Archives December 2021

There is no perfect vacation for a trader. So let me drop a quick note.

The trading range I had expected is well underway. And we did bounce on the “Options Expiration” pivot I talked about on Sunday night.

The Navigator shifted back to a buy signal at 4531.75 on Monday morning. You can see the turn on the daily chart above, and we saw some follow-through yesterday and today. Here is a granular look at the buy signal and turn:

The Founders Group is on vacation, so we are not partaking in the run these past few days. As we say at the office, there is always another train leaving the station.

We are now at the top of the trading range – or close to it. Given the brick wall that we have seen at 4700 these past four weeks, it is doubtful we will see a breakout. Also, we are near the Weekly Expected Move High of 4708 on the cash index.

That we might not break out is just an opinion, of course. But the statistical probability of a breakout failure is 80%. We will see how it goes, but I would not be surprised to see another loop back down. Price action always rules opinion anyway.

A lot of this price movement is short covering. Sentiment got too negative for further declines, as I pointed out last Sunday. And we always have to be mindful of manipulation in light, holiday volume. So it is not advisable to jump in at the top of this range.

Perhaps the market is in the process of forming an ascending triangle.

We know from history that when Fed policy begins to shift, the market tends to stall into a trading range. Markets don’t typically roll from bull to bear immediately. Usually, a trading range precedes the transition.

Anyway, this market has yet to violate the recent bull uptrend and may find support again on the trendline if we loop back down. Therein lies your makings of an ascending triangle.

The bullish price action belies all this talk of crashes and such that I read. Nevertheless, I fully expect considerably more volatility in 2022 than we have experienced recently.

I hope this quick update keeps you alert as we get ready for the new year.

Again, Merry Christmas and Happy New Year

A.F. Thornton

The Next Publication Will be January 3, 2022

Navigator™ Swing Strategy – 100% Cash / Navigator™ Day Trading Strategy – Below Key MAs – Bias is Short.

I have been working all weekend on my 2022 outlook. In a phrase, my conclusion is that we are rapidly running out of pavement. The best case I see is a trading range, with at least a 20% plus decline somewhere in the mix.

With the Fed pivot, low productivity, dragflation, and the pressure coming on energy costs, the picture looks a bit bleak for swing and/or position traders. Just the fact that the Fed will be tightening into economic weakness is enough to roil the markets. However, if you are a short-term trader, willing to trade both the long and short sides, it promises to be a phenomenal year with a lot of volatility.

We will be introducing several new services when we start up again in January. One of those services includes a live trading room several times a week. Given how that will impact my previously enjoyed freedoms, I am taking these last two weeks of the year off. So other than my 2022 outlook video, this will be the last formal outlook unless circumstances require emergency commentary.

Swing Traders

On Friday, we stopped out on our Dow and S&P 500 calls on sustained price action below the 5-day lines. We were out at 356.25 on the DIA and 463.50 on the SPY.

We had a substantial profit on the first third of the calls at the open on the morning after the Fed meeting on Thursday. But we were only slightly profitable on the remaining two-thirds of the positions.

The Dow was walloped by the CDC withdrawing its Johnson and Johnson Covid Vaccine recommendation over blood clots on Friday. JNJ is one of the 30 Dow stocks. I lost a father-in-law earlier this year to the vaccine and communicated the risks on these pages. I am mortified that it took this long to make the announcement.

The Fat Five tech stocks finally started to join the correction, negatively impacting the S&P 500 (as well as the NASDAQ 100). We stopped out when the SPY gapped open below the 5-day line. We gave it an hour or so before we pulled the trigger.

Keep in mind that the S&P 500 has been bottoming on the Monday/Tuesday after options expiration over the past six months or so. This could bring us the bottom of a trading range in the next few sessions.

So now what? Do the surviving JNJ vaccinated now have to further experiment with the Phizer and Moderna vaccines? Or should I call them gene therapies – since they really are not vaccines at all?

Interestingly, Dr. Robert Malone, who invented the mRNA technology, published a video over the weekend imploring parents not to give their children the Phizer and Moderna vaccines based on his technology. It is hard for the government to cover that up – when it came straight from the inventor himself.

Swing Traders should hold their powder dry until January. Unless there is an exceptional opportunity, I see big bars back and forth on the charts, which means big confusion. Big confusion usually leads to a trading range. We will see how it goes on Monday, but I will be traveling for the holidays, and you will be on your own. Take some time off – it is not worth the risk here.

Day Traders

I see bears shorting bull candles and bulls buying bear candles. That is not easy trading – as trends never have a chance to get underway. Also, we are heading into very light holiday trading – which allows a lot of hedge fund manipulation. That is why I’m not particularly eager to trade in light volume – as there can be a lot of sudden liquidation breaks. So be careful.

Key levels to watch for support include the uptrend lines from March, October, and last week’s low. The key reference above is 4700 on the S&P 500, almost becoming a fortress wall.

Sentiment indicators are still quite negative, which is normally bullish. So don’t become overly negative. Look for a trading range to set up for a while and trade the range if you are inclined to trade over the holiday weeks.

I highly recommend taking these last two weeks off and recharging your batteries. I am preparing for one of the toughest markets on record next year, and you should too.

Merry Christmas and Happy New Year,

A.F. Thornton

Navigator™ Swing Strategy – 25% SPY and 25% DIA January Monthly Calls – Add on Dips to the 5-Day Line / Navigator™ Day Trading Strategy – No Trading Today.

I woke up to almost a six-hour overnight power outage. Naturally, I first made sure I had paid the bill. Since I live in my computers, I tend to be an absent-minded professor from time to time.

Since that wasn’t the case, it turns out the power company was repairing something overnight – or so they say. It is the third time the power has been out since I returned to Southern California these past few months. I am starting to think Trump was right – “Honey, can you look outside to see if the wind is blowing the windmills for power? I want to trade this morning.”

By the way, what happens to your electric car that is supposed to be charging overnight? I am sticking to a hybrid for now. Plus, my hybrid SUV irritates the Commies around here.

Anyway, since I usually work until 11:00 pm and start my mornings at 3:00 am, I find myself less than ideally prepared today. The power went off at 10:00 pm and did not come back on until 4:00 am. The circumstances mess with my Trading Chi.

Fortunately, that might be ok since this is Quadruple Witching day. We get this day four times a year when almost everything in the derivatives universe either rolls or expires. It has tended to draw the markets down of late, which may explain yesterday’s rollback of Wednesday’s spectacular gains. One can only hope.

We reduced our 40% position in each of the S&P 500, and Dow January calls to 25% each at the open yesterday. I was glad we peeled off a third of the position, as the market went nearly straight south for the remainder of the day. Fortunately, we held the best indices for the moment. The Dow losses were negligible, and the S&P 500 losses were tolerable. The NASDAQ 100 and Russell 2000 bore the brunt of the damage, both closing below their five-day lines.

At this writing, the S&P 500 is below its five-day line in overnight trading, and the Dow is right on it. This area is where we either add to the positions or stop out. And it will be hard to determine on a day such as this, where the market tends to behave more like a market of stocks dancing around expiration than a stock market. Let’s see how it goes.

And that big dilemma is still on the table. We have been experiencing a bull market in the major indices and a bear market in most stocks. While rotational from growth stocks to value stocks, yesterday’s reversal saw the indexes’ clobbered by the fat five – Apple, Amazon, Facebook, Nvidia, and Tesla. Those stocks are 25% of the S&P 500 and 40% of the NASDAQ 100 indexes, respectively. Their influence is unpleasant unless the stocks are going up.

Swing Traders

Let’s see how the day goes, even though it won’t tell us much. The S&P 500 and Dow Industrials have the convergence of the five-day line, 21-day line, the Weekly Expected Move low, and the Navigator Algo Trigger to support them at the current price. It might be best to leave well-enough alone today and go with the specific option’s expiration script where we dip on Monday and turnaround on Tuesday. Staying with our calls that expire in a month requires evidence that the rotation underneath the market is enough to compensate for the weakness in the generals.

Day Traders

It would be best if you were starting your weekend already. You should not be day trading today if you are not executing a specific “pinning” or other options expiration strategy. By the way, 4600 looks interesting for the SPX on a pinning trade.

Enjoy your weekend, and recall that I will only be publishing as needed until January 3rd, when all of our new services and the live trading room will start.

I will put out a short video on the macro picture over the weekend.

A.F. Thornton

Navigator™ Swing Strategy – 25% SPY and 25% DIA Calls – Add on Dips to the 5-Day Line / Navigator™ Day Trading Strategy – Bias is Long – Key Levels Below.

One of my mentors used to say that trading was a lot like magic. There is a lot of sleight of hand and misdirection. In other words, it is easy to get distracted by the “thing” when the real issue is less apparent. Yesterday reminded me of his wise counsel.

While everyone was focused on the Fed announcement, the Democrats quietly shelved the Build Back Better bill until next year. We all know that in an election year, especially with the polls as horrific as we find them now, the Democrats will be focused on getting reelected. So the bill is likely dead on arrival – forever.

I would humbly suggest that the market rallied on the failure of Build Back Better – not the Fed announcement. The market celebrated $5 trillion less in debt and deficit spending, less inflation pressure, no tax hikes, no 80,000 new IRS agents, less Socialism, etc. So did the market actually rally because the Fed decided to get more aggressive? Or did the market celebrate the death of Build Back Bankrupt? You decide.

Celebrate it did, and the market is slated to follow through on Santa Claus’s rally this morning with a gap open and new all-time highs for the S&P 500 Index. The NASDAQ 100 is next in line, followed by the Dow. The Russell 2000 is tagging along with the medics for now – but it is rising nonetheless.

By the way, I love how the pundits are characterizing the Fed action as “aggressive.” Let me get this straight – they are slowing their liquidity pump. But they are still pumping. And they will do so until March. No rate hikes until after that. It looks like the punch bowl is still there to me. All I see is that the Fed warned the Wall Street crowd so they have plenty of time to exit the markets next year. Also, the Fed gave the market what it asked for – no more and no less. So, “Party on, Ted.” “Excellent!”

And what about the Fed’s latest round of absurd projections? Looking at their last couple of dot plots, I wonder which governor predicted a 4.75% Fed Funds rate for 2020. Another had predicted 4%. Can you say “Bankruptcy” for the Federal Government?

In yesterday’s dot plot, five FOMC participants actually believe that the Fed will hike all the way from 2.75% to 3.25% by 2024. What is the annual interest on $30 trillion at 3%? How about triple what it is now. We don’t even collect enough income taxes to pay that interest, much less anything else in the budget.

I seriously doubt that the Fed hikes at all in 2022, and we certainly will not see six hikes by the end of 2023. If so, we will likely be speaking Mandarin by then in the wake of our economic collapse.

Speaking of Mandarin, with China’s Real Estate Market imploding and slower growth, as well as other draconian reactions to the latest Omicron variant, the global economy is already showing signs of slowing. Eurodollar futures are inverted – an ominous prediction for the global economy. Interest rates are more likely to take care of themselves in the circumstances. And that assumes the fix is not in on inflation anyway.

Swing Traders

I know you had to be quick yesterday, but we went to a 40% position in each of the Dow and S&P 500 indexes at the Weekly Expected Move lows. The indices turned higher after Chairman Powell started speaking. They never looked back.

Because the market is almost vertical, I will cut those positions back to 25% each at the open today. From there, I plan to keep the Swing Trading strategy at 25% invested in SPY and DIA January monthly calls as long as we stay above the five-day line or we reach the top of the trading channel around 4800.

Conservative swing traders can add to positions on any visit to the five-day line. And while I will be out for the holidays next week, I will advise if anything changes – exactly what I had wanted to avoid after last Monday. I wanted unencumbered time off, but the temptation was too sweet yesterday.

Day Traders

I am writing this at about 4:30 am PST, and the S&P 500 Futures are only a few ticks from the all-time high. There are no references when we hit blue sky above the breakout.

If the market achieves new highs above 4740.50, monitor for continuation. Use 4700 as your line in the sand to maintain the break-out status. Buy dips to the 15-minute and hourly 21-period mean if the market remains brisk – and sell at the standard deviation bands.

The market will be short-term overbought soon, so be careful. Remember that tomorrow is Quadruple Witching expiration, which could distort trading even today as market makers position for expiration. I am not trading tomorrow, and there will be no Pre_Market Outlook.

One last cautionary note – we still need the soldiers on board for this rally, or we will have lots of cautionary divergences forming on this run. But as I said yesterday, from a pure chartist perspective, the bull market is very much intact on the S&P 500 and NASDAQ 100 indices.

A.F. Thornton

I know I said I wouldn’t, nor did I want to monitor anything over Christmas, but the Founders Group is back to a 40% position in each of SPY, and DIA January ATM calls for a total of 80%. As Chairman Powell spoke, we entered the calls when the SPY was 463.73, and the IWM was 356.25, respectively. As I had suspected, the Fed was a bit more aggressive than anticipated, so the market is happy for now. Welcome, Santa Claus!

Since this is a swing position, you can enter at the close today or even on a small pullback tomorrow. The market is racing on short-covering at the moment, so it makes sense to wait for the short-covering to calm down. You may be able to enter in the morning.

I am hoping we can hold these positions for a few weeks. With the Fed meeting out of the way, there is not much negativity between now and year-end.

A.F. Thornton

Inflation has two components. First, it has the monetary side. In that regard, both Congress and the Fed have screwed this economy into oblivion by flooding the money supply with their record deficits and other economically suicidal policies. That is why prices are skyrocketing.

But there is a second component that involves the rest of us. It is the psychological component involved in whether the population “accepts” or “rejects” higher prices. When inflation becomes ingrained in our collective psyche – it isn’t easy to put the genie back in the bottle. That is where we find ourselves today, probably awaiting one of the most important Fed announcements of all time.

There are two camps. The first camp, cynical of all that has gone on the past few years, believes that the Fed does not have the guts to crack down as is necessary. The Fed would need to stop the QE taper, raise interest rates, and then bring on a recession. The Fed would finish off Joe Biden’s Presidency in the process, and the Democrats (like the Republicans after the Great Depression) would not see majorities again for a generation.

Recall that while Fed Chairman Powell has been reappointed, the Democrat-controlled Congress has not yet confirmed him. So while the Fed’s independence and credibility are at stake, so is Powell’s job. It is not an easy position for him. Moreover, Congress has/is rendering the Fed irrelevant with its recent fiscal policies.

The second camp believes that while the Fed screwed this up big time, it is not too late to tame inflation IF Powell is sufficiently aggressive. That will require pricking the asset bubble. The stock market could lose half its value in the process.

Swing Traders

We are 100% cash on our swing trading model now, after being stopped out on Tuesday’s monster Producer Price Index reporting almost 9% wholesale inflation. While this position is prudent, we risk missing a nice rally between now and year-end. But so be it.

When we hit our stops Tuesday, I had too much experience to ignore them. Stops have saved my bacon more than once over the years, even though I believe that a surprise rally is in the cards after today’s Fed meeting.

Day Traders

This is not a good trading session unless you are gambling or have a specific strategy around the Fed announcement. Also, Friday’s quadruple witching expiration, which often draws the market down, complicates matters.

Other than that, today is when the Santa Claus rally typically launches. It is also the technical bottom of the 80-day cycle, were the cycle to be perfectly symmetrical. Likely, it has already bottomed and is deciding whether it will have left or right translation.

Fear gauges are more bullish than bearish, meaning fear is high. I will go out on a limb and say that for today, the more aggressive the Fed announcement, the more likely the market will rally for a few days.

If the Fed is not aggressive and appears tolerant of the inflation at hand, then the market is likely to correct significantly. So what the market needs to hear is that the Fed is willing to accelerate the taper and raise rates sooner rather than later. We will see how well my prediction becomes a reality.

Day Traders – we are close enough to the 50-day line at 4685 to use that as your line in the sand and magnet today. All major indices are on their Weekly Expected Move lows at the open (about 4625 at this writing). Selling will accelerate considerably below the WEM low and you can target the 50-day line first.

At this writing, the bull market is very well intact, and none of the price action in December has violated the uptrend on the S&P 500 or NASDAQ 100. But we have lost the broader market, and the generals have been waning over the last two sessions. So the problem at hand remains, will the generals fall, or will they pick up the rest of the market and take us to new highs?

A.F. Thornton

We lost the five-day line overnight, so our stops were triggered and the Navigator Swing Strategy is back to cash. And since all we did was give up gains from earlier in the year on this stop, we are officially done for the year at roughly a plus 635% gain, if you took every trade with us at the close of the day the trader was communicated. Our original $10,000 account is now worth $63,561. It wasn’t a bad year, but not as good as our 900% plus return last year.

Absent an exceptional opportunity, we will not be taking any further swing positions until after the first of the year. That is also when we will also formally launch the Trading Post (new trading room) and other new services.

We get the Fed announcement tomorrow, then quadruple witching expiration on Friday. I don’t recommend day trading on those days. After that, we roll into the holiday week. After Friday, I will not be publishing again until the first business day of the year – Monday, January 1st, 2022. That is also when all the new services, including the Trading Post, officially launch.

Swing Traders

Depending on what the Fed does tomorrow, we could see a melt-up or a meltdown and your guess is as good as mine. What I do know is that high inflation and zero interest rates will continue to make stocks one of the few attractive asset classes, as overvalued as they might be.

But it is a dawn of a new day. I have been trading disinflation my entire professional career. Trading inflation is an entirely new game, especially with constant fiscal interference from Washington D.C. It will be a transitional market, and inflation trading like the 1970s is something I intend to study extensively over the next few weeks. 2022 promises to be a challenging year for all investors.

Day Traders

Reverse yesterday’s script. Gap Rules and Balance Rules both apply but in reverse. We will gap down below the balance area low. If the market fails to find acceptance, we can roll back above balance. If so, we roll back up to the range top again.

Both the Russell and the NASDAQ 100 will open below the 21. Without the NASDAQ 100, we lose the generals. In fact, the NASDAQ 100 will gap open below the 21 and 5-day lines. Today is all about whether and where the markets find acceptance before tomorrow’s Fed announcement.

The lack of follow-through from last week also means that last week’s gains can be attributed to short-covering. That does not mean that there isn’t money set to deploy tomorrow, depending on what the Fed decides.

Today’s plan is to follow the gap and balance rules, but your key line in the sand on the S&P 500 is the 21-day line at 4637, with the Algo Trigger line at 4624. We rolled into last week’s gap overnight so also watch for the complete gap fill around 4600.

I am a bit under the weather this morning, so I will not be in the Trading Post until Thursday.

A.F. Thornton

The Founders Group is adding another 5% each to the existing SPY and DIA calls here on the five-day lines, 467.75 and 357.25, respectively. This brings each position to 30% for an aggregate 60% commitment to the markets.

Be mindful of the leverage. These are big boy positions.

The market moved back into the balance range per the morning discussion and we are entering at the range bottom, coinciding with the five-day line.

A material close below the five-day lines remains the stop.

A.F. Thornton

Navigator™ Swing Strategy – 25% SPY and 25% DIA Calls – Add on Dips to the 5-Day Line / Navigator™ Day Trading Strategy – Bias is Long – Key Levels Below.

The damage had been severe even before the market bottomed a week ago today. Just look at this chart from late November:

The broad market suffers from the reality that the Fed is ready to pull the punch bowl away. The question becomes whether a handful of tech stocks can continue to carry the market post the Fed announcement this week. As the saying goes, If the soldiers fail to join the fight, the generals eventually fall. That would be an unpleasant way to end the year.

The top five stocks are now 25.5% of the S&P 500 index. You have to go back to 1964 to top that figure, and the market was topping then for a 50% trading range market that lasted 18 years.

As well, trailing P/E ratios in the S&P 500 are at the year 2000 levels, with the NASDAQ ratios exceeding that era’s tech bubble. It’s incredible what unprecedented liquidity and zero interest rates can do – until they fade into the annals of history.

By the way, President Biden told us Friday morning that inflation would be a blip on the radar screen. Then late afternoon, the Bureau of Labor statistics let us know that they would be changing the formula used to calculate the Consumer Price Index. Way to go, Joe!.

That is the same way the US Government initially fought inflation in the 1980s – change the formula. They changed the definition of “Vaccine” and “Anti-Vaxxer” earlier this year.

If you go over to ShadowStats.com, they keep a record of all of these “changes.” You will find that the CPI rate over the last year on the 1980s formula was 14.7%. That is a bit closer to reality than the 6.8% rate just reported. But surely we can get the rate even lower if we change the formula again. Indeed, you cannot make this stuff up.

Swing Traders

We start the week with some overnight gains in the major indices, including our core S&P 500 market index. So our entry at Friday’s close for the S&P 500 and Dow looks to be profitable out of the gate. It will be every bit as tempting to grab the quick gains as it was last week. Stay alert for my signals. The 5-day EMA line will be our stop and where we may add to positions if it is successfully tested.

The market has the opportunity to test the all-time intraday high from last month pegged at 4735 on the new March 2022 S&P 500 futures contract. This should be formidable resistance, not to mention that we have the Producer Price Index tomorrow and the Fed announcement Wednesday for a dose of volatility. Friday is also Quadruple Witching – when all the multiple time frame options and futures expire. Interestingly, market-makers forecast half the volatility (75 points in each direction) this week than in the past few weeks.

With Santa Claus coming, fear indicators still high, and a breadth thrust last Tuesday, the market could move back up to the top of the weekly channel. So we have set the WEM high at 4785 on the cash index (and a comparable Dow level at 35,600) as our next targets. We expect the market to crawl up the wall of worry to those levels. It will help if the soldiers wake up.

Day Traders

Watch your resistance here. Both Balance and Gap Rules are on the table this morning. Also, there is a discernable “V” reversal pattern projecting 4880 if it takes. Friday’s halfback and VPOC at 4683.50 would be my absolute threshold to remain long today. Still, acceptance below the balance area high around 4705 would be the most lethal as it would confirm price action back inside the balance area and a rotation down per the rules.

The game is to watch for the fade on 100% long overnight inventory (short it if you like) and see if it grips. If so, does it make it to full gap-fill (at Friday’s 4705 high) and then reject or come into range? Coming back into range may carry different consequences due to balance rules in today’s situation. Should the market come back into the four-day balance area and find acceptance, there is potential for rotation back down to the lower end of balance around 4550 or so.

As always, then, early trade will be noteworthy. And given the context, assume at least some potential for fade and monitor closely for how much, how far, and how fast. All of that is Market Generated Information to carry forward today.

Holding above the balance area high is bullish and puts the Globex high at 4723.25 and the All-Time High at 4735 into play.

A.F. Thornton

The Founders Group are long calls equivalent to 469.50 on the SPY (S&P 500) and 359.25 on the DIA (Dow Industrials) at the close. These trades put our Navigator Swing Strategy long at 25% in each position, with 50% remaining in cash. I will catch up with all of you over the weekend.

A.F. Thornton