This morning, my dominant thought is that there are many issues at hand and so little time to discuss them. Suffice it to say; we are dealing with a lot of distortions related to how governments around the world reacted to the Pandemic – shades of “the cure was worse than the illness.” Deflationary pressures related to innovation and productivity are ever-present, perhaps even accelerating. Deflation surely will follow the bursting of the corporate and sovereign debt bubble.
Yet government action, shutdowns, trade deals, and the like have created bottlenecks and shortages, leading to price hikes all over the place – hurting low-income consumers who can least afford it. Are the price hikes temporary? Are they transitory as the Fed would have us believe?
There is only one way to reliably answer these questions, and it is the only thing that matters in trading – follow the money. What are prices and prices alone telling us? Everything else we discuss in these pages is nothing more than opinion and speculation that attempts to give price behavior some context. Frankly, my opinion is wrong often enough that even I would not trade on it. That is why we have objective algorithms and place so much emphasis on Market Generated Information. We call it M.G.I. I even like to refer to it as Magic – because when you consider M.G.I. over the talking heads, it seems to work like Magic.
Asia was on board with the bulls last night, but Europe fed the sellers until about 6 am EST. By the way, nine times out of ten, whatever the S&P 500 futures have been doing overnight, the market will switch direction at that hour. It did so this morning as well.
We will open with the futures mixed again, but with the Nasdaq 100 strengthing over the S&P 500. This is a carry forward of M.G.I. The S&P 500 futures overnight activity is balanced around the settlement, so the odds don’t favor early trading like they did yesterday.
We have nuances above and below that are of note. On the upside, we have the bottom of a small gap where the overnight high stopped. That is a long breakout point for the full gap fill. On the downside, the overnight low is a weak low as it stopped right at halfback, which is a visual and mechanical reference. But do not lose sight of the 4104 Weekly Expected Move low. Market makers have to hold that level until tomorrow’s close.
At a minimum, expect a balancing day and responsive trading. Most days are balancing days with responsive trading. That is the default day trading day. What I want to see is a follow-through from the successful retest low. Don’t lose sight of the fact that the NASDAQ has been correcting for five weeks – the longest stretch since 2012. It may be ready to take a trip back up, at the very least to establish the top of a new trading range.
As always, keep an eye on the 10-year treasury rate – it still holds the keys to the castle.
A.F. Thornton