAQ 100 at plus or minus 330 points (a total 660 point top the to bottom range).

Last Monday, the markets attempted to launch a successful retest of the March 5th, 20-week cycle low. The retest came in higher and appeared to cement the right shoulder of the potential head and shoulders reversal pattern I recently identified on the NASDAQ 100 Index. The S&P 500 had a different yet positive pattern as well. And the March dips coincided with the first 20-day cycle loop out of the March 5th bottom.

I was on it – positioning to 50% on the previous Friday. We started the week with the initial (unrealized) gains from our previous Friday positions and then added to the positions intraday at Monday’s lows. All was well Monday night and into Tuesday morning, as I was patting myself on the back for the NASDAQ 100 reverse rotation call. By the way, the best jinx for a good trader is when he or she thinks they have become smart. The market gods have a way of exacting revenge for such arrogance.

Several events then intervened Tuesday, interrupted the flow, and stopped us out of our positions. First, Lebanon’s currency collapse continued to rattle international bond markets. China sanctions and threats added to the global intrigue. Then, both Treasury Secretary Janet Yellen and Fed Chairman Jerome Powell began testifying to Congress, with the markets hanging on every word relating to inflation and interest rates.

The mid-week markets then tried to digest sudden and inexplicable 30% plus plunges in stocks like CBSViacom and Discover. The plunges turned out to be driven by loan collateral sales associated with the Tiger Cub hedge fund blowing sky high on a $20 billion margin call. I ask myself – is the latter situation is a sign of things to come?

By Thursday, the markets had settled down, and we put about 60% of our cash back to work at the mid-day lows, just ahead of high volume buying that kicked-into the last hour of trading. This indicated serious institutional buying to me – and I prefer to hang out with the smart money.

Then, we put another 20% to work at the lows on Friday, right before another explosive, institutionally-driven, and high-volume rally into the close. It is one thing for institutions to buy on Thursday. Still, when they plunge in during the last hour on a Friday afternoon before the weekend – that is the true bullish statement – especially ahead of a holiday-shortened trading week.

Of course, the market’s resumption of the trend lines up with everything else I see, confirming that the 20-week cycle low is in. The only caveat would be if these Thursday and Friday runs were short-covering (see more on this below).

After reviewing our positions in detail over the weekend, I am impressed with how solid they look so far, appearing poised to move higher but perhaps not on to new highs in every case – depending on how early the peak in the nominal 18-month cycle arrives. The XLE (Energy ETF) position is even getting a short-term boost from the ship blocking the Suez Canal and adding to even more supply chain interruptions and the inflation spikes occurring worldwide as a result.

In particular, I wanted to draw your attention to the NASDAQ 100 (QQQ ETF)), which appears to be moving out of a volatility squeeze on the daily chart. Volatility squeezes often lead to a big move – but they don’t forecast the move’s direction. We have to infer direction from our other work, as with the recent bottoming of cycles due, Navigator algorithm buy signals, momentum divergences, trend direction, etc. In this case, we would infer that the volatility squeeze would thrust prices higher:

The other sector that caught my eye over the weekend was gold. The U.S. Dollar has been rallying – attracting international capital to our higher interest rates. This is the Fed’s worst nightmare – justifying an entirely separate discussion (coming soon). The Fed needs to tamp down the dollar’s rise by fighting higher interest rates at both ends of the yield curve, raising the potential for both bonds and gold to rally, albeit briefly. In that sense, gold appears tradeable. A true trend reversal would take a lot more work:

Despite all the recent inflation rhetoric, gold and bonds have been trading together. Perhaps if they decouple, a more dystopian scenario could be underway. In fact, gold, dollar, and bond prices correlating in rallies could be the first seeds to spot in a potential flight to safety or risk-off transition. The Founder’s Group has not taken a gold position yet, but it is on our radar, and I will share the trade if it manifests.

For now, I continue to encourage readers to buy small denomination gold and silver coins for a rainy day, especially when prices have dipped like this. I am not advocating so-called “rare” coins. Buy Krugerrands or other coins – or any other tangible forms – that track the spot price of gold or silver as closely as possible, are small enough to use for bartering or currency in an all-out disaster, and don’t overpay in commissions. I am talking physical gold and silver in your physical possession – not paper form.

The price of gold is heavily tamped down and manipulated by central banks, as it competes against all government inflated fiat global currencies, including the U.S. Dollar. In my opinion. Gold is undervalued, and when the central banks lose control of the situation at hand, gold will skyrocket.

I would make one final and positive point on this potential pivot higher in the stock market indexes. Coincident to Wednesday’s low in the NASDAQ 100 and S&P 500, we saw the CBOE Put/Call ratio spike, a positive sign of fear we typically want to see at important lows. Signs of fear have been rare these days – with sentiment so elevated in the wake of the retail crowd’s arrival. This gave me additional confidence to begin retaking positions on Thursday – at least in the short term.

The CBOE Put/Call ratio fear spike was confirmed by the CNN Fear/Greed Index, which has parachuted out of the greed clouds and back to moderate fear, at least right before Thursday and Friday’s rally. While we don’t see extreme fear, nor would we expect to at a 20-week cycle low, the fact that the index had dropped back to 40 before Friday’s open, and is now neutral after Friday’s final hour rally, helps confirm that the froth is temporarily out of the market. Markets are known to climb the wall of worry when the crowd is skeptical.

As you can see from the chart below, we are at the low end of the index’s recent range – and we all know it has been difficult to scare this crowd. Note that the two extremes in fear at the beginning of 2019 and again at the 2020 March lows were coincidental with the nominal 18-month cycle lows in the stock market.

Gordon Grecko’s famous line in the movie “Wall Street” was “Greed is Good.” Well, that may work in movies, but when you are buying into the markets, “Fear is Good” and “Greed is Bad,” at least as far as investor sentiment goes. Or, as Ben Franklin so deftly put it many years ago, we should “Buy on the Canons, and Sell on the Trumpets.”

So, all in all, my conclusions are that we are well-positioned for the final run in this nominal 18-month cycle. It should take us a bit higher, perhaps to double tops in the NASDAQ 100, Energy, and Financials. The S&P 500 is likely to tag the 4000 level finally. My Fibonacci targets are only slightly above the recent highs – so I don’t know how much higher we can really go before the larger cycle asserts itself.

At this point, we are still not quite out of the gate, heading into a shortened holiday week that may find us in light trading volume. Whether these instruments follow through or not, we must monitor a final run like this closely. This is not a run for inattentive investors or traders.

When the nominal 18-month cycle resets mid-year, you likely will be able to position and sit for a while and get out to the golf course. I know I will.

Day Trading Plan

I don’t typically trade on Mondays, and I already have large long positions as outline above. Spike Rules will govern the open and potentially the remainder of the trading day if you want to trade today. Acceptance within Friday’s spike is seen as bullish.

Use the bottom of the spike at 3934.25 (12,874 on the NASDAQ 100) as a bull/bear line in the sand. A stronger market should not move below that level or deeper into the value area. The spike bottom can be a long setup on any weakness that touches it.

As Friday was a follow-through day with a strong close, assume that any acceptance below the Value Area Low at 3931.50 (12,782 on the NASDAQ 100) has the potential to switch the tone back to balance/chop.

A.F. Thornton

NASDAQ 100 and Gold Poised to Move

AF Thornton

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NASDAQ 100 and Gold Poised to Move

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