Navigator™ Swing Strategy – 25% SPY and 25% DIA Calls – Add on Dips to the 5-Day Line / Navigator™ Day Trading Strategy – Bias is Long – Key Levels Below.
The damage had been severe even before the market bottomed a week ago today. Just look at this chart from late November:
The broad market suffers from the reality that the Fed is ready to pull the punch bowl away. The question becomes whether a handful of tech stocks can continue to carry the market post the Fed announcement this week. As the saying goes, If the soldiers fail to join the fight, the generals eventually fall. That would be an unpleasant way to end the year.
The top five stocks are now 25.5% of the S&P 500 index. You have to go back to 1964 to top that figure, and the market was topping then for a 50% trading range market that lasted 18 years.
As well, trailing P/E ratios in the S&P 500 are at the year 2000 levels, with the NASDAQ ratios exceeding that era’s tech bubble. It’s incredible what unprecedented liquidity and zero interest rates can do – until they fade into the annals of history.
By the way, President Biden told us Friday morning that inflation would be a blip on the radar screen. Then late afternoon, the Bureau of Labor statistics let us know that they would be changing the formula used to calculate the Consumer Price Index. Way to go, Joe!.
That is the same way the US Government initially fought inflation in the 1980s – change the formula. They changed the definition of “Vaccine” and “Anti-Vaxxer” earlier this year.
If you go over to ShadowStats.com, they keep a record of all of these “changes.” You will find that the CPI rate over the last year on the 1980s formula was 14.7%. That is a bit closer to reality than the 6.8% rate just reported. But surely we can get the rate even lower if we change the formula again. Indeed, you cannot make this stuff up.
Swing Traders
We start the week with some overnight gains in the major indices, including our core S&P 500 market index. So our entry at Friday’s close for the S&P 500 and Dow looks to be profitable out of the gate. It will be every bit as tempting to grab the quick gains as it was last week. Stay alert for my signals. The 5-day EMA line will be our stop and where we may add to positions if it is successfully tested.
The market has the opportunity to test the all-time intraday high from last month pegged at 4735 on the new March 2022 S&P 500 futures contract. This should be formidable resistance, not to mention that we have the Producer Price Index tomorrow and the Fed announcement Wednesday for a dose of volatility. Friday is also Quadruple Witching – when all the multiple time frame options and futures expire. Interestingly, market-makers forecast half the volatility (75 points in each direction) this week than in the past few weeks.
With Santa Claus coming, fear indicators still high, and a breadth thrust last Tuesday, the market could move back up to the top of the weekly channel. So we have set the WEM high at 4785 on the cash index (and a comparable Dow level at 35,600) as our next targets. We expect the market to crawl up the wall of worry to those levels. It will help if the soldiers wake up.
Day Traders
Watch your resistance here. Both Balance and Gap Rules are on the table this morning. Also, there is a discernable “V” reversal pattern projecting 4880 if it takes. Friday’s halfback and VPOC at 4683.50 would be my absolute threshold to remain long today. Still, acceptance below the balance area high around 4705 would be the most lethal as it would confirm price action back inside the balance area and a rotation down per the rules.
The game is to watch for the fade on 100% long overnight inventory (short it if you like) and see if it grips. If so, does it make it to full gap-fill (at Friday’s 4705 high) and then reject or come into range? Coming back into range may carry different consequences due to balance rules in today’s situation. Should the market come back into the four-day balance area and find acceptance, there is potential for rotation back down to the lower end of balance around 4550 or so.
As always, then, early trade will be noteworthy. And given the context, assume at least some potential for fade and monitor closely for how much, how far, and how fast. All of that is Market Generated Information to carry forward today.
Holding above the balance area high is bullish and puts the Globex high at 4723.25 and the All-Time High at 4735 into play.
A.F. Thornton