Archives October 2021

Friday’s short-covering rally left a trail of single prints – indicating a lot of emotional trading. The overnight activity is within the value area, which tells us there was no price exploration in the overnight session. Today’s activity will tell us a lot about future direction as we see if any longer-term buyers are spurred to action. The trend is still down until the Navigator Algo line triggers a buy, breaking the downtrend line.

The higher odds trades will probably develop later rather than earlier in this session. Watch the ends of the single prints at 4338 and 4329.75 as potential inflection points for trades. They often act as support or resistance. Assume a more bullish stance should price hold in the upper distribution (above 4338) and more bearish should they hold in the lower (below 4329.75).

A.F. Thornton

There are four keys to the current bull market kingdom. The first key is Fed policy. The second is interest rates (a derivative of Fed policy assuming the Fed does not lose control of the bond market). The third is earnings (currently threatened by labor shortages, supply chain and transportation problems, inflation, and a potential economic contraction). The fourth and final key is global stability (currently threatened by Chinese military incursions into Taiwan).

The pressure is off the Fed to taper and/or raise rates due to the current stock market correction and economic contraction. But a disturbing, intermediate reversal pattern continues to develop on the 10-year treasury rate chart, and we need to monitor this pattern carefully. The developing pattern could reflect higher inflation expectations and portend a return to 2018 interest rate levels (double what rates are now).

Both inflation and China remain wildcards. As to earnings, strap in as third-quarter earnings – AND FORWARD GUIDANCE – are about to get underway. At least with September’s reversal of August’s stock market gains, the frosting is off the cake, and that is likely a good thing for the short term.

We successfully retested the September 20th low on Friday on short-term fear extremes. Thus the probabilities favor the 80-day cycle low is in place. Also, we were bumping up against the Navigator Algo buy trigger line at Friday’s close, and I will notify readers if it triggers today.

Amazingly, and as deep as the correction went Thursday night, market makers brought the market all the way back to the Weekly Expected Move low by Friday’s close. It is always important to monitor the expected move high and low each week. Knowing the level allowed me to ride a nice trade into the close from the depths of the early morning lows. I honestly expected the trade to fail, but that is why our algorithms are more important than my opinions.

All references to the stock market below use the S&P 500 index futures as the proxy.

The Monthly Chart

On the monthly Emini chart, September’s candlestick was a bear outside down bar closing near its low and below the August low. This is bearish, but the bull trend is strong. Traders will typically buy the first intermediate pullback and retest the high before resuming two to three months of sideways to down trading. The bar after an outside bar typically has a lot of overlap with the outside bar, so we do expect October’s price action to invade September’s candle to some extent, perhaps even retesting the September high. The probabilities do not favor new highs.

The Weekly Chart

The stock market has been in a small pullback bull trend for more than 60 bars (weeks) which is unusual, unsustainable, and climactic. But traders know that most reversal attempts in a strong bull trend are minor. That means they become either bull flags or the start of a trading range. Since this rally has been so extreme, a trading range for ten or more weeks is likely underway which should end in late November on the next major cycle low. Even if there is a marginal, new, all-time high in the next few months, traders should not expect a resumption of the bull trend until at least December.

Friday’s Action

Friday had a big bull body after breaking below the September 20th low. The bulls hope this 2nd reversal up from the 89-day EMA line will resumption the bull trend. They see this as a lower low, double bottom with the September 20 low.

But Friday had a big tail on top, and the September 23rd high is still a credible lower high trend reversal. It could also be the right shoulder of a head and shoulders top. Today, traders will be deciding if the 89-day line and support are more important than the 50-day line and resistance. As mentioned above, even on the daily chart, It is typical for a market to enter a trading range once it has a big reversal down from a buy climax.

Always remember that big up and down bars reflect directional confusion. It is that very confusion that typically results in a trading range. On close examination, the daily chart has essentially been consolidating since July. Traders are deciding if the September selloff is just a bear-leg in the trading range or the start of a bear trend.

A bear trend has a series of lower highs and lows. The bears need to do more before traders believe that the market is in a bear trend. When the chart is this unclear, the probability is usually about 50/50 for the bulls and bears, far from the “crash” talk prevailing on YouTube and other financial, social media. Traders need to see a strong break below Friday’s low or above the September 23 lower high before believing that the trading range is becoming a trend.

As always, stay tuned.

A.F. Thornton

We closed out September yesterday with the break I have been predicting in the near historic winning streak on the monthly charts. In fact, September entirely reversed August’s gains leaving a key reversal on the charts. But all my prediction means is that I was finally right just like a broken clock that is right twice a day.

We closed just slightly above a retest of the 9/20 swing low. They took it down another 30 points overnight but brought it back. Were it not for the overnight action, the cash chart simply looks like we will finish testing the low this morning and go from there. Lately though, the daytime crowd has shown no respect for the overnight team. My fear is that the bears are making too much money to quit now. In any case, a rip your face off short-covering rally is due soon and may have already started.

My dilemma is threefold. First, is this truly the bottom of the 80-day cycle? If so, we should move higher from here to establish the top of a trading range. If not, what are we experiencing? Is the 18-month cycle still in our windshield and the markdown just started? Did the 80-week cycle bottom on 9/20 only to peak early giving us left translation in the wave, as further evidence of a late arrival of the 18th-month cycle? Is all of this just political volatility around Congressional infighting and Fed Chairman Powell testimony?

Let’s see if the small gap higher attracts early sellers or not and assume potential for short covering with a first target of the Globex high at 4320, with an ultimate target at yesterday’s halfback at 4333. Monitor for continuation very closely.

If we are to head lower, the opening drive will move lower almost immediately which would tell us that sellers are VERY firmly in control and are not interested in covering at all, which also would be confirmed by a retracement back down through the open which would be a short. Given the sentiment out there, the cross down through yesterday’s RTH low at 4293.75 could also be an entry or level where earlier shorts can add to their position.

Again, monitor for continuation very closely. It goes without saying that the Navigator Algo has not rendered a buy signal yet.

A.F. Thornton