Archives December 2021

There is a lot that does not make sense right now. But regardless of the narrative, price action is what matters.

We sit here today with the highest inflation reading in 39-years. Yet Gold does little or nothing (and has done little or nothing), rates remain low, interest-sensitive growth stocks rally, and so do interest-sensitive utilities and REITs.

Perhaps the market believes that inflation is peaking here – and there is a solid case to be made.

Whatever the Fed plans to do, it is no secret and is already baked into the tape.

If the market holds its ground at 3:55 EST (in 25 minutes), which means it holds above 466 on the SPY, we will reenter a 25% position in each of the DIA and SPY at-the-money calls expiring January 18th at or near the closing price.

Since we will be executing in the last 5 minutes, I can only publish after the fact. At the moment, I am simply waiting for expiration to be out of the way.

The DIA has remained the strongest of the indices this past week. It has a symmetrical V reversal pattern, which is also visible in the SPY.

Straight calls are okay now with the drop in the VIX today. We will hold our other 50% in abeyance. I will communicate stops over the weekend, as they are unnecessary (and not possible) on calls. Our risk is limited to what we pay for them.

Stay tuned,

A.F. Thornton

The gap-fill has morphed into a look above and fail per balance rules on the SPY and the DIA. We will take our stops at the market here. At least we tried, and we will try again if circumstances warrant. If you did a debit spread with us, you should have a slight gain due to the credit end of the spread. The Weekly Expected Move is still drawing the market down into today’s expiration at the close.

Let’s give our stops some room – basing them on an hourly close below the stop level. I will advise you if they are triggered.

The Founder’s Group just nibbled on a swing buy with the DIA at 359. We used a January monthly expiration call debit spread. We targeted a 25% position with a 358.25 stop. Futures or shares of the cash index are fine too, depending on your tolerance for leverage. This brings the Founder’s Group to a 50% swing position.

The Founder’s Group just nibbled on a swing buy with the SPY at 469. We used a January monthly expiration call debit spread. We targeted a 25% position with a 468.25 stop. Futures or purchasing cash shares are fine too, depending on your leverage tolerance. Yes, it feels like jumping into the deep end holding my nose. But when the market rallies on bad news, you do what you have to do.

Navigator™ Swing Strategy – Buy on Dips to the 5-Day Line / Navigator™ Day Trading Strategy – Bias is Long – Looking for a Partial Gap Fill.

You will start believing in my magic after yesterday, if not sooner. The market must have read my script. It dipped right to the top of the Weekly Expected Move at 4675 (actually 4672), bounced, tagged it one more time, then went into a bull microchannel to close at a marginal gain over Tuesday. Of course, the price action was mainly inside the pinned range established after Tuesday’s (as yet) unfilled gap opening. In a sense, then, the market is still balancing at the top of Tuesday’s breakup candle.

Given the bullish recovery on Monday and Tuesday, I theorized that the market makers must have jumped to neutralize their deltas right at the WEM high, lest the market leaves them hanging again later this week. And I almost issued a nibble signal to start accumulating with them, but I am more inclined to buy below the WEM high and closer to the five-day line.

That reminds me – breakouts fail 80% of the time. We would need a breakout for any meaningful swing profit from 4672, and I don’t want to go through a drawdown first. Patience is a valuable commodity in this business. Remember that we always look for the “cradle trade” after the first run through the Navigator™ Algo trigger. And even with all of that, we might still be at the top of a new trading range.

And the Fed meeting announcement is now less than a week away. It seems insane to take any position before that meeting. Yet, they have already forecast a decision that seemingly would be the worst case. If the market is rallying, perhaps that means the market welcomes the Fed fighting inflation – though it will be difficult to avoid a recession as the Fed already blew it with their “transitory” nonsense.

If I am thinking about anything this morning, it is why interest rates are so low. With the short-term rates still close to zero and falling again, why would anyone find the rates acceptable? After all, if you bought treasuries a year ago, you lost money in real terms.

If you cash year-old treasuries, you can only buy 80% as many groceries, 70% house, 70% car, 50% gas, etc. An institution buys the sovereign debt of many countries, including the U.S., with balance sheets well over 100% of GDP. Sovereign debt levels, by any measure, are unprecedented at this writing.

Institutions all over the world are not dumb. The only reason I can think of as to why they would find negative “real” interest rates acceptable in this environment would be that they are more concerned about the return “of” their money than their return “on” it.

In that sense, then, would not higher interest rates be a good thing? Would they not signal a more robust economy? Less fear?

Swing Traders

We are looking to buy a “continuation” trade. But so is everyone else. We look to avoid a bull trap at these levels. We have a range of support from the Navigator™ Algo trigger at 4611 to the five-day line at 4655. Somewhere in that zone makes sense for an entry, fully recognizing that we could be buying in the middle of a new trading range. And that is the point now. This new market is more volatile. The easy times are behind us with the apparent shift in Fed policy.

Day Traders

I seriously doubt I can top yesterday. I still think the WEM high (now solidified around 4672) will be a magnet the rest of this week. I have seen the market balance a few points around it in the past, with the WEM high level in the middle. Looking to the left on the daily chart, we could see a similar, symmetrical, tight, range pattern form to the right.

Since the overnight action is inside yesterday’s range, use the overnight high around 4700 and the overnight low at the WEM high of 4672 as your breakout points today. The more time spent at the WEM high, the more market makers have the opportunity to hedge their unpleasant experience from Tuesday. A break of yesterday’s low at 4672 would change the tone back to negative – at least down to the five-day line at 4655 or so.

Capturing the hill at 4700 has been the battle of the century now since November 5th. Does persistence beat resistance? Perhaps if the Santa Claus rally is on tap. First, target the VPOC at 4715 if the market can poke above 4700 today. Then target the all-time high that sits 4740.50.

The cycles and seasonal patterns don’t forecast clear sailing until the 15th, also the Fed announcement day. And as we found out over the Thanksgiving holiday, seasonality may not matter this year.

Overnight inventory is net short, so a small pop near the open is in order while Globex traders take profits. I plan to mark the opening range and project it in both directions. When the range breaches, that will be your first clue. I would pick up two contracts.

Take your profit on one at the breach range target. Hold a runner if we have a solid break above 4700 and target the VPOC at 4715. See how it goes from there. On a short position, take a profit at the breach range and hold a runner if we start trading below yesterday’s low (also the top of the single prints) at 4666, with a final target in the 4655 to 4622 range. Look for a pivot from one of the key lines. The five-day, 21, or Algo trigger start at 4655.

A gap-fill starts at 4747.25. At the other end, the all-time high is 4740.50.

Good luck today. Stay alert for a swing trade signal.

A.F. Thornton

Navigator™ Swing Strategy – Buy on Dips to the 5-Day Line / Navigator™ Day Trading Strategy – Bias is Long – Looking for a Partial Gap Fill

It turns out my uber-aggressive long position was THE bottom last Friday afternoon. And I continue to regret not keeping my call debit spread position beyond Monday. Sure, 60 points were great, but 160 would have been better. Let there be no doubt that I am human – the fear infects me sometimes (even with my Crystal Ball).

Yesterday went as predicted. 15-minutes into the gap, the market pinned. The Gap and Go trade per Rules #2 and #4 was successful but rendered fewer gains than would have been the case without the overnight burglary. And there was a hell of a lot of merciless, painful short-covering yesterday. All of us have been there at least once in our career, and it hurts badly.

That reminds me of an important point. Two-thirds of yesterday’s gains occurred in the overnight session on negligible volume. That leaves a lot of white space on any invasion of the gap, something that usually follows in a few days. It will be an unpleasant visit into the gap zone without a parachute, as is typically the case.

Moreover, the evidence suggests that yesterday was primarily short-covering. There were also a lot of corporate buybacks last week. But retail traders were scarce, as were the institutions. We need follow-through “real buying” on good volume to ensure that the institutions are as foolish as the rest of us running into this House of Cards.

There are still those China Real Estate Collapse, Consumer Confidence, Flattening Yield Curve, Taiwan, and Ukraine things, lest you get too happy about yesterday. Those risks don’t even account for the severe damage and broken stocks under the hood.

And that reminds me, President Biden says he yelled at Putin yesterday. Biden threatened to cut Putin off from U.S. banking if Putin invaded Ukraine. Putin likely thought to himself, “I will keep my gold rather than your worthless paper money system, thank you.”

My theory of the macro case remains a trading range, if not new all-time highs. But the Elliott folks still have a “2” wave up argument here, with a “3” wave down ahead. The 78% retracement is the usual line in the sand, and we did stall there yesterday. I don’t completely discount the argument – and it would fool most people betting on new highs.

Tinfoil Hat Traders

Sure, we were expecting Santa Claus soon. But one could argue that the Fed is juicing the markets into next week’s meeting so that they can introduce a faster taper of QE Infinity and carpet bomb the markets.

It goes back to my Orange County/John Wayne Airport takeoff analogy. They are full throttle at the Fed’s Plunge Protection Team before shutting the engines down and the jet stalls.

Fed buying might also be the explanation for the Junk Bond jump yesterday. How much junk do you want at 4% interest? Other than short covering, only the Fed wants to be under-compensated for that kind of sizable risk.

Swing Traders

When the smoke clears, the market did exactly what it should do to retain the uptrend. It came down and tested the November breakout and pivoted higher. Nothing to see here, as the bull market is very much intact.

Unbelievably, we are short-term overbought in a single day but still closer to structurally oversold in the bigger picture. With the Navigator™ now on a long signal, I am looking to add positions on pivots connecting from the five-day line (about 4640 today).

The market is at 4687 at this writing. There is a coincident group of support lines between 4620 and 4640 for a good, long entry on a pivot. Refer to yesterday’s discussion of the zone, and it would be lucky for us to get the opportunity.

Unfortunately, the market triggered the Navigator™ signal line overnight, so we were not awake to execute. That is why we are looking for an entry point. Note that traders could be fighting the market makers on any longs above the Weekly Expected Move high at 4675 until Friday’s close.

I will give the buy signal when it presents. Otherwise, we would be chasing the market here in the short term and could very well regret it. Heaven help you if you did not cover your short positions on Monday morning’s initial weakness as I counseled.

Day Traders

We made a slight new high overnight, and inventory is net long. So we have a 70% chance of a counter auction at the open. Other than that, there is little to guide us except to recognize that we are short-term overbought with a lot of resistance above us and the Weekly Expected Move high below us at 4675 to draw us lower into Friday’s expiration.

Market makers will fight hard to bring the market down to 4675 or below to flatten their weekly expiration risk. They could not have expected us to blow through the WEM high in a million years, having already doubled the usual volatility range.

With the VIX still above 20, watch position size. We have been experiencing wide daily swings in the indexes.

The WEM high ar 4675 or so could form a center to trade around the rest of this week. The opinion assumes the shorts have finished covering their positions. Expected moves can be less reliable in this kind of volatility.

Also, note the 4700 roundie above us. It could not hold this level as hard as the market fought for several weeks going into the decline.

With all of this in mind, your initial playground today should be between 4700 and the WEM high at 4675.

Traders should treat any move above 4694 with suspicion given the 4700 roundie and all the trading/resistance there since October. With the magnet of the WEM high at 4675 below. It would be an excellent short to the WEM high on a pivot lower from the resistance zone.

There likely will be buyers (or more short-covering) below the WEM high. See if you can project a 30-minute clearing breach trade and target double the range. Also, look to the 4620 to 4640 area to cover shorts or go long – if we are fortunate enough to get there. All the lines I mentioned Monday coincide in that zone. Buyers are likely to congregate there.

Everything today depends on whether the shorts are done covering their positions. There were a ton of them short into the hole on Friday – more than we have seen in a year.

A.F. Thornton

Today is Pearl Harbor Day. As with most events of that era, we are now more than 80 years out from that Fourth Turning. 80-years is the magic cycle from Fourth Turning to Fourth Turning. As you can see from our own Fourth Turning thus far, these turnings are not fun. I simply hope this one will be over soon.

Today we will see how the President’s conversation with Vladimir Putin goes. Putin has now amassed nearly 200,000 troops on Ukraine’s border. If Putin invades, Biden has threatened to take Russia out of the “SWIFT” banking system. Since Russia holds real gold now instead of U.S. Treasury ‘paper”, I am not sure he cares. It is a bit like bringing a sword to a gunfight. Maybe arming Ukraine is a better idea.

In addition to the Russia wildcard, we still have China ready to forcibly take Taiwan. And they want to build a new military base on one of the harbors they foreclosed on in the Atlantic on the West Coast of Africa. Perceptibly, that is too close to home for the U.S., even though our military bases surround China. Who said life is fair? Anyway, Taiwan is more concerning because they make most of our semiconductors.

China probably won’t cause any trouble until after the Winter Olympics in Beijing early next year. By the way, our “diplomats” are not allowed to attend as punishment for China’s human rights abuses. Big deal.

China points to all the January 6th Trump supporters still sitting and abused as political prisoners in Washington D.C. As China says, we have no room to criticize them. But then, hypocrisy is plentiful in our nation’s capital these days. Maybe it has always been so.

Am I just griping? No. I am reminding you to use stops. We are one news story away from disaster. No matter what, I always use a “disaster” stop any time I am free trading in the market. It might be 15 points below – but it is always there.

Since the market is dynamic, I use a 3 ATR (Average True Range) stop. I will expand more on how to set these some other time. It is there just in case something comes out of left field (no pun intended), even though I am otherwise bullish (or bearish) as the case may be.

All the recent consternation stems from the Fed potentially accelerating the taper next week, but the European Central Bank has no similar plans. Accelerating the taper is not a negative, just less of a positive. The end of the taper in Q1 or Q2 is more problematic. Raising interest rates is even more challenging.

Regardless of this rally from deeply oversold conditions, please don’t lose sight of where we find ourselves. If the jet engines quit, It remains a long jump from 30,000 feet without a parachute.

Swing Traders

Refer to yesterday’s discussion as to why we are bouncing. We got the bounce and closed slightly above the 5-day line, a net positive, but also right below the Algo trigger and 21-day line. The Dow Industrials led, as I had suspected would be the case. The laggards led us down, so they are the first to recover.

I hope you took my advice and covered any short positions on the initial morning weakness. My long S&P 500 call spread trade from the close Friday afternoon bagged a 60+ point profit, but I wish I had held onto it now. Our Globex sisters rocked the market overnight, and we will gap right through buy signals this morning. Robbed in the middle of the night again!

So with follow through this morning, we have our Navigator Algorithm buy signal. But we cannot chase the market. Moreover, we could now be in a trading range – so I don’t necessarily expect a move to new highs. I will alert you to any entry points on a reconnect to the 5-day line. Also, we need to see if New York follows through on Asian and European enthusiasm.

While the major indices don’t seem to have corrected that much, they are disguising massive damage under the hood. For example. almost a third of the stocks in the Nasdaq Composite are down 50% from highs. It is a two-tiered market, a less than ideal scenario.

After the shorts run for the exits this morning, we may (and likely will) roll down again for a retest, perhaps into next week’s Fed meeting. Let’s see what happens, and I will alert you to any entries now that the Navigator has rendered a preliminary buy signal.

Day Traders

We will Gap open right to resistance at 4660, on inventory that is 100% long overnight. Gap Rules apply. Rule #4 seems most applicable this morning. While one would expect a counter auction on such heavy overnight inventory, a lot of the action could be short-covering and there will be plenty more this morning. That is why I refer back to Gap Rule #4.

And it seems we are only a stone’s throw from new highs given the volatility at hand. I am betting on a Gap-fill this morning, but I cannot guarantee it. There are a lot of shorts out there waiting to cover.

4700 is the next goal, and then the old high is just below 4750. I am sitting today out until a storyline emerges. It is too late to chase longs unless we get a complete gap fill, which is a distinct possibility. More probable is a pinned trading range.

A.F. Thornton

I took a profit on the uber-aggressive swing trade at the 5-day line. In at 4404 near the close Friday and out at 4565 at the open for 61 points. I am keeping things tight at the moment until the dust clears.

A.F. Thornton