Sunday Notes – 8/28/2022

Happy Sunday:

• Fortunately, the Navigator Algorithm Swing Strategy took us to 100% cash at 3302.75 on 8/15.
• The summer rally subsequently peaked at 3327.50.
• If you are new or have doubts about our strategy’s success, I encourage you to review the last few weeks of this Blog. We earn triple-digit returns year in and year out, and while the past is no guarantee of the future, you have every opportunity to achieve high returns too.
• Of course, we can only identify the recent peak in hindsight, but our algorithm sell alerts near the recent rally peak were worth their weight in gold.
• Since the exit, we have been day-trading S&P 500 EMini futures in the Founders Room, earning anywhere from 16-24 points per contract each session.
• In the Navigator Swing Strategy, we planned to wait for the market to fall to the 4120 high volume node/mean and then gauge the market’s reaction and performance.
• The market should have reversed higher at 4120 if a new bull market was truly underway.
• The market did turn higher for a few days but then rolled violently lower on Friday after Jerome Powell spoke for 10-minutes.
• As a side note, I think the Fed pulled a Biden on the Fed Chairman and held him to 10-minutes, so he did not say anything to screw up the intended hawkish narrative.
• In the Founders Room, we took a low risk to stop long entry last Wednesday at 4127 and sold into the initial Friday morning rally at 4195 when we were live on YouTube. We posted gains of 65 points per contract.
• After a nice morning gain such as Friday’s, I like to hang it up and enjoy the weekend.
• Nothing is worse than carrying the negativity of a Friday loss into the weekend. Better to take a bird in the hand, not the one in the bush.
• After the Fed announcement, I moved on to other things. So I likely was one of the few who made money long on Friday but also missed the shorting opportunity.
• The market eventually locked into a negative Gamma spiral, fueled by dealers selling futures to hedge the breaches of the WEM and DEM lows.
• And yes, I got FOMO just like anyone would. But I would rather carry FOMO than losses into the weekend.
• I should have followed my advice and taken advantage of the risk of the lower, two-sigma move I had discussed since Monday. But I did not truly believe that the movement would manifest.
• I suppose this is my example of recency bias. The bottom of the projected two-sigma move was 4162. The market closed Friday at 4159.
• I hope some of you took advantage of my advice, even though I didn’t.
• I was also right that the initial price reaction to the Fed announcement would be higher, then lower after a few bars.
• Back to our swing trading plan and quoting from the 8/23 Blog: “Below the 4120 level, the market looks more bearish, but there is bull thesis tolerance to the 50-day line at 3976 and the lower end of the Fib range at 3900.”
• By Friday, the 50-day line had moved to just above 4000 at 4005.
• I also mentioned that any price acceptance below 3900 would kick the idea of a new bull market. We will see what happens this week.
• The options market, now late to the volatility party, is pricing in a 220-point WEM range with a floor of 3950 to a ceiling of 4170 for the coming week. Dealers and market-makers are trying to make up for blowing the range last week. Once bitten – twice shy.
• Holding 4000 is psychologically key right now. 4000 is a big round number. It seems unlikely the level will hold, but anything is possible, and we have already seen a bounce slightly above the level overnight.
• Globex traders took the price down to test the 50-day line at 4005, the 1 to 1 projection of the “A” wave (see chart above), and the 50% retracement of the summer rally.
• Overnight buyers showed up around 4000, and the market had turned higher at this writing.
• Beyond 4000, the next major support is the WEM low at 3950, then the next high volume node at 3910. Remember that 3910 hurdle on the climb up?
• The next support is 3865. I prefer not to discuss lower targets tonight; we can save that for later in the week. I don’t want to jinx a Monday morning crash.
• If the market should be so lucky, resistance now shows at 4066, 4080, and 4120, with major resistance at 4150.
• As I always counsel investors and traders, price is far more important than news, though there is plenty of bearish information.
• What disturbs me in the price action are the two breakaway gaps that started the first leg of the decline from August 16-23rd, followed by the anemic retracement of a few days.
• Now, we have a nearly vertical 170-point down bar to start the second phase of the decline following the Fed announcement at Jackson Hole on Friday.
• The price action shows very aggressive selling on increasingly high volumes. The waterfall character of the declines bodes caution for longs.
• Anyone long this market looking for a chance to get out just passed an opportunity to exit at a mere 10% correction from the January peak. Longs may very well remember this last exit opportunity fondly.
• Also, the negative price action may telegraph typical Elliott “3” down wave behavior.
• Consider the entire decline from January 3rd to June 17th as the first leg or wave “1” down and the subsequent summer rally from June 17th to July 16th as the likely “2” wave up.
• That would potentially make the wave we are in now a “3” wave down, where the most damage occurs in a bear market. In the circumstances, and given the aggressive selling, extreme caution for bulls is warranted.
• On a positive note, the falling wedge / expanding triangle pattern in the bear since January could be a Descending Broadening Wedge pattern in a high time frame.
• The DBW pattern typically marks a bull flag on the rare occasions that it presents. A bull flag could lead to a resumption of the up trend that preceded the pattern.
• And it is not unusual for the pattern to reverse higher at the 50% correction of the last leg down (about where we are now) or perhaps on a retest of the June low.
• I am not a pattern fan because very few of them give you an edge these days.
• The probabilities are typically 50/50, which is not an edge, but I would be remiss not to point out the pattern. See a complete analysis of the pattern by Bulkowski here.
• The chart pattern could lead to another “pain trade,” which would be higher and shock most traders after Friday.
• It seems so obvious that the market should continue lower that it bothers me. It cannot be that obvious, and rarely is it that easy.
• And that is why one should always endeavor to keep an open mind. Profits depend on it.
• I won’t likely put out any Morning Notes unless warranted. You know everything you need to know from this writing for now.
• We will day-trade until the Navigator Swing Algorithm kindly flashes its next buy alerts.
  As always, stay tuned. Our Fourth Turning is an interesting time to be alive as we witness history unfolding before us. Let’s hope we live to write about it.

A.F. Thornton