Reverse, Reverse Rotation and Cross, Cross Currents

Reverse, Reverse Rotation and Cross, Cross Currents

Somebody once sent me a Christmas card, and it told the story of a contrarian. At first, our subject was a normal investor. Then, she realized that the real money was in being a contrarian. Soon, being a contrarian became so popular, it stopped working. Ahh said our subject, now I need to be a contrarian, contrarian. The card went on and on in the most humorous way until they finally put our subject in the looney bin.

In Charles MacKay’s classic book “Extraordinary Popular Delusions and the Madness of Crowds, he wrote, “Men, it has been well said, think in herds; We will see that they go mad in herds, while they only recover their senses slowly, one by one.” Certainly, yesterday smacked a bit of crowd madness.

Of late, when bonds rallied (interest rates fell), so did growth stocks and the NASDAQ 100. When bonds sold off (interest rates rise), energy and financials rallied, and growth stocks and the NASDAQ 100 sold off. Those relationships were all broken yesterday. Rates fell, and bonds rallied, but this time the NASDAQ 100 sold off, and both financials and energy rallied. Go figure.

Likely, yesterday’s break in the routine has to do with money manager window dressing as we approach the end of the first calendar quarter. Unfortunately, and despite the overnight rally, we did not even get a chance to raise our NASDAQ 100 stops yesterday before they triggered. Price went on to break key levels in the NASDAQ 100 index, so the index is off the table for now.

Rather than rush through more detail this morning, and given that our swing strategy is back to cash, I will take some time and put out something more extensive this afternoon. But for now, our thesis remains intact. We started the final and fourth nominal 20-week cycle in the nominal 18-month cycle at the March lows. We are open to the cycle peaking earlier than normal, and there are certainly arguments to support that. But since that would be the outlier case, I would need more proof.

Today’s Day Trading Plan

As to the S&P 500 index, we will be coming into the morning session trading near the bottom of the overnight range with a true gap down, so gap rules and potential for an early upward fade of the gap are in play. Settlement yesterday was 3882, so in overnight trading, we could not hold the 3900 roundie or the 21-day EMA at 3894. We will currently test the 50-day EMA at 3864 to see if it can hold, then on to 3850 and other key levels as set forth below.

Overnight inventory is net long, so any selling at the opening could be old business (overnight traders taking profits on their long positions). Keep that in mind if we approach the overnight low at 3859, in addition to gap rules #2 and #4. Another negative, the market seems to be rejecting the old balance area between 3875 and 3940, and the 4000ish Fibonacci target set from the crash bottom a year ago continues to remain elusive. Again, we have to consider quarter-end rebalancing as having some influence over the next week or so.

Key levels currently below us to watch today will be the 50-day EMA at 3864, overnight low at 3859, the half-roundie at 3850, and the next point of control at 3830. Remember that we are oversold from the standpoint that we are trading well below the 10-day point of control at 3930 and the 10-day value area low at 3920. If the overnight low holds, then target the levels above sequentially and monitor for continuation.

Key levels to watch above us also include the overnight halfback at 3877.50 (also yesterday’s low) and the overnight high and 21-day EMA around the 3895 area (also the bottom of yesterday’s single prints). Likely, traders will test the overnight low first.

Yesterday’s action carried our two key indexes, the S&P 500 and the NASDAQ 100, below their 21-day EMAs, and I carry that forward as bearish. The NASDAQ 100 has also breached its 50-day EMA, and the S&P 500 sits right on its 50-day EMA at 3864.

A.F. Thornton

AF Thornton

Website: https://tradingarchimedes.com

A.F. "Arthur" Thornton is an expert in logic, risk/reward quantification, market fractals, pattern recognition and asset class behavioral analysis with 34 years devoted to developing algorithmic and quantitative trading systems. In addition to trading his own capital, Mr. Thornton designs custom algorithmic and quantitative trading systems for a small and exclusive group of exceptionally qualified traders.

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