March 2021 | Archimedes Methodologies

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Well, you may have heard that a big snowstorm hit Colorado over the weekend, and that is where I happen to be. Not that it would have been any better in Wyoming. I got to choose death by knife or fire. But I woke up to no Internet and had to wade through the snow to clear the back-up satellite dish. It works, but dropping down from Gig-Speed to 50 mpps, in a word, sucks.

So I will be very brief this morning. I am sure that will be a relief, given my recent rants. If time permits today, I will put out something more comprehensive when the Internet is back up.

The sum of my conclusions over the weekend is largely unchanged from last week. The 20-week cycle has bottomed. This is the last run in the sequence of four before the 18-month cycle tops and sets in.

My biggest dilemma is whether this last 20-week cycle will peak early or perhaps even late. That really depends on whether we have started a new, secular bull market as with 1982, 1997, 2003, and 2009. My best judgment is that we have this coming correction will set the stage for the next run. In other words, I am not in the crash camp – at least as yet.

However, I am cognizant of the proposition that a correction is when your money is involved, and a crash is when my money is involved.

Our current allocation of 50% S&P 500 and 50% Nasdaq 100 held its ground Friday. The Nasdaq 100 barely held. Nothing seems on fire this morning in either direction. I want to continue to use an hourly close below the daily 5-day EMA as our stop on both indexes.

I expect the NASDAQ 100 to benefit from some temporary reverse rotation, and the S&P 500 is knocking on the door of new all-time highs. Being a bit self-critical, I see the need to broaden my horizons a bit into some cyclical areas – perhaps even the Dow on the next rotation. I am ok with where we are for the moment.

Day Trading Today

The usual blah blah blah – I don’t typically trade on Mondays. Overnight activity is balanced. Traders did not explore price beyond the recent range in either direction. This means we should deploy responsive trading, using the 3949 all-time high from March 11 as the upper end of the range and Friday’s 3904.50 as the low end. Perhaps the overnight low at 3924.25 could provide support in a more bullish scenario. If so, carry that forward.

For those new to the site, a responsive trade is a counter-trend trade taken against a specific level. The theory is that when two-sided or “balanced” trade is taking place, there will not be enough momentum to push past key levels, and buyers or sellers, as the case may be, will respond to those areas, essentially pushing prices away from them.

In other words, neither buyers nor sellers are in control so they respond to both ends of the spectrum until price breaks in a new direction. This is the opposite of breakout or initiative trading which is more directional in nature and is generally taken in the prevailing trend.

The recent ATH at 3949 may be a breakout point for initiative trade. Watch for the pros running the buy stops sitting right above, then monitor for continuation if a true breakout holds or even consider buying the ATH’s retest after the breakout.

Friday’s low showed a lack of material excess (the minimum two ticks needed not to be poor). That structure could require repair on any liquidation break. Also, there is a virgin (untouched) point of control at 3890.00 from March 10th.

Again, if you are new, our typical approach to day trading, besides identifying key support and resistance, is to follow the sequence of testing yesterday’s high and low and the overnight high and low, depending on initial direction, to see where the market finds the path of least resistance. We are always cognizant that even after the initial drive, no matter how impressive, there is a 50% chance of the market reversing.

Sometimes the overnight action helps us pick the initial direction right out of the gate. In cases such as today, the trading overnight has given us no clue, so we are likely to find the best trades later rather than earlier in today’s session.

A.F. Thornton

Founder's Trading Journal

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So the wife is in Greece indefinitely. Her father, 92 years young, is terminal, and we believe it directly relates to his second China virus shot. Imagine, he was healthy as could be and even survived World War II as a captain in the Greek navy. Yet, he is randomly taken out by vaccination against a bioweapon. Oh, and by the way, in recent simulated Pentagon War games, apparently we lose fast with a Chinese biological-weapon attack. Well, if there were any doubt, the anecdotal evidence now is profound. Just listening to the bizarre rant by President* Biden last night should be enough to convince you.

If you are going to get the vaccination, one of our group owns a prominent biotech company and favors the Johnson & Johnson version. It likely won’t surprise you that I am not a vaccine person. But I am a math person. Let’s see, if your income bracket is low enough, you get a $1,400.00 stimulus check. Yet, the U.S. Government is incurring another $17,000 of debt on your behalf. Somehow, that does not add up, especially when you consider that only 10% of the stimulus bill is going to China Virus related stimulus. Maybe the next largest portion is going to bail out the blue states that screwed their economies and drove small businesses into the ground. Then there are the reparations buried in the bill. And, a family of five with two unemployed parents looks to be able to make about $95,000 a year, at least until September. Nice! This gives new meaning to that scary phrase, “we are the government and we are here to help.”

As I analyze all the recent bills and proposals, here is what I am thinking. Since gender is up for grabs these days, and science doesn’t matter unless it is fudged to make you wear a mask, I am seriously considering identifying as a minority, LGBT woman. No offense intended to the real ones determined by the old scientific method.

The point is, this would give me many, many government benefits. If I had a farm, the new stimulus bill pays it off up to 120% of the original loan. Then there are the SBA loans that never have to be paid back. I could guilt all my white friends about their inherent bias – maybe even getting one to mow my lawn for free! I am willing to pledge to nevermore use any of those nasty, prejudicial terms like mom, dad, parents, brother, sister, grandmother, grandfather, etc. And you shouldn’t either, it might offend me. But I don’t plan to give up the term “China Virus” term anytime soon – I am holding onto it just to keep a small part of my former self.

Of course, all of this is beyond ridiculous, and I don’t mean to offend anyone beyond making the point that this is the logical extension of all these policies. And while I am on the subject, I am sick and tired of the term “woke.” Every time I hear it, I literally want to puke! The proper application of the term, given the circumstances, is to wake me up when this is all over!

So what does any of this have to do with the stock market or our current posture? Besides being upset that these government policies and mandates may kill my father-in-law, the lack of market enthusiasm for the stimulus bill explains the volatility we have been experiencing in the debt and equity markets. Market participants, especially as it has related to growth stocks and interest rates, are less than thrilled at the moment.

The good news is, we had a fabulous day yesterday. The bad news is that neither the NASDAQ 100 nor S&P 500 gains qualified as follow-through days, as the volume still has not exceeded the prior days.

The NASDAQ 100 index slammed into its Weekly Expected Move high and had formed a rising wedge pattern by yesterday’s close. The pattern broke overnight. A rising wedge pattern is often the first wave of a new advance. So that is a good thing. The NASDAQ 100 held at a 50% retracement of the recent gains from the bottom overnight, also a good thing. But the overnight action did not tell us a lot for today’s session, as the traders could not take out yesterday’s low or high.

On the other side, and having experienced these one-hit-wonder days over the past few weeks, I want to lock in profits while giving the markets some room to maneuver. I don’t want to ride a full retest of the lows or even the possibility that the NASDAQ 100 decides to tag a new low at its 200-day moving average. So let’s set a stop as an hourly close below the overnight low at 12776. Stay alert, as we are not too far off the low at this writing. I think that is a solid plan for the S&P 500 as well. The stop level there is 3900.75. These stops only apply if the price is below the stated levels for an hourly bar close.

Day Trading Plan

As you know, I don’t usually day trade on Fridays, especially when we are skirting expected moves at weekly options expiration, as is the case with both the S&P 500 and NASDAQ 100 indices.

As to the S&P 500, the all-time high is slightly below its WEM high, likely to cap gains today. In fact, the all-time-high in the S&P 500 index could take time -even several more days to resolve.

As well, the NASDAQ 100 high yesterday, it’s overnight high, and the WEM high all congregate just above 13,000, also likely to cap any gains today.

The potential is strong for some balance today. Watch for internals to be slightly conflicting. The settlement, points of control, and value area lows are very close to each other and could be used as responsive shorts.

Overnight activity filled yesterday’s small gap, but this does not count towards a fill because it did not occur in a regular day session. If context supports it, sellers can target that gap fill on a short from the aforementioned levels.

Have a great weekend!

A.F. Thornton

Founder's Trading Journal

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Founder's Trading Journal

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The Founders Group went to a fully invested position last night with 50% in the NASDAQ 100 and 50% in the S&P 500 Futures. Our entry prices were 3888.50 and 12,750.25. We are using an hourly close below yesterday’s low as our stop. You should wait and watch for my signal this morning on a pullback for those of you who have to operate in the regular session markets.

The S&P 500 broke resistance, and the NASDAQ 100 retraced all of its losses from yesterday in the Globex session. Mostly, however, I am convinced that the panic in the bond market is subsiding, and this will shift preferences back to growth stocks.

Whether we are dealing with the bond market and interest rates or the stock market, volatility peaks in panics. Accordingly, when we see a significant volatility spike, we can assess that a bottom to the correction at hand is near.

Taking a look at the weekly chart of investment-grade corporate bonds below, the SRVIX (Swap Rate Volatility Index) is at one of the highest spikes in its history, almost rivaling the level it reached in the China Virus panic a year ago in March. In the chart, we track the value of investment-grade corporate bonds, which move inversely to interest rates. So when rates are rising, the price of bonds falls and vice versa.

The bonds lost about 25% of their recent value in the inflation panic, a substantial and healthy correction. The spike in volatility, which essentially measures fear, indicates that a bottom in bonds (peak in rates) is close at hand. The spike is evident in the chart below:

The trend in bonds, as it is for interest rates, remains bearish. Bonds have a long way to go to rise back into an uptrend. Perhaps more importantly, interest rates could move into a trading range for a bit. Or, we could see a relief rally. Short-term, however, the panic is subsiding, rates are stabilizing, and this will allow the stock market to move forward into its final, 20-week cycle before the 18-month cycle correction kicks in. That is my best judgment.

I would expect to see profit-taking soon in Financials, Energy, and some of the cyclical/value sectors – with the funds rolled back into growth stocks. The NASDAQ 100 is most favored for this rotation, with the S&P 500 index capturing all sides of the coin.

I will expand this discussion considerably before the end of the day, but I wanted to get the signals out as soon as possible.

Day Trading Outlook

Gap rules are in play this morning, especially #2 and #4. As with any true gap, the early potential for a fade is there. You might short below the first one-minute low or on a retest of the open, should the opening drive be higher. In either scenario, it’s better if the overnight high is not taken out. Target the regular session high first on a short.

Crossing the overnight high on faster tempo and bullish internals would show potential for the market to move higher, confirming the overnight breakouts. As overnight inventory is skewed long but not 100% so, there is potential for this rally. Monitor closely for continuation.

Continue to watch where value develops. Over the last three sessions, it has been higher. A markedly lower value can change the current tone. Note that this will be harder to do once all majors have crossed downtrend lines.

A.F. Thornton

Founder's Trading Journal

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Wednesdays tend to bring trading ranges in the markets much of the time. But today’s slopfest in the S&P 500 and NASDAQ 100 was particularly gruesome. Nor were the two indexes able to conquer their resistance downtrend lines.

The NASDAQ 100 turned in another negative performance, and the S&P 500 ended the day up fractionally. But the Dow turned in a 520 point gain – almost 2% on the scale. The Russell small-cap index followed the Dow’s lead. So clearly, money is still rotating from the tech sectors to cyclical stocks.

But the concern is that the Dow is hitting resistance at the top of its trading channel, the Russell is hitting resistance at a double top, while the S&P 500 and NASDAQ 100 are hitting resistance at their downtrend lines. If the music stops here, there is only one exit, and it points downward. So I am still content to sit in cash.

While I recognize that every dog has its day, and this is the Dow’s day in the sun after underperforming for years, it has not paid to buck the S&P 500 index’s trend in my career, though it may work for a short time. So I am not a current fan of a flash trend built on buying something cheap that does not have exponential growth potential. I will leave that to Warren Buffett.

In fact, this reminds me of one of those old market truisms. Where the generals lead, the soldiers must follow, or the soldiers could lose the war. Failure of every other index to confirm the 30 Dow Stock Index at new highs does not bode well for a healthy market, at least on the surface. On the other hand, the math is definitely complicated here.

Breadth was still positive today, as there were a net 379 stocks that hit new highs versus new lows. Moreover, the percentage of stocks over their 50-day moving average continues to improve. All of this may still reflect the flipside of last summer and fall, where the generals carried the markets alone on their backs. Maybe the soldiers are taking the lead now, and the generals are so worn out they went back to headquarters. Only time will tell.

Given the circumstances, I cannot say with any confidence that this correction is over quite yet. Perhaps we might see the Dow head south with the NASDAQ 100 pointed north – the reverse rotation play. What I will continue to say for sure is that all of this is good for the markets, working off some of the giddy craziness. So far, and while I recognize it can be frustrating, the markets are not crashing, and the world is not coming to an end, as many have been predicting.

Even more interesting today, the markets seemed to yawn at falling 10-year Treasury rates after the auction. Congress has now reconciled and passed the stimulus bill, which *President Biden plans to sign on Friday. The market did not even poke its head up when the bill passed. The market did pop to the upside on the Consumer Price Index report right before the open. Inflation was tame, which triggered some short-covering to the upside, but the rally was short-lived. Anyway, inflation shows up in producer prices first, and it has not been tame there.

For now, I am still content with this roadmap from yesterday.

Steve Hochberg jolted my memory with a little history in the Elliott Wave short-term update this afternoon (www.ElliottWave.com). On this date, 21 years ago, March 10, 2000, the broad NASDAQ Composite registered its intraday and closing highs, ending the dot-com mania era. The NASDAQ 100 index held up for ten more trading days, peaking on March 24, 2000, along with the S&P 500.

The NASDAQ crashed 78% in the ensuing 31 months, and many investors experienced the aftermath of a stock market mania for the first time in their lives. It took the NASDAQ 15 years to match the high of March 2000.

A lesser-known but equally important stock market top also occurred on March 10, this
one in 1937. This was the second wave of the 1929 crash that lasted until 1942 in nominal terms. The Dow lost half of its entire value, declining nearly 50% from March
1937 to March 1938. This was also known as the “Rich Man’s Crash.” it is said that many of the smart people that avoided the first wave down in the 1929 crash, got caught in this second wave because it was unexpected. This was the famed “C” wave we feared after the market rallied of the lows last March. Fortunately, it never arrived in our setting, so here we sit, that is unless…

What are the odds that this could be the third of history’s most important stock market tops – all three occurring on or near the same date? Investor psychology is certainly primed for such a peak – so I always keep an open mind…

Tomorrow is another day.

A.F. Thornton

Founder's Trading Journal

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This might be a first. Yesterday, the Dow and Russell hit the upper end of their Weekly Expected Moves, whilst the NASDAQ 100 hit the lower end of its Weekly Expected Move. In other words, you could practically have done a pairs option trade playing the NASDAQ 100 index off the others. Since these indexes are nearly always highly correlated, the situation is unusual. Strange to be sure, but true. The question remains, is this healthy, and does it give us any clue as to future direction?

As you can see from the chart above, another unusual feature of this 20-week cycle correction is the broadening formation in the S&P 500 index. I recall a similar corrective pattern unfolding in the NASDAQ 100 back in 2014. The pattern resolved bullishly, but not until after it jumped off a cliff from the upper resistance downtrend line, a position analogous to where we find the S&P 500 index now. But the textbook says it is supposed to resolve bullishly – it simply leaves out a few details about the road to nirvana. The broadening formation above is not to be confused with the megaphone broadening formation in the S&P 500 that has been unfolding since 2017. That macro formation, tilted in the opposite direction of what we see above, normally resolves bearishly.

I mention chart patterns from time to time when they might be relevant. Over the years, these patterns have become less reliable as they tend to be obvious to everyone who has read an investment book, and they lend themselves to algorithmic programming. In a sense, the market efficiency that follows mass recognition of the patterns tends to cancel them. That is unless the pattern appears to coincide with something else that could be unfolding.

As mentioned recently, the head and shoulders pattern is an example of a reliable pattern when it appears near a topping or (when it is inverted) bottoming cycle. As practically a real-time example, the NASDAQ 100 just flashed a clear H&S topping pattern to mark the peak of the 20-week cycle, as you can see from the chart below:

For now, it looks like the market is trying to make a legitimate turn here. The NASDAQ 100 futures would need to maintain the Globex low, as would the S&P 500 futures. So I may be issuing a buy signal today. Stay alert.

Day Trading Plan

Futures moved in a tight range overnight until the positive (non-inflationary) consumer price data this morning opened the door to a strong rally. However, even with a 16 point gap, we are still slated to open within yesterday’s range, so gap rules are not in play. In fact, overnight inventory is very balanced, and we are currently close to the Globex high. As well, we are at critical junctures on daily charts, especially the S&P 500 and NASDAQ 100 futures.

It’s important to note that both indexes’ trendline resistance is within spitting distance and could be tested today. It’s noteworthy that if you look at the S&P 500 cash index (SPX or SPY), the index actually broke the line on yesterday’s rally, although the index could not close above it. Should either of the futures close a daily bar above the trendline, it will put the bear case into serious question and further confirm that the 20-week cycle has bottomed. This would open the door to an attempt to go back up and conquer the all-time highs.

Current prices are trading very close to the volume point of control which is in the middle of yesterday’s value range. That gives little indication of how traders will act around the open, especially with overnight inventory quite balanced. Higher odds are that the good trades will develop later rather than earlier.

The poor high from yesterday is in play and has potential for repair. Target this high on strength and also a position for a breakout higher to repair the structure. Then monitor for continuation.

The Globex low is very close to yesterday’s low. Consider that fact If the S&P 500 should revisit this weak low. Failure to hold these lows would have the potential to change the tone. Since the Weekly Expected Move low should contain any further downdraft on the NASDAQ 100, I would not expect much further damage this week even if the low is breached.

One more item, the market has tended to rise in the first hour and sell-off in the final hour of trading. This indicates institutional distribution. A change in that tone today could further bolster the bullish case.

A.F. Thornton

Founder's Trading Journal

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While we had a fabulous intraday trade into about 2 pm EST on all the indexes, the market then sold off for the last two hours, rejecting prices right at the downtrend line on the daily chart, at least for our core, S&P 500 Index. From a swing trading perspective, that does not yet trigger a new buy.

If you magnify the upper Algo labels in the chart above, you will see that the Algo places the “Wave State” in the “Kill Zone.” Naturally, I program the circumstances that elicit the label – and they are not circumstances to go long for a few days or weeks quite yet. Also, there are still lots of red and yellow on the status labels, as opposed to green. The labels are purposefully color-coded. Again this is less than ideal.

There is a faint tail visible on today’s candle above, handily rejecting a down trendline break. Volume was light and lower than yesterday on this up day – so no follow-through yet either. But you know the saying “if at first you don’t succeed…”

Tomorrow is a new day – let’s see if the market can take another shot at breaking the downtrend. The NASDAQ 100 is in the same boat, essentially. Both the Dow and Russell 2000 rejected new highs as well by the end of the day.

I am sticking to day trading for now – no Navigator swing buys as yet.

A.F. Thornton

Founder's Trading Journal

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So far this morning, we have the Dow hitting a new, all-time high. The Russell 2000 Small Cap Index closely follows and is within hitting distance of a new, all-time high. The S&P 500 is running in third place, with at least 60 points to go. The NASDAQ 100 is miles behind, at least 1000 points off its all-time high.

Interest rates have backed off a little overnight, while oil is hitting 18-year resistance here. This is giving technology a small boost, as well as a few other growth stocks. Financial and energy stocks are taking a breather. One day, of course, is not a trend.

All of this equates to a striking index divergence – and not a typical healthy, syncopated, or correlated equity market. We have to give some allowance for the discrepancies because the cyclical/value sectors and the leading growth stocks are coming off a historic spread favoring growth. Allowing for some spread reversal is not unreasonable. Nevertheless, the behavior is a warning that this correction may continue south after this brief reprieve.

On cycles, keep in mind that the 20-week cycle could bottom (and likely already has), but the next 20-week loop may result in some indexes and sectors achieving new highs and some not. The cycle could roll over below all-time highs in some sectors – perhaps even in the Nasdaq 100 index itself. This sometimes happens in the fourth 20-week sequence that leads to the 18-month low. The chart below outlines the current road map.

[Clicking on the Image Below will Bring Up the Full Model]

I would normally be issuing a buy signal by the end of the day. The algos are telegraphing the buy signal now, but the price would have to stay above or near current levels by the close to confirm the signal.

The problem is that the algos know how to buy and sell but cannot tell us how far the buy signal takes us. We have to do those forecasts with our other work. If the correction were to continue, then the buy signal would be hard-pressed to capture much gain.

Let’s see what the rest of the day brings, and if I think a buy is warranted for swing traders (meaning we can hold it more than a day), I will telegraph a signal about 15 minutes before the close. Otherwise, our swing trading model needs to stay in cash for now.

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