Navigator Algorithms – 10% Nasdaq 100 Futures, 10% S&P 500 Futures, 5% April 16, 2021 XLF 33 Calls, and 5% April 16, 2021 XLE 49 Calls
Revised to Include Stop References
Yesterday. I hammered the talking heads who got too negative on the market by last Friday. Yet, I only had the guts to go to a 30% invested position myself. Granted, the position is highly leveraged, but I still confess to being a chicken and somewhat affected by all the talk of a meltdown. So who am I to criticize?
Yesterday was one of the most powerful rallies I have seen in a long time. At one point, 495 out of 500 stocks in the S&P 500 index were positive – and the breadth lasted most of the day. We saw ticks on the NYSE exceed +2000 at one point. It does not get much better. The gains are to be expected when larger degree cycles, such as the 20-week cycle I have been discussing of late, launch. In fact, we can use the launch as additional confirmation that the cycle has bottomed. However, until the market achieves new highs, confirmation is not absolute.
Of course, the buying likely included considerable short-covering – forced buying as opposed to real, bullish investors. Never confuse the two – as it can be to your detriment.
But I would not be doing my job if I did not identify at least one negative. Using harmonics and corrective pattern analysis, the market could be forming a bearish “Shark Pattern.” If so, the peak would come at about 3870 on the S&P 500 futures. And that would coincide with a small downtrend line you can draw from the recent peak at 3959.25. I view that line as our line in the sand right now between bullish or more bearish activity.
Aside from that, the trading channel’s top takes us up over 4000 on the S&P 500 index:
Anyway, I would move your stops up to two ticks below the 5-day EMA on all of the aforementioned positions. The Globex lows on the NASDAQ 100 (13153.50) and S&P 500 (3866.25) are good proxies. Since the XLE and XLF don’t have Globex trading, use a couple of ticks below the top of yesterday’s gaps (the gap tops are 49.25 on the XLE and 32.86 on the XLF). Use a close below the levels for now as your stop, rather than an intraday violation.
I want to add to positions if the right opportunity presents. Otherwise, I am satisfied with our current mix. Last night, the S&P 500 futures pulled back to the 21 EMA, but I slept through it. If I had been up, I would have moved us to 50% invested proportionately.
Today’s Plan
Overnight inventory is balanced, giving little indication of the market’s direction this morning. I would let the market settle a bit before forming an opinion. On the S&P 500, key levels will be 3870, where the shark pattern projects a potential reversal, and the downtrend line comes in from the all-time high. Again, use 3870 as your line in the sand for bullish versus bearish bias. If we manage to conquer that level, we would need to conquer yesterday’s high at 3912.50 – then the Weekly Expected Move high for this week at 3936 which is right above yesterday’s high, and likely to be an obstacle for the remainder of the week.
We can exceed the WEM high, at least early in the week, but the price is likely to anchor us for the rest of the week. Nevertheless, when and if we conquer 3912 or 3936 meaningfully, then we go up to challenge the all-time high at 3959.25.
Settlement yesterday was 3899.50 on the S&P 500. On the downside, we should encounter support at the halfback of 3885, then 3881.50 for the top of the single prints, then the 3866 overnight low, and then yesterday’s gap high at 3859 or so. The daily 5-day and 8-day exponential moving averages should provide support along the way.
We remain in lofty territory, risks are high, and the shark pattern projection at 3870 could be a bearish turning point for the market. That would be the market’s ultimate revenge. We think all is well after such a great day, only to see the market reverse and crater. I specialize in unintended consequences – so I think about these things.
Balanced trading frequently follows a large up day as yesterday, so the overnight range may be repeated in today’s trading.
A.F. Thornton