Yesterday saw what I am affectionately calling the “Rickety Rally” continue. The rally from the swing low on the 10th kinda sorta has a rising wedge-like appearance – and could be the fifth wave before a larger correction in Elliott Wave parlance. Yesterday was rickety in the sense that market internals remained unsupportive, maybe even weak. And not many traders showed up, as reflected in the sparse volume numbers. It reminded me that next week is a holiday week, at least until the wokesters cancel Thanksgiving.
So with the few soldiers at hand in yesterday’s regular session, taking the hill at 4700 and near the all-time high at 4712.50 remained elusive. But they are likely to mount a couple of advances before giving up. Giving up brings us the double top that would confound swing traders here.
Anyway, it makes sense to pay attention to the hesitancy of this latest run from the 11/10 low. It could foretell a trading range ahead, or another of those slowly rising Gamma spirals that mirror an Ivy vine wrapping around a shallow sloping fence line. The fence is the top line of the weekly channel.
From the October low, it has been kind of like taking off in a jet from the John Wayne Orange County Airport in Newport Beach. There is that steep climb, and then they practically shut the engines off as the plane levels off to lessen the jet noise to the residents below. I always appreciated the noise abatement but still hated cleaning the black jet carbon off my patio furniture. The market is now in that leveling-off phase. But we need to be attentive to a stall warning, as with any good take-off.
Over in the bond department, they continue to work hard to turn the stock market music down. In other words, rates continue to rise. That should make some sense. If I have the numbers right, the 10-year Treasury pays 1.6%, and even the understated inflation rate reported by the government is about 6%. So that would make the “real” return on the 10-year about -4.4%. Is it any wonder that the stock market is parabolic?
What happens when rates return to market rates? Historically, the “real” rate of return is about 1% over the inflation rate. How long can the government keep these rates artificially low? For the last 40 years, rates have been falling from 18% in the late 1970s to below zero now. I think someone already coined the phrase “Think Differently.” That is good advice.
In short, savers are facing return-free risk in U.S. Treasuries rather than risk-free returns. Is it any wonder attendance at the recent auctions has been (shall we say) down? At the very least, it will be interesting to watch what happens next, hopefully on my big screen TV at a comfortable distance from the U.S. on a small island in Greece.
For now, Swing Traders need to keep their powder dry unless you want to sit in front of your computer all day, which makes you a day trader. You get the point. You have to be patient to deploy your capital at more significant lows, like October. If you are already in, it is perfectly acceptable to hold for now. But do watch for the double top/trading range possibility. Use hourly candles closing below 4667 as your stop.
I have given day traders the keys to the kingdom several days in a row if you execute on the key levels once the market has established its direction. We have been one-time framing higher on each daily candle since the 10th, regardless of how the candle finished. And no candle has finished in the lower half of the daily range. All of that keeps the bullish bias intact, but the last few candles have overlapped a bit more than the first few. So the yellow flag is up.
The 4667 level remains a crucial downside reference. As we have progressed, I believe that closing candles below that level raises the possibility of a double top underway, and at least a potential move back down to the swing low around 4625.25. The market would have to close below 4625.25 to affirm a double top and deeper correction. Carry the 4667 level forward in your narrative.
Overnight trading is balanced, with a squat profile centered at 4695, with the high at 4701 and the low at 4688.50. I think it essential to hold the overnight low. I won’t short if we start closing candles below it, but I go into wait and see mode. Closing candles below yesterday’s low at 4670 is something I would consider shorting, as it is only a hop skip and a jump to the 4667 line in the sand.
If we start closing candles above 4700, there is a trade up to the old high at 4712.50. You could use multiple contracts and hold a runner for a break up to new highs. I don’t know how far we will get today if that happens, but my ultimate target would be 4740 which coincidentally is the Weekly Expected Move high.
Good luck today. As an early reminder, there will be no updates during the holiday week next week.
A.F. Thornton