Archives 2021

Founder's Trading Journal

Happy Anniversary!

AF Thornton 0 Comment

Somehow this intro got deleted in the first publication. I wished everyone a happy anniversary, as a year ago today, the China Virus crash bottomed and the Founders Group went to a fully invested position. What a day that was, as I communicated on these pages. It was one of the braver moves I have made over the years, and I fear I am becoming more conservative in my old age.

So far, the market has followed through on our reverse rotation thesis as tech led the rally yesterday and seemingly is confirming the same overnight. There was selling in both Asia and Europe last night, but the market traded in a rather tight range that landed in the middle of yesterday’s regular session range. This tells us little about what to expect from today. But I am pleased with our progress so far, as we begin this last 20-week cycle before the 18-month cycle inflicts a reality check on the markets.

By the way, the volume could have been better yesterday. Perhaps a better way to look at volume is to break down each daily candle and put the volume out to the right – looking at volume at price. For even better context, we can look at the amount of time the market spent at each price. The volume concept is called “Volume Profile,” and the time concept is called “Market Profile.”

Essentially, you are looking at something that starts as a bell curve and forms various shapes and patterns that can tell us a lot about the market and where traders are positioned. This works on any financial instrument that involves volume, whether it be an index, ETF, or stock.

We focus on the bulges to the right in the profiles above, indicating what price had the most volume and caused the market to spend the most time. I think you can see that the price that attracts the most volume and where the instrument spends the most time is a key piece of information, whether you are looking at a single day, the Globex overnight session, or the regular day session. In my case, I also look at an aggregate of the last 10-days. The “10-day POC” marked by the yellow line above is the price (about 12950) that has attracted the most volume over the past 10 trading sessions (about two calendar weeks). 

On the NASDAQ 100 profile above, the settlement at yesterday’s regular session close was 13071. Since most of last night’s trading occurred below that level, we can say that traders are coming into today’s session net short. As the session opens today, those traders may help drive a rally as they go to cover their shorts this morning. Overall, however, the overnight profile is in the middle of yesterday’s regular day session, giving us little direction about today’s regular session trading. Every profile gives different information about the day that might be ahead.

The Navigator swing strategy is 25% S&P 500 and 25% NASDAQ 100, and I am looking to add to those positions on pullbacks.

Today’s Day Trading Plan

Now that you have a better sense of the profiles as set forth above realize that a lot of the key levels and concepts I talk about here come from the profiles above.

Yesterday, I noted that the Friday low should be considered secure. Accordingly, and for now, pullbacks to the 15 or 30-minute 21 EMAs are buyable unless we take out Friday’s low. The NASDAQ 100 continues to lead,  which gives lower odds of any short setups working in the S&P 500.

Overnight inventory is net short but not 100%. The entire overnight range is within the RTH range, which indicates balance.

Use yesterday’s settlement at 3812.62 (S&P Futures) and 13071 (NASDAQ 100 Futures) as bias lines. Otherwise, follow the quartet and monitor for continuation. There is a lot to digest, especially in the NASDAQ 100, from yesterday’s gains.

A.F. Thornton

Founder's Trading Journal

Update: Stops

AF Thornton 0 Comment

We are having an awesome morning thus far, but I take nothing for granted. The Founders Group moved our stops up as follows:

SPY – 389.75

S&P 500 Futures – 3897.50

QQQ – 314.75

NASDAQ 100 Futures – 12967.50

I will update these pages if our stops change for any reason.

This information is provided for educational purposes. Always do your own homework.

A.F. Thornton

Founder's Trading Journal

Soup Du Jour

AF Thornton 0 Comment

At the end of the day, trading is nothing more than a hypothesis overlayed on randomness that may or may not play out. Even more fun, when a trade fails to play out, your lizard brain blocks all access to your cerebral cortex and higher thinking, almost guaranteeing a loss. If that wasn’t challenging enough, it seems we always have a “soup de jour” of sorts that traders hang on every month. Call it the “issue du jour” – or classic groupthink. 

Right now, the issue is interest rates. But it changes. I remember when we hung on every monthly trade deficit. Then there was the budget deficit. If those issues were so important in the 90s, what the hell does anyone think now? 

And so it goes with interest rates. They have not yet even reached pre-China Virus levels. Anyway, to be successful at this, you have to have perspective and see the game for what it is – a game. You have to play the game better than most other traders.

Of course, there is pressure on rates. But will it be the end of the world if they go to 2%? Really? Ensure the person you are listening to is not a Hedge Fund manager on CNBC who is short and trying to talk the market down. 

History does not bear out that higher rates kill the market, but here we are in the game – so let’s play it. Right now, it is a contest between financials and tech stocks. To make it interesting, we have the cyclicals moving around the periphery. Rates go up, financials – particularly banks – perform well. Rates go down; tech stocks perform well.

Looking at it another way, the NASDAQ 100 rises when rate scares abate; the Dow rises on cyclical prospects, and the Russell 2000 / S&P 500 benefit from the financials. Actually, the S&P 500 gets yanked in every direction.

So we are 50/50 Nasdaq 100 and S&P 500 to work all ends toward the middle, giving an edge to reverse rotation back into tech, at least for the short-term. Then, as the 18-month cycle peaks, we will go back into full correlation again – and we will head for the hills. 

Based in Italy and one of the foremost experts on Hurst Cycles, David Hickson put out a great video on Saturday reviewing the current position of the cycles and the coming 18-month peak. It is a bit technical but worth reviewing for the bigger picture.

Meanwhile, back at the ranch, our latest mix and signals appear to be working well this morning, now that quadruple witching is over. By the way, here is some European humor for you:

Scary, right? So far, I am gleaning that the Europeans think we are a bunch of idiots in the US. But they have always had a superior attitude.

Day Trading Plan

One would think that being six hours ahead of New York trading. I would be in the future and have some advantage over the U.S. traders. I had a lot of fun this morning (here) trading the Globex markets (there), so I was not left with crumbs as usual in the US. I could get used to this. But anyway, I don’t typically trade on Mondays – but if you do – here goes it…

I would assume Friday’s low to be secure in the S&P 500 until it’s not. Today will be all about whether or not the overnight NASDAQ 100 strength continues into today’s session and overcomes the S&P 500 index relative weakness.

While the NASDAQ 100 futures moved out of Friday’s range overnight, the S&P 500 futures were unable to duplicate the success, and as such, the extremes of Friday’s S&P 500 range are the main key levels. Even with NASDAQ strength, there is potential for the S&P 500 to remain within range. There will be a small gap higher at the open, but it is not a true gap, so gap rules are not in play. Overnight inventory is balanced in the S&P 500, so let the market sort itself out before jumping in with both feet.

I will communicate new stops on our current positions later this morning.

A.F. Thornton

Founder's Trading Journal

Update: Stops

AF Thornton 0 Comment

This morning, we retested the Globex lows on both the NASDAQ 100 and S&P 500 500 indexes. The lows held, keeping our reversal pattern on the NASDAQ 100 intact. The S&P 500 tagged its 21-day EMA and reversed higher, also a confirming signal. These are good omens and support the bottoming of the nominal 20-day cycle thesis. 

Of course, professionals all see the same things on their screens. What can be frustrating is that a bounce here would be due anyway from those of us applying the same theories, but it has to be enough of a consensus to turn the markets. Combined with our Algo buy signals, the scenario looks promising so far. Of course, we always set stops because regardless of the probabilities, the market has a mind of its own at times and could care less what I think.

As previously mentioned in these pages, today is quadruple witching – so there will be quite a few cross-currents as various options and futures expire for the week, month and quarter. While I would not day trade today, today is fine for establishing our Navigator Algorithm swing buys.

The stops I am communicating below require the set levels to be violated on the NYSE close. We will not worry about hourly closes. I will send out a signal if we are honoring any stops – as at least today, I am not on an airplane. I am just operating a half-day ahead time zone-wise.

Unless otherwise posted, here are the initial stop levels: (i) NQ (NASDAQ 100 FUTURES) is 12,680.50; (ii) QQQ stop level is 308.75; (iii) ES (S&P 500 FUTURES) is 3874.50; and (iv) SPY is 386.50. As communicated this morning, we are starting with 25% positions in each index. We will add to the positions as more confirmation of the turn establishes. In this regard, I am looking for a price on the 30-minute charts to rise above and successfully retest their 21-day Exponential Moving Averages.

While you can set these stops with futures and cash indexes, there is no way to set a stop on options. So the stop is mental in that sense, and something you just have to watch from day to day. That has been part of the frustration as the markets have gotten so choppy and volatile. it becomes very difficult to swing-trade options, but hopefully we have positions here that we can retain for a bit.

While the probabilities are in our favor at the moment, we must stay alert and keep an open mind as to other possibilities. Check your emails throughout the day. I will update our group if anything changes.

I hope that sharing our strategies, along with the commentary, is educational and beneficial. At the end of the day, however, I don’t know your personal circumstances so you have to make your own decisions as to how the knowledge and education applies to your own portfolio.

Have a great weekend!

A.F. Thornton

Founder's Trading Journal

“V” for Victory and More Buy Signals

AF Thornton 0 Comment

We are spoiled rotten of late. It seems that no matter the dip, the market takes off out of a “V” bottom and never looks back. But now, as the nominal 18-month cycle matures, the market is settling back into more typical behavior. Let me digress.

I talk about cycles incessantly. The reason is, cycles give us context. Just like you can take a quote from someone out of context and render the opposite meaning, so too you can take a peak or trough in the market out of context and get the wrong impression. The quote example leads to inconvenience. But the market example can cost you money.

Last March, the markets bottomed a number of cycles simultaneously, from the nominal 54- month (four-year Presidential cycle) on down to the nominal 18-month, 40-week, 20-week, etc. That is why the dip was so pronounced. When long-term cycles nest with all the shorter-term cycles below them, we experience the most pronounced corrections. The Mental China Pandemic was simply the catalyst – but the dip would have occurred regardless. Fundamentals can exaggerate the amplitude of the cycles, but the nest of lows would have presented anyway. Here is an example of how the 9-month cycle is phased:

Time-Price-Research: J.M. Hurst

While it is true that the nest of cycle lows exacerbates the dip, it is also true that the rally on the other side of it is usually something to behold. The new bull run that comes out on the other side is usually so strong that the shorter cycles are barely discernable at all, especially in the first nominal 54-month cycle that ensues. In other words, the market barely dips, and when it does price only spends a nanosecond at the trough. We have seen this over and over since last March.

The aforementioned behavior is different in more mature cycles. In a typical dip as the market matures, there is a retest after the first run out. That is how financial markets were behaving before last March. You might have heard this described as “Elliott Waves” or “three pushes.” Essentially, these theories reference the fact that the markets tend to move in five waves; three advancing waves and two correcting waves as can be seen in the chart below:

ELLIOTT WAVE UNTANGLED. - EGM Analytics

Closely examined over the years, these waves have particular characteristics. There is no need to review that here – as it is a science in and of itself. Notably, for this morning, the first 1-2 sequence involves anywhere from a 50% to 80% retracement of the first run out or blue “1” wave as labeled above. This forms the “2.” And this makes sense because at this point in the “1” wave rally, there are a series of declining peaks and troughs leading into the dip, so until the market has a dip that presents the first higher trough, few people jump on board. When the trough turns at a higher level than the troughs preceding it, you have a classic trend reversal and everyone jumps aboard. And not just buyers come flooding in, but the shorts also panic buy to cover. Hence the longer run in the “2-3” sequence as compared to the “1” wave illustrated above. Makes sense, right?

Then there is the head and shoulders pattern. Recall our discussion back on February 24th. Here is a refresher illustration, using a reverse head and shoulders, the relevant pattern this morning:

Tutorials On Reverse Head And Shoulder Chart Pattern

Recall that I pointed to this pattern as a typical pattern presented when bottoming a cycle. As you can see, it also marks the transition of a trend reversal, which is what we see at cycle lows.

So where am I headed with all of this? Take a look at the NASDAQ 100 index as it currently presents this morning? How does this all tie together?

Allow me to summarize the possibilities. Emphasis on “probability” as nothing is for certain in the markets, and we must always keep an open mind. Yet for the Founders Group, we put our money where our proverbial “probabilities” lie, especially when our algorithms confirm a buy signal.

So here is the argument: (i) we are retesting the nominal 20-week cycle low, which is now the “head” in the illustration above; (ii) this is the first round of the nominal 20-day (calendar day) cycle out of that trough; (iii) the average length of the 20-day cycle trough to trough has been about 10-12 trading days, and we are on day 11; (iv) we see a potential head and shoulders reversal pattern coming in the right at the mark; (v) since the cyclical indexes are stretched, we expect a reverse rotation back into growth stocks, currently spooked by interest-rate scares; (vi) the Fed said nothing Wednesday to cause concerns about any reversal in the accommodative rate policies; (vii) while the momentum in the markets has waned of late, market internals remain very strong; (ix) the NASDAQ 100 and S&P 500 indexes tagged their 20-day future lines of demarcation yesterday, further confirming that the 20-day cycle has reached its projection.

The Founders Group was stopped out of our 8-point stop yesterday on our S&P 500 position. We are currently reestablishing a 25% position, along with a 25% position in the NASDAQ 100. We are still using futures, but it is fine to buy the cash indexes (SPY or QQQ) or April 16 at the money calls on the same. I will communicate stops later this morning. If you did not honor yesterday’s stop on the S&P 500, hold the position for now and add the NASDAQ 100.

A.F. Thornton

Founder's Trading Journal

Buy Signal – S&P 500 Index

AF Thornton 0 Comment

The Founders Group just bought a 50% position in the S&P 500 Index at 3932 with an 7 point stop. This means that if the S&P 500 futures contract has an hourly close below 3925, we exit the position. This is a risky entry at these levels, and not for the faint of heart. This is a Navigator buy signal swing trade – but still use caution. For calls, use at the money April 16th calls – which are the 395 calls at this writing. The position will be choppy through Friday, but should position us well to ride one more wave higher next week. If not, our stop is set. We are sharing this for educational purposes only. Do your own homework and make sure you evaluate your position size relative to your account size and risk tolerance.

Founder's Trading Journal

Stopped Out Yesterday – Back to Cash

AF Thornton 0 Comment

Just a brief note, we were stopped out at the end of the first hour yesterday on both our 50% Nasdaq 100 and 50% S&P 500 positions. We stopped out at 13035 and 3939, respectively. 

The market opened below our 5-day EMA stop point. As you will recall, our stop for the day session was an hourly close below the 5-day EMA. Since we opened below it, we took the closing price at the end of the first hour since the market could not punch back through the stop line. This is somewhat of a judgment call and depends on market conditions. In a fast market, we simply would have stopped out at the open – but conditions yesterday allowed us to wait until the end of the first hour. We made substantial profits in both positions.

When I first started trading, the gray hairs told me that to be a successful trader; you have to learn how to take and handle a loss. After these many years, I have concluded that to be a successful trader; you have to learn how to accept a stop and then watch the market take off without you. That is what happened yesterday afternoon.

I am not sure what anyone was expecting from the Fed, but the crowd was apparently short. After the announcement, the short-covering was something to behold, and the market spiked higher. However, the overnight crowd took the market right back to the pre-meeting levels this morning, so I don’t feel too bad. We will see what the day brings.

As before, I am traveling but would not be day trading until next week anyway. Today and tomorrow, many market-makers will be dealing with quadruple witching – a day that occurs each calendar quarter when stock index futures, stock index options, stock options, and single stock futures expire simultaneously. The cross-currents distort the normal market – and I have not found it worth trading.

At some point, I will discuss some techniques, such as pinning trades, that can be fun for derivative expiration days.

We will hold to our cash position, looking for another entry point, long or short, as circumstances dictate. Risks remain very high here, and I believe that financial stocks continue to hold the keys to the castle. Our friends over at Kimble Charting published this salient chart yesterday:

This is a time to be cautious. In a perfect world, what we have here is a recovering economy and likely an early-stage secular bull market. Nevertheless, the market is overdone by any measure and well ahead of itself. This would lead to a 10% to 15% correction in normal conditions – likely to be coincident with the 18-month cycle low. That will present soon.

If the doom and gloom folks are correct, we could start into the 80-year cycle correction, a much harder cycle to call but the one that promises to be most brutal to the current generation. The last one bottomed after the Great Depression. The mid-point of the cycle was the bottom in 1974. The next bottom is due any time – and we have not even started into it.

If you are trading, keep stops tight. Always have a disaster stop set. If you are stuck in positions for tax or other reasons, consider using some options or futures to offset risk, almost like insurance. If you want to play the lottery, consider buying cheap, out of the money puts. At least until the 18-month cycle correction is behind us sometime this summer, risks are extraordinarily high.

A.F. Thornton

Founder's Trading Journal

Travel Time (Updated)

AF Thornton 0 Comment

I need a couple of days of travel time, and the next few days are as good as it gets. It would be best if you did not day-trade on Wednesday through Friday. Tomorrow (Wednesday), we are on the Fed announcement watch. The board starts meeting today. Nobody anticipates any change from the Fed, but that may be the problem as market participants may be looking for inflation vigilance. In any event, it is not advisable to day trade on a Fed announcement day.

Additionally, Friday is quadruple witching day. No, this is not a day to honor Hillary Clinton. It is a day when stock index futures, stock index options, stock options, and single stock futures expire simultaneously. The cross-currents, having little to do with market direction, are nearly impossible to anticipate or trade.

You could try some day-trading on Thursday, but being sandwiched between the two salient non-trading days – day-trading on Thursday is not advisable either – just less risky than Wednesday or Friday. Traders and market-makers often start hedging on Thursdays as they prepare for expiration Friday.

As a housekeeping item, this will be my last commentary until next week, given this week’s less than desirable day-trading circumstances. Our portfolio remains 50% S&P 500 and 50% Nasdaq 100, and we have been rewarded handsomely for picking up the 20-week cycle trough, especially on the NASDAQ 100. I will send out a commentary if the macro picture changes or we achieve price targets. In the meantime, I have some commentary I have been writing on various subjects that I will publish sporadically through the weekend. Monday morning will be the next focused commentary.

Today’s Plan for Day Trading

The S&P 500 notched a new all-time high in a spike in the last five minutes of yesterday’s regular session. The overnight high is a new all-time high and should be carried forward as insecure until it is confirmed or exceeded in the regular trading session. At this writing, the S&P 500 (and NASDAQ 100) are slated to gap (true gap) open. Yesterday’s settlement ended on a spike, but yesterday’s volume and time points of control failed to migrate higher, a slight negative.

As to where the markets are positioned just before the New York open, both spike and gap rules are in play this morning, with early indications being bullish and trading above the spike. Given any conflict, I will be favoring spike rules. The NASDAQ 100 is just now coming alive, as I had been expecting. 

Respecting our core trading vehicle, the S&P 500 index futures, the spike’s base at 3948 is important today as it is also the prior all-time-high. Buyers should be present there as the market retests the breakout level. Keep that market-generated information in mind should that level come into play.

Regardless of price action, where value develops will continue to be important, as will the relative strength on the NASDAQ 100. Good day trading is often like keeping a lot of balls in the air at once. We absorb the price exploration data, watch sensitivity at the key levels, make our decision, and execute. We set our stop just in case we are wrong.

When I  am executing perfectly, following every rule I know (whether in micro-day-trading or macro strategy), the market likely will disappoint me in at least four out of every 10 trades. Keep this in mind, as it is in the realm of statistical probabilities and in no way a reflection of your character or skill as a trader. It is how you handle and manage each circumstance that defines your success and drives your ultimate returns.

A.F. Thornton

Founder's Trading Journal

Knee Deep

AF Thornton 0 Comment

Well, you may have heard that a big snowstorm hit Colorado over the weekend, and that is where I happen to be. Not that it would have been any better in Wyoming. I got to choose death by knife or fire. But I woke up to no Internet and had to wade through the snow to clear the back-up satellite dish. It works, but dropping down from Gig-Speed to 50 mpps, in a word, sucks.

So I will be very brief this morning. I am sure that will be a relief, given my recent rants. If time permits today, I will put out something more comprehensive when the Internet is back up.

The sum of my conclusions over the weekend is largely unchanged from last week.  The 20-week cycle has bottomed. This is the last run in the sequence of four before the 18-month cycle tops and sets in. 

My biggest dilemma is whether this last 20-week cycle will peak early or perhaps even late. That really depends on whether we have started a new, secular bull market as with 1982, 1997, 2003, and 2009. My best judgment is that we have this coming correction will set the stage for the next run. In other words, I am not in the crash camp – at least as yet.

However, I am cognizant of the proposition that a correction is when your money is involved, and a crash is when my money is involved.

Our current allocation of 50% S&P 500 and 50% Nasdaq 100 held its ground Friday. The Nasdaq 100 barely held. Nothing seems on fire this morning in either direction. I want to continue to use an hourly close below the daily 5-day EMA as our stop on both indexes.

I expect the NASDAQ 100 to benefit from some temporary reverse rotation, and the S&P 500 is knocking on the door of new all-time highs. Being a bit self-critical, I see the need to broaden my horizons a bit into some cyclical areas – perhaps even the Dow on the next rotation. I am ok with where we are for the moment.

Day Trading Today

The usual blah blah blah – I don’t typically trade on Mondays. Overnight activity is balanced. Traders did not explore price beyond the recent range in either direction. This means we should deploy responsive trading, using the 3949 all-time high from March 11 as the upper end of the range and Friday’s 3904.50 as the low end. Perhaps the overnight low at 3924.25 could provide support in a more bullish scenario. If so, carry that forward.

For those new to the site, a responsive trade is a counter-trend trade taken against a specific level. The theory is that when two-sided or “balanced” trade is taking place, there will not be enough momentum to push past key levels, and buyers or sellers, as the case may be, will respond to those areas, essentially pushing prices away from them. 

In other words, neither buyers nor sellers are in control so they respond to both ends of the spectrum until price breaks in a new direction. This is the opposite of breakout or initiative trading which is more directional in nature and is generally taken in the prevailing trend.

The recent ATH at 3949 may be a breakout point for initiative trade. Watch for the pros running the buy stops sitting right above, then monitor for continuation if a true breakout holds or even consider buying the ATH’s retest after the breakout.

Friday’s low showed a lack of material excess (the minimum two ticks needed not to be poor). That structure could require repair on any liquidation break. Also, there is a virgin (untouched) point of control at 3890.00 from March 10th.

Again, if you are new, our typical approach to day trading, besides identifying key support and resistance, is to follow the sequence of testing yesterday’s high and low and the overnight high and low, depending on initial direction, to see where the market finds the path of least resistance. We are always cognizant that even after the initial drive, no matter how impressive, there is a 50% chance of the market reversing. 

Sometimes the overnight action helps us pick the initial direction right out of the gate. In cases such as today, the trading overnight has given us no clue, so we are likely to find the best trades later rather than earlier in today’s session.

A.F. Thornton

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