Archives June 2021

Buy Signal

The Founder’s Group is taking a long position in the NASDAQ 100 futures at 13733 with a 15 point stop. This is a somewhat risky trade at the top of the range, but also note the upside reversal Head and Shoulders pattern formed from Friday. As always, do your own homework carefully. QQQ at the money July 16 calls or a debit spread will work as well.

Pre-Market Outlook 6/7/2021

Be sure to review the Top-Down analysis published earlier this morning. Not a lot has changed in the bigger picture from last week, except that we are now back at the top of the trading range, with bulls hoping for a breakout.

Except for a few ticks, the overnight range is within Friday’s range. The inability to break out of Friday’s range tells us that the market is in balance for now.

The overnight balance often carries over into the regular session. We always want to think in terms of probabilities – and that is the most probable course.

The all-time high right above us does complicate the probabilities. Market makers could try to run the buy-stops above the range to capture the order flow.

Pay attention to internals and FANGMAN+T. Strength with either or both could support a breakout.

Friday’s market profile resulted in a double distribution. The overnight halfback is the exact point where the upper one ends, and the lower one begins. Treat each profile as a different day. Acceptance in the upper one is more bullish than acceptance in the lower one. To put it another way, watch where value develops today.

The all-time high could easily be in play today, and traders should also note that the overnight high and Friday’s high are almost identical. That sets up a potential go/no-go level on the upside.

Given the overnight tone, assume further balance if the market cannot move out of the overnight and Friday range. Potential is there for higher over the overnight high, targeting the all-time high.

There is an unfilled gap below us from Thurs/Fri of last week. This gap should remain unfilled for the time being if the bullish sentiment from late last week is to hold. Filling it has the potential to change the tone. Continue to carry it forward as long as it is unfilled.

View from the Top Down

View from the Top in Assos, Cephalonia (also known as Kefolonia), Greece

The market was just plain wrong on Friday...

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

Pre-Market Outlook – 6/4/2021

The market reacted positively to the April employment report released this morning, showing the unemployment rate dropping to 5.8%. As you know, I don’t typically day trade on Friday.

The Employment report got prices well above yesterday’s high. Still, we have now come back into range. We also have overnight inventory that is relatively balanced with an almost equal distribution of time spent on either side of settlement.

Even if there is a small true gap higher by the time the bell rings, we would still be well within the larger balance area where there is a lot of value range if you look to the last week of the market action. For these reasons, better trades are likely to develop later rather than earlier today.

The second thing to note is that I would only focus on two fundamental levels today – the overnight high at 4210.25 and yesterday’s low at 4165.25. On the NASDAQ 100, find the equivalent levels, keeping in mind that the index already bounced from the WEM low yesterday.

It is likely that anything between these levels is simply going to be responsive trade that doesn’t bring about any meaningful change.

Change is an important word. Trading is all about anticipating change and trying to either get ahead of it or get aboard.

The market is looking for a catalyst in my view, and when that arrives we will see the picture more clearly.

Chop, chop – is the buzzword for today.

A.F. Thornton

View from the Top – Interim Update

Every once in a while, the market likes to humble me. Yesterday, the S&P 500 bounced at the 21-day line as expected and returned to the 4195 area, where I was looking to get short. However, the market ran out of time – but still – so far, so good. Then the price recovered enough to negate the Algo sell signal mentioned yesterday morning – standing the probability on its proverbial head. The sell signal may yet return today.

Nevertheless, the Founders Group honored our 5-day line stop at 4190, and the market failed to close above the 5-day line by the close. So I remain comfortable in cash at the moment. I am still looking to short rallies – but I am not getting aggressively short as yet.

Yesterday, the S&P 500 managed to close inside its wider range (between 4215 and 4180). But the NASDAQ 100 failed to get back inside its analogous range.

Former market leaders like Apple and Tesla continue to break down, which negatively affects the indexes. Bitcoin perked up a bit yesterday, but it is still throwing a pattern that typically points lower.

On the surface, then, it would not seem that the picture is any more transparent today than it was yesterday. The S&P 500 continues to move sideways – and that can chew up premium if you are investing with options.

Beneath the surface, the action continues to be about rotation. Rotation is healthy – correlation is not, especially on a down day. In thinking about how to illustrate this, I thought I would show you the positive extreme first:

In the chart above, you can see that the XLRE Real Estate ETF continues to move above its May peak to new highs. That makes sense in light of recent inflation trends.

On the opposing side, you can see from the chart above that the XLK Technology ETF has a lower peak than May. Given the lofty valuations, that makes sense too. The money rotating into the other sectors has to come from somewhere.

Then you can see from the last chart above that the SPY S&P 500 index ETF is almost matching its May peak, somewhere in the middle of the two previous price charts. 

Stepping out then, we still have Communications (XLC), Energy (XLE), Financials (XLF), and Real Estate (XLRE) moving higher at the expense of our former leaders in Technology (XLK), Utilities (XLU), Health Care (XLV), and Consumer Discretionary (XLY). We find industrials (XLI), Materials (XLB), and Consumer Staples (XLP) are moving sideways with the S&P 500.

With the pie chart below, you can begin to see how each sector influences the S&P 500 index. For now, the math is such that the aggregate of current sector performance moves the S&P 500 sideways. When I cannot achieve my goals in the S&P 500 index futures, I will look up the top 10 holdings of each sector fund that is moving. Because the ETFs are cap-weighted, I can often buy options on one or two top holdings to meet my goals. A good resource for this is ETFdb.com.

It is vital to carry the current leadership forward, as trends tend to persist. Institutions have barely scratched the surface investing in many of these existing, leading “value” sectors and will likely reposition themselves further if the correction I am expecting materializes.

I sketched a head and shoulders topping possibility in the NASDAQ 100 chart above. The pattern projects a low down to 12,200. I am not a huge pattern trader, as our brains look for them – even when they don’t exist. I will point them out when I see them, however.

The NASDAQ 100 index has likely seen its lows for the week, bouncing off its Weekly Expected Move low yesterday. I see the same H&S pattern present in Apple (AAPL). If the design materializes, the S&P 500 might fall to the May lows in sympathy with the NASDAQ 100 – a target around 4050. I would speculate that these levels will establish the bottom of a new trading range. But again, I am guessing. Guessing is what we do while we wait for the market to do its work.

I see the trading range possibility because, as yet, the market appears to be digesting current valuations – not rejecting them. The sentiment is neither frothy nor particularly supportive – almost dead neutral. We do have the cycle correction ahead, but there is no way to predict the depth or the exact start date. The dip could visit the 200-day moving average, an unpleasant journey to 3750 on the S&P 500. However, with the average in a nice upward slope, why not simply move sideways into the line over a few months of the summer?

The linchpin in all of this is Federal Reserve policy. If the Fed eases up slowly, something they clarified yesterday, maybe they can engineer a soft landing such as I am describing. They made clear yesterday that they might slow up corporate bond purchases – but not treasuries. The market will find that palatable. 

Part of the market’s recovery yesterday was due to the Biden administration easing up talk of higher corporate taxes, offering a minimum 15% corporate tax instead. The market liked that too.

Stay tuned, as the road ahead promises to be interesting.

A.F. Thornton

Pre-Market Outlook – 6/3/2021

Yesterday was classic WWSHD and, as Peter Reznick over at ShadowTrader.net calls it – “Door #3 action. 

As to Door #3, the reference is about sideways rather than trending up or down action (Doors #1 and #2). Yesterday, we tested both of our key levels that should have brought about change (4215 on the upside and 4198 on the downside), and they didn’t. As to WWSHD, buyers should be frustrated as they had some acceptance over the start of the single print area at 4210, which fizzled.

What bothers me is that as we approach the top of the range, it feels like my grandmother slapping my hands when she caught me in the cookie jar. The selling has been aggressive at the top of the range all week, leaving us with so-called “b” market profiles. 

A “b” profile looks like the alphabet letter, where time spent, and volume is thin along the upper stem, indicating very aggressive sellers up the line. The shape is wide at the bottom, where all the rotation action settles. 

The belief is that longs are trapped, still trying to exit the market – but they need to be quick at the higher prices. While not a hard and fast rule, “b” profiles tend to appear at the end of uptrends, so carry that forward in your narrative.

Tuesday and Wednesday's S&P 500 Volume and Market Profiles with the Daily Candle Alongside - Both are Examples of "b" Profiles, with Tuesday's (the first) Profiles Being the Best Example

The 5-day EMA held the line yesterday – though just barely. So we were still in the game with the Navigator swing strategy. Unexpectedly, the Asians took us right back to the top of the range in Globex last night.

The Plot Thickens

I wrote all of the above last night before Europe opened, as I usually put my initial thoughts down early in the evening, then update them about 30-minutes before the New York open. I would have added that the Fed was jawboning the market down again yesterday – indicating that they were getting ready to taper bond purchases – or quantitative easing as it has come to be known. That put a negative quell on the market mid-day.  It is axiomatic that the Fed still holds the keys to this market uptrend.

Now we can add that the Europeans came into the markets in a sour mood. New York has followed suit pre-market. So the roll-down to 4173.50 per the “look above and fail” in our balance rules on Tuesday is now complete. 

Unfortunately, this price action has tripped our 5-day EMA stop on the Navigator Swing Strategy at 4190, and the Algo sell signal on a negative momentum divergence. A volatility squeeze that is now firing short could easily magnify the downside. It likely will make sense for the active trader to short rallies instead of buying dips from here. 

I need to mention that technically, the Algo signals are not valid until today’s candle is complete. Still, it would take a dramatic recovery in the candle to invalidate the signal. It has happened before, but it is not the most probable outcome. We have to make our decisions on probabilities, not certainty. My bias is not constructive, even though I do my best to be objective. 

For today’s trading plan, overnight inventory is nearly 100% short this morning, The S&P 500 will open with a true gap down right into the 21-day line, and I would expect overnight traders to buy on the open to take profits on their short positions. Of course, gap rules apply this morning, focusing on #2 and #4.

Unlike when the profile structure is repairing, the rotation to the low end of balance can be completed in an overnight session. We can already see buyers stepping in at that level as prices just below it were rejected recently – and we also see some positive reaction to the unemployment numbers this morning. Early trade, then, could be tricky.

Regardless of whether there is a fade or not, assume that there is overhead supply from the larger balance area above us. That means traders can sell counter-trend rallies towards yesterday’s low around 4195 given the correct corresponding context.

Should the opening drive be lower and acceptance found below the overnight low, look towards the Weekly Expected Move low at 4153 for support. That should be the worst case for the week. 

Beyond the WEM low is the 4120 balance area low. The uptrend and 50-day lines also converge there. Falling through 4120, then, would confirm that the 18-month cycle correction is underway.

While I expect a bounce at the open, I think cash is the best place to be for now, unless you want to shift gears and short rallies.

Pre-Market Outlook – 6/2/2021

Things have perked up in the last hour, and we will open with a small gap higher, but not a true gap as we are still well within yesterday’s range. Gap rules are not in play, and the higher odds trades are likely to develop later rather than earlier in the session.

Yesterday’s activity represented a “look above and fail” as per the balance rules. The rule portends potential for rotation to the opposing end of balance which is roughly at 4173. Remember that potential is not certainty and the 5-day EMA is powerful support above that level.

We have a 45-degree line overnight, and 4198 is the wide part. The 45-degree line is at odds with the balance rules thesis that we should move to the low end of balance. The 45-degree line is a sign that sellers have painted themselves into a corner near the lows of the session and creates the potential for an upward reversal in the next session. The 45-degree low at 4191.75 should be viewed as secure. A move up through 4210 (the single prints) would signal strength for long bias.

On weakness, watch the 4198 area to see if we can get any acceptance below there. The odds of moving to the ONL at 4191.75 increase with acceptance below 4198. The low end of balance at 4173 lies as the next support below 4191.75.

As always, don’t discount the potential to hold within balance. This would be signaled by range-bound trading that doesn’t find acceptance above or below any of the key levels listed above. Watch for confirmation from strong internals on a break above, or weak internals on a break below.

A.F. Thornton

View from the Top – 6/2/2021

Arogostoli, Cephalonia, Greece

Well, my view has been different recently – coming from a small island in the Ionian Sea. I have been here for a while and likely will remain another month or so. It has been a sad journey, tending to the untimely and Pandemic-related death of my father-in-law.

Traditions here are pretty different. As one example, the church bell rings in the village when someone dies. I guess I never understood the meaning of “For Whom the Bell Tolls” until now. Then, posters go up all over the village announcing the death and funeral – like the lost and found signs we see on telephone polls at home. The funeral occurs within 24 hours, as there is no embalming. It does not seem enough time to grieve and let go. But it is what it is.

Talking to people on my travels in and around here, the views of most Europeans have been disheartening. They believe that the United States has lost its footing since Trump left office. Some say the country is over as we knew it. It is a perspective unsurprising to someone like me who studies the trends, but it is nevertheless alarming to hear it in person. 

In the U.S., the news media led us to believe that the Europeans disliked Trump and his policies, but clearly, that was an elitist view. Regular people seem to embrace populism similar to the Trump movement in America. The wealth gap is at the heart of the problem here, just as it is at home. Anyway, it is always helpful to get different perspectives. 

When the relics of the Pandemic are in the rearview mirror, we are likely to get a more balanced view of the post-pandemic world. Hopefully, policies will focus on long-term solutions to helping families at the bottom of the ladder achieve lasting progress toward a good and decent standard of living.

So we ended May with a price candle called a “hanging man.” As the name might indicate, it is not a bullish candle. It would portend a few months of consternation ahead, just as we are expecting.

I would put yesterday’s action in the WWSHD (When What Should Happen Doesn’t) category. The first day of a new month should be strong. It wasn’t, save for energy, basic materials, real estate, and financials. Those sectors tend to be late-cycle. Financials are on thin ice, as the critical spread between 10 and 2-year treasury rates has been narrowing lately. The banks make money on the spread, so the preference would be that it widen.

Perhaps more importantly, in the S&P 500 index, we had another “look above and fail” per our balance rules. As pointed out in yesterday’s pre-market outlook, we expected the holiday and Globex traders to fade the gap and take profits (old business) and hoped the new monthly inflows (new business) would buy the breakout above balance. That didn’t happen. But for the daily 5-EMA support, the market would have rolled down to the balance area lows around 4179. That could still happen in today’s session.

That leaves us with a 50 point trading range in the last six sessions roughly bounded by 4180 and 4215. You could also define it loosely by going back to April, with a southern boundary of 4120 and 4220 to the north. What is more certain is the importance of the trendline coming up from the March 3rd low and connecting the lows from May 13th and May 19th. The trendline also tracks the 50-day line reasonably closely at the moment.

As Edwards and McGee pointed out in their seminal work on technical analysis, when a trendline is touched once, it might be chance, twice it might be a coincidence, but three times and it becomes a good pattern.

The Founder’s Group is still focusing on the daily 5-EMA as our line in the sand for the Navigator swing strategy. Partly, that is due to our leverage in the S&P 500 futures contract. For non-leveraged, very long-term portfolios, a close below 4120 would be my maximum tolerance. The 50-day line and the trendline mentioned above congregate there. A compromise might be a close below the 21-day line – smack in the middle between the Founder’s Group line in the sand and the unconditional support at 4120.

For the moment, then, financials, metals/materials, real estate (XLRE), and energy are leading the charge. These sectors help drive the IWM (Russell 2000 ETF) higher. Crypto is still bleeding, perhaps forecasting trouble. Commodities (check out the DBC ETF) hit new highs yesterday – energy undoubtedly boosted the gains. I am still buying Freeport-McMoran (FTC) and PAVE (infrastructure ETF)on dips to the 21 or 50 – as the charts dictate.

I am continuing to keep leverage at a minimum unless I am right in front of the computer.

As a side note, Apple (AAPL) looks like it could be forming a head and shoulders topping pattern. Keep an eye on it. It is hard to imagine the broad market gaining much without Apple.

There is no big move to defensive sectors yet, just the continued rotation from growth to value style stocks and back.

The SKEW index is still historically high, so there is a significant premium to be had for premium sellers. In part, that is causing the trading range to become self-reinforcing. Market makers fight prices above the range to keep the premiums they have sold to retail investors.

Candidly, if you don’t need the money, this is an excellent time to put everything on the shelf and do something else. I am not an enthusiastic buyer, but it is a bit early to get aggressive on the short side.  Again, never discount the possibility of a trading range for the summer, finishing in a fall correction.

A.F. Thornton

Pre-Market Outlook – 6/1/2021

While the market (as measured by the S&P 500) has not progressed much since mid-April, my weekend review found the market internals constructive. As the market consolidates around a center point such as 4200, it builds a lot of energy for an eventual, significant move. Though the direction is not readily discernable, it is reasonable to conclude that the market will move toward the prevailing trend, which currently points higher.

This morning, oil is hitting new post-pandemic highs, and we will see if the higher auction prices are accepted by traders today. That would bode well for the XLE (Energy ETF). While interest rates have been behaving of late, some inflation reports mid-week, not to mention the monthly employment report on Friday, have the potential to rock the boat. Higher rates will benefit the XLF (Financial ETF). If both the XLE and XLF are moving higher, that boosts the IWM (Russell Small-Cap ETF). The IWM has significant exposure to energy and financials.

Meanwhile, the SMH (semi-conductor ETF) has been moving up nicely from a three-month consolidation. Semi-conductors can be an excellent leading economic indicator, just as transports tended to be in the past. Nevertheless, I still think semi-conductors and technology (e.g. the NASDAQ 100) are good candidates for a trading range when they reach their prior peaks. Only time will tell.

Gold, copper, and silver have been moving higher out of consolidations, with gold breaking its recent downtrend. I am keeping an eye on FCX (Freeport-McMoran) as a proxy for copper and GOLD (Barrick Gold) as a proxy for gold. The relative strength (vs. the S&P 500) has been there for FCX but is still somewhat anemic for GOLD. I am not interested in something that does not outperform the market. Gold is also rising at the expense of the U.S. Dollar. The dollar has weakened once again as lower interest rates make it less attractive than foreign currencies. Lower rates are a picture show, however, that is enjoying popcorn at intermission.

Bitcoin has not been around long enough, but I am pondering whether or not it might be a leading indicator in the risk-on/risk-off analysis. Its recent struggles may portend that an intermediate correction will present soon in the financial indices. It had another challenging weekend, remains down 50%, and may have more downside ahead of it. 

Given that we expect an intermediate correction anyway in the 18-month cycle peak, it makes sense to lighten up on risk when presented with good rallies. I am reticent to put on much leverage here and always on guard for liquidation breaks. 

The volume would indicate that we are more likely trading with the weaker hands of the retail crowd at the moment. The institutions may already have hedged their bets. The SKEW – one measure of such hedging activity – index is off the charts – so the demand for OTM puts is at an all-time high – perhaps signaling a “black swan” event ahead. The SKEW has a mixed forecasting record, however, and has remained persistently high all year.

Morning Trading Plan

We will open with a true gap and breakout from a few days of balance, and that puts gap rules in play with balanced inventory from Friday (we ignore yesterday’s Globex holiday session). Of course, old business comes before new business, so there is potential for a fade early which would be the overnight inventory correcting itself (old business). Then there is also potential for rally (either after a full gap fill or partial) because the new business may come in and buy the breakout from balance. Balance rules then also apply – as we are breaking out of the value area highs, which are virtually identical in the last five trading sessions.

On any strength (be it in opening drive or after a fade), target the overnight high at 4228.25 first and then the all-time high at 4238.25. As always, monitor closely for continuation. There could easily be new money coming into the market (new business) on the first of a month that may take us higher.

 Any fade that doesn’t stop at Friday’s high (4215.50) should target the prominent TPO POC first at 4209.50 with the clear understanding that there is potential for a rotation to the lower end of balance (balance rules).

Welcome to June – the time flies.

A.F. Thornton

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