Can you believe I would even say that? If I thought it, you should run for the hills. Since I am being facetious, it is acceptable to read on. My personal opinion means nothing because the market is never wrong. Perhaps the jury is still a bit out on my trading range scenario until we see if the market decides to break to new highs today – but I missed Thursday and Friday’s turnaround from the 21-day line. Friday’s action was not what I had expected – I expected a breakdown, not up. To be good at trading and investing, our misses can be the best teacher.

So let’s get the hard part done first – the admission of being wwwrrrrong. There, I said it. I was wrong. The words still sting my lips – whenever wrong-headed decisions force me to utter them.  My job is to make sure we are appropriately allocated – in line with the net aggregate opinion of all market participants regarding all subjects on all time frames. Of course, the charts help me as gigantic psychological profiles of the current state of the market or any part of it. But I have to read them correctly. The market is always right because it reflects the net aggregate opinion I am required to discern accurately.

I did three things wrong on Thursday. First, I was lazy in the sense that when our 5-day EMA stop was hit overnight (which was perfectly fine), I figured there would be some time before we needed to get back in the market again – perhaps a few days or a week. Also, I wouldn’t say I like to day-trade Fridays, so I am less attentive.

Second, Thursday’s candle fell exceptionally far for the current context and painted an Algo sell signal intraday. I did mention the potential, fleeting nature of the signal in my writings here, but I must admit that the temporary sign made me overly negative. I should have waited for the Algo sell signal to paint definitively at the close of Thursday’s candle – instead of anticipating it. The signal negated by the time the candle closed – and I should have taken that as a potential WWSHD alert that a buy might be in order. After all, we were on the 21-day line.

Finally, I should have given more confidence to the 21-day line, exactly where the market bounced. Eight out of ten times, the market will find support on the 21-day line. Sure, I mentioned and expected the bounce. But I did not account for a complete reversal of the magnitude we experienced on Friday. I should have been more respectful of that possibility.

The way to execute this would have been to take a position at Thursday’s close, with something like a stop 5 points below the 21-day line. Our job is to find low-risk entry points, and this certainly fits the bill. Whether the market ultimately breaks to new highs or not this week, that would have been a 50-point trade or $2,500 per futures contract. As I always say, that buys dinner with the wife. Here in Greece, where your money goes a long way, that buys dinner with the wife for an entire year.

The NASDAQ 100 bounced off its WEM low Thursday. I should have recognized that this limited the negative influence of tech on the S&P 500. There were a few other clues the market would survive here as well. Breadth had been acceptable, and junk bonds were breaking to new highs. Investor sentiment was at least neutral, and even the bond market was rallying. While the NASDAQ 100 had taken a steep fall in the latest dip, it appears to be capable of recovering to new highs. I did not think the bond market or the NASDAQ 100 could perform as well as it did.

I also mentioned bias. I need to check myself on that issue as it had the most significant influence on my attitude last week. I do have a risk-averse preference at the moment. Inevitably, we need to check our prejudice at the door most of the time to be successful. As an example, junk bonds breaking higher Thursday and Friday is hardly risk-averse behavior.

Markets reverse when people like me think they are right but end up being wrong. I am always looking for things that prove I am wrong. But there is no perfection in the search. When I am wrong, it likely has to do with misreading something, missing something, or bias. I don’t think I missed much here as I look back on my writings. Instead, I got a bit lazy and too negative. However, if I am going to be wrong, I would rather the result be an opportunity loss such as the current case rather than actual, hard-nosed investment losses. 

As we have been discussing on these pages, we have been in a trading range now since early April, sometimes wider and sometimes narrower. We have looked above and failed, as well as looked below and failed several times. Every time we have a consolidation such as this, I have to decide whether it represents net distribution or net accumulation. The difference between the two can be very subtle if it is discernable at all. As of Thursday, I was leaning toward distribution. Now, the opposite appears to be the case, but we will only know for sure with a solid breakout and follow-through on either side.

I did mention I had been expecting a catalyst. The employment report missed on Friday. I suppose the market liked that in a Goldilocks sort of way. The economy is not so hot that the Fed has to put on the brakes, but not so cold that we need to be concerned. 

But the most significant jump on Friday came out when the Biden administration backed off their drive for higher corporate income taxes in favor of a 15% global, minimum, corporate income tax. Janet Yellen made clear to the G20 this weekend that the tax is a worldwide effort to discourage tax haven shopping. We will see if the potential agreement has a negative or positive effect on the markets today. Incidentally, Yellen also said that the U.S. needs higher interest rates and can tolerate higher inflation. That could also be a drag on a breakout today.

This week, the bulls have the ball, and odds favor a breakout of the range rather than a double top. Nothing else has changed much. The run since early March this year is the third push higher from the March 2020 pandemic lows. That is the typical sequence before an intermediate correction of the type we expect on the nominal 18-month cycle. 

The entire rally has been parabolic, and such climaxes can last a lot longer than we typically expect. Based on historical analysis of parabolic runs, it is even possible that a typical, intermediate correction of 10% to 15% may not present at all. The result would be unusual, but we cannot eliminate the possibility.

This latest run since the March 2021 low this year has a bit of a rising wedge shape to it – which is likely to be aggressively sold as it peaks. A rising wedge is a unique characteristic of an Elliott 5th wave (a third push higher in the sequence interrupted by two countertrend corrections). So far, June is an inside bar as to May – which might indicate that June will close below its monthly open. June is one of the weaker months anyway, historically. The first few days of the month should have performed better than we experienced. So there is a bit of WWSHD at play.

While the 1st intermediate pullback from the Pandemic lows will probably last only a few months, it is essential to note that it could lead to a trading range that could last a year or more. The January 2018 buy climax led to a trading range that lasted two years. The trading range that began in 2014 stayed more than a year, despite a strong bull trend.

So I am coming into this week neutral to slightly bullish. I think a break to new highs is more likely than not. The stars have favorably aligned for it. However, given the rising wedge pattern and the number of traders that could get sucked into the new highs, we need to be on high alert for a relatively sudden reversal that could begin the intermediate correction. I will continue to use the 5-day EMA as a stop line, along with the Algo trigger. The Founders Group is 100% in cash right now after a better than 300% year-to-date return.

I will be looking to re-enter the market (at least for a short-term swing) if the opportunity presents itself. As I have continued to point out these past few weeks, it is still a bit premature to get overly aggressive on the short side. The SKEW (premium in OTM puts versus calls) hit historic highs on Friday. So buying OTM puts is very expensive right now due to demand. The SKEW indicates that the institutions are substantially hedged – but it likely makes more sense to sell premium rather than buy it when the time is right.

As always, I will try to do better next time. I do sincerely hate leaving money on the table.

A.F. Thornton