Archives 2021

Founder's Trading Journal

Bond Market Revolts

AF Thornton 0 Comment

In the land of make-believe, everything must be perfect – or there will be no milk and honey. It is a good day to be in cash, as interest rates and the bond market went on a rampage after Fed Chairman Powell signaled a “tolerance” for “upward pressure on prices” and “patience” for the rise in 10-year rates he “admitted” to having “noticed” recently. 

Clearly, Chairman Powell has enough discretionary income to tolerate higher prices for everything. The average person doesn’t. With those statements, the dream world for the stock market we have enjoyed since last March ended. Remember this day, and remember it well.

All bets are off now, though the markets will continue to offer us trading opportunities. Why the bond market revolt? Governments have a poor history of containing inflation once it is out of the box. What the market anticipates is a coming change in Fed policy. 

A smart Fed cannot be so accommodative and will need to reverse course, taking away the punch bowl at this party. A dumb Fed will continue current policies and start the road to oblivion, the one that eventually caused the collapse of the German Mark in the 1920s. 

Short-rates are already close to zero, so lowering rates further is hardly an option to appease investors. The Fed can “twist” the bond market, selling short-term bills and buying longer-term notes. The Fed can double down on quantitative easing as Australia did over the weekend. But then where does it all end? When does the Fed take the punch bowl away, and at what price?

Think back to 2018. The Fed attempted a return to “normalcy” by easing its balance sheet and raising rates a couple of times. The stock market went into a 20% correction that August, putting President Trump into a tizzy. The market did not bottom until Christmas eve. The equity markets are more overvalued now than they were then. If the Fed now doubles down on the easy-money policies and continues to print money, where will the market go when the music finally stops? From what level?

You see, it is damned if he does and damned if he doesn’t. For the moment, thank heavens we still have enough of a free bond market left to wake Powell up. I sincerely hope he takes the red pill. It will be a rocky road into the next Fed meeting, scheduled for mid-March.

Hat tip to the NASDAQ 100, it saw this moment coming. That is why it has underperformed so significantly these past few weeks, leading the rest of the market down. Hat tip also to oil, up nearly 4% today while everything else is red. You see, oil loves inflation. Gold, not so much. It is down with the rest of the market. Gold raises currency complications – we will need to sort that out in the coming days.

In the meantime, it is nice to be in cash today. I gave it my best shot catching the volatility of the past few weeks, but I was smart enough to throw in the towel yesterday afternoon. Small profits are better than losses. I bailed yesterday on the WWSHD signal. When what should happen doesn’t.

Stay Tuned,

A.F. Thornton

Founder's Trading Journal

Merry Go Round?

AF Thornton 0 Comment

My first thoughts this morning were to let me off this “Merry Go Round.” We stopped out of all our positions yesterday, setting the morning low as our line in the sand. In the interim, I had turned a large profit on Monday into a small profit by yesterday. Therein lies the challenge of trying to swing-trade a choppy and volatile market. Day-trading has been easy, if not almost euphoric.

And it truly has been a veritable Marry Go Round for swing-trading. As you can see from the daily chart of the S&P 500 index below, we have made two wide and volatile swings between 3800 and 3900 in less than a week.  That is just under a 5% trading range. While we have well north of a 100% return year-to-date, I don’t see how any of you can keep up with the trades unless you are parked in front of the computer. Swing-trading normally has fewer round trips, and we have already had more round trips than last year, and last year our return was almost 900%.

There is a saying for everything in the market. Here, we call it the “choppy top of the bull.” But is this truly the top, as many have called? I would venture that this could be part of the topping process for an intermediate correction. As for the mother of all tops, I still don’t think so. 

I remain convinced that we merely reached the top of the 20-week cycle – and we are experiencing the bottoming process of a normal and healthy correction. The problem is that the cycle has such a wide time window to bottom – all the way to March 15th. That is why cycles only give us a target zone – the bottoms vary too much in time to trade with precision. But knowing this is a 20-week cycle zone, as opposed to an 18-month, is still helpful in not getting too bearish on the possibilities.

What we have encountered here is a simple math problem. The market is not dead – it is rotational. While the FANGMAN stocks – a small handful of tech/growth companies – carried the entire market on their backs for most of last year, we now get to experience the reverse effect. They are disproportionately and negatively impacting the indices as profits are taken and rotated into the more cyclical, recovery-oriented stocks. Energy, financials, basic materials, and industrials have all been positive, while tech and communications have suffered the profit rotation. 

But the aforementioned positive sectors don’t have enough capitalization weight to keep the indices positive. The NASDAQ 100 suffers the most. The S&P 500 does a little better than the NASDAQ 100 but still suffers. The Dow Jones Industrials – the old “price-weighted,” stalwart index – tends to do the best. The Russell 2000 small-cap index does well because it is not weighted at all and has a great representation of regional banks. Having said that, in a pinch, the Russell 2000 will suffer liquidity issues when you need to exit, exacerbating losses. So there you have it – the math problem.

For a better understanding of the cycles, take a look at the chart below. I have isolated the cycle algorithms that are built into the main Navigator Algorithm:

Email me at info@bluprinttrading.com if you want a larger, more detailed version of the chart above. It illustrates the dominant cycles’ current position, demonstrating that the 20-week low is due here soon. It could bottom today. 

The most notable line on the cycle chart above is the dotted yellow line towards the top. The computer creates a composite of all the dominant cycles and then projects the market’s path. As you can see, the computer is projecting an intermediate top soon. 

An intermediate top is not necessarily the end of the bull market, nor does it predict a crash. It simply projects a peak of the 18-month cycle towards April and a bottom towards the end of the summer. This could end up being a normal correction. I suspect that will be the case, as many other indicators show that we are at the beginning of a new, secular bull market, not the end. Only time will tell, but the market certainly needs to correct.

That brings me to my last point. We tend to think of the markets in terms of up or down. Yet, the markets spend the vast majority of their time going sideways. I would not be surprised to see the market get stuck in a trading range for a while. As an extreme example, the Dow index traded between 500 and 1000 from 1966 until 1982. Trust me; it happens in both macro and micro time ranges.

For now, I will attempt to reduce the number of trades as much as possible while still trying to capture some profitable swings. Until the market is clearly trending again, you will have to stay vigilant for alerts to keep up with the strategy. Incidentally, our infrastructure to expand the Founder’s Group (beyond BluPrint’s founders) is beta testing successfully and almost ready to launch. Automatic text alerts are part of that infrastructure.

Today’s Day Trading Plan

Yesterday’s late-day structure and close indicate emotional selling and poor location for many shorts. Early trade has the potential for an opening drive higher.

Should it be lower, I will buy the high of the first one-minute bar or a cross back through the open.

Rejection back out of yesterday’s range would be less bullish but tricky as we are so far off the Globex low. I would let sellers have their way for a bit before trying to short as high as possible.

I will be watching how value develops below the settlement at 3813.50 before looking at potential shorts. I will be trading from the framework that most of the overnight players are wrong and will use any weakness to cover. If they don’t, then we have important information to glean from that.

Note that we still have an unfilled gap. Overnight traders tested the Gap, but that doesn’t count towards repair unless done in a regular session.

A.F. Thornton

Founder's Trading Journal

Update

AF Thornton 0 Comment

The market is running at a slow pace today, with the low this morning holding the keys to the kingdom. As we retest the morning low on the Nasdaq 100 at this writing, the S&P 500 is coming in higher – confirmation that this sell-off is rotational. Tech profits continue to be redirected into energy, financials, industrials, and basic materials. The latter sectors are cyclical, showing investors still anticipating growth. Many of the cyclical stocks remain undervalued.

Of course, the market could repeat yesterday and still sell-off. If so, our stops are set at this morning’s low for old positions and 8 points below the entries on the new positions. If the sell-off is contained, as I suspect, we are adding to positions at a good level. If we are stopped out, then a larger correction is unfolding. That would mean either the 20-week has not quite bottomed, or perhaps we are starting early into the 18-month cycle. I can make arguments both ways, but still, believe it is too early for the 18-month to begin correcting.

Australia doubled their bond buys over the weekend, essentially doubling up on their quantitative easing. Bond market participants took the cue positively, hoping the US Federal Reserve will follow suit or give similar comfort. I don’t like all the manipulation – but I don’t make the rules either. What I know is that if 10-year Treasury yields behave, the stock market will behave a bit longer.

A.F. Thornton

Founder's Trading Journal

Update on Stops

AF Thornton 0 Comment

With the XLE and XLF trading nicely positive this morning, there are no concerns on these positions at the moment, and we will continue to use a close below the 5-day exponential moving average on the daily chart as our stop. 

As to the S&P 500 index, continued selling of key tech stocks are weighing on the index, but we have positive breadth across the NYSE. So I will hold the S&P 500 position, using this morning’s low at 3833.25 as a stop, unless I send out an earlier signal.

Statistically speaking, there is a better than 70% chance that the low is in for today. So we will see how the rest of the day unfolds.

A.F. Thornton

Founder's Trading Journal

Balance or Ambiguity?

AF Thornton 0 Comment

After such a powerful and vibrant day such as Monday delivered, one expects the day that follows to be somewhat balanced. For the most part, Tuesday delivered a balanced day for our market proxy – the S&P 500 index. However, the final hour selling, accompanied by closing near the day’s lows, is less than desirable. Also problematic, Monday’s rally volume was average, and yesterday’s volume slightly exceeded it – showing potential distribution. The NASDAQ 100 had below-average volume on Monday – but at least yesterday’s volume on the profit-taking did not exceed Monday’s.

One basic question I ask myself every day is this: are traders buying dips or selling rallies? If the last 24-hours is any indication, they are selling rallies. Perhaps that confirms that a lot of Monday’s gains were associated with short-covering rather than bullish buying. On a positive note, interest rates (the 10-year Treasury rate in particular) backed off for another day. The rate is now back to 1.415%. A subject for another day is why the Federal Reserve needs to “control” rates at all. What is wrong with letting the markets set the rates – unless the government does not like the free-market results? Is this simply another instance where the government does not like the vote (hint, hint)?

Moreover, the Nasdaq 100 is finding resistance at its mean – the 21-day exponential moving average. Simultaneously, the S&P 500 index is finding support at its mean – at least as of yesterday. I get the rotation – and have commented about the health of the market rally broadening out. But it still bothers me to see the leading growth stocks of the day sputtering. I always keep my eye on that – no matter the purported justification.

It is noteworthy that overnight traders could not drive the market lower, at least when I started this writing. I carry that forward into today. Traders are net-long overnight, but we are trading near the Globex session’s lows, so it does not give us a lot of information about this morning’s trading, except that it confirms that the short-term money is selling rallies – even when they occur overnight. There are also some poorly positioned longs from the Globex session.

One needs to give the benefit of the doubt to the rally and the launch from a potential 20-week cycle low. The last few day’s actions should be a brief consolidation to move higher and test the downtrend line from February. The line is on the chart above – prominently displayed in red. But then there is the old saying: shoulda, coulda, woulda… We could be forming a large triangle – and triangles are hard to predict.

The result of all this for us is that we profitably stopped out of our Nasdaq 100/QQQ positions at the close yesterday. We are on the verge of stopping out of all of our positions this morning – as our XLF, XLE, and S&P 500/SPY positions are sitting right at or below their stop levels. I prefer to honor the stops on a closing basis, but I will give the market an hour from the New York open to make a decision – so check your emails at 10:30 am New York time. I will let you know either way.

Today’s Plan

As you can see from the chart above, the Navigator algorithm system labels are flashing a lot of yellow.  The 3850 level on the S&P 500 futures is a key support level, and I will monitor whether the S&P 500 can maintain it. I will flow the information through analogously to our remaining XLE and XLF positions. Given an impressive pivot higher, I may add to our positions in the Founder’s Group. Otherwise, I would rather honor the stops, lock in our remaining profits from Monday and start with a clean slate.

Overnight futures were higher when I began writing this but have dropped slightly on a couple of economic reports. Preliminary employment data for February from ADP showed 117,000 jobs were added. That is about half of what had been expected – a disappointment. Interestingly, 10-year rates jumped a bit on the news.

Should we open outside of yesterday’s range, gap rules are in play. Watch yesterday’s low at 3865 as a potential entry for rotation back up into yesterday’s range. A rally to and rejection away from yesterday’s low is a potential short and will be my trigger to exit on all of our remaining long positions.

Long trades would potentially set up only if acceptance is found back above yesterday’s regular session low at 3865. I am monitoring the value area (where 70% of the volume occurs). So far, it maintained Monday’s level, which is bullish, but if the value were to move lower, it would confirm a more bearish scenario. Yesterday’s value area low is around 3878, with the high at 3898. If we roll back up and through yesterday’s low, the value area low may provide additional resistance.

A.F. Thornton

Founder's Trading Journal

Adding to Positions

AF Thornton 0 Comment

Be sure to read the revised “Up, Up, and Away” post from this morning. I just published it.

The Founder’s Group just added another 20% S&P 500 futures to the current position at 3868.50, with the same stops we are using for the first positions. The market is visiting the daily 21-EMA, which should hold if we are truly back in an uptrend. It is always a bit riskier to add to positions intraday – not knowing how we will close. 

As always, make your own decisions. At the money SPY, ETF calls expiring on April 16th are fine for the additional position. Cash SPY ETF works as well if you don’t want the leverage.

This brings the Founder’s Group to a 50% invested position. 5% XLE Calls, 5% XLF Calls, 10% Nasdaq 100 Micro Futures, and 30% S&P 500 Micro Futures.

A.F. Thornton

Founder's Trading Journal

Up, Up, and Away…

AF Thornton 0 Comment

Navigator Algorithms – 10% Nasdaq 100 Futures, 10% S&P 500 Futures, 5% April 16, 2021 XLF 33 Calls, and 5% April 16, 2021 XLE 49 Calls

Revised to Include Stop References

Yesterday. I hammered the talking heads who got too negative on the market by last Friday. Yet, I only had the guts to go to a 30% invested position myself. Granted, the position is highly leveraged, but I still confess to being a chicken and somewhat affected by all the talk of a meltdown. So who am I to criticize?

Yesterday was one of the most powerful rallies I have seen in a long time. At one point, 495 out of 500 stocks in the S&P 500 index were positive – and the breadth lasted most of the day. We saw ticks on the NYSE exceed +2000 at one point. It does not get much better. The gains are to be expected when larger degree cycles, such as the 20-week cycle I have been discussing of late, launch. In fact, we can use the launch as additional confirmation that the cycle has bottomed. However, until the market achieves new highs, confirmation is not absolute.

Of course, the buying likely included considerable short-covering – forced buying as opposed to real, bullish investors. Never confuse the two – as it can be to your detriment.

But I would not be doing my job if I did not identify at least one negative. Using harmonics and corrective pattern analysis, the market could be forming a bearish “Shark Pattern.” If so, the peak would come at about 3870 on the S&P 500 futures. And that would coincide with a small downtrend line you can draw from the recent peak at 3959.25. I view that line as our line in the sand right now between bullish or more bearish activity.

Aside from that, the trading channel’s top takes us up over 4000 on the S&P 500 index:

Anyway, I would move your stops up to two ticks below the 5-day EMA on all of the aforementioned positions. The Globex lows on the NASDAQ 100 (13153.50) and S&P 500 (3866.25) are good proxies. Since the XLE and XLF don’t have Globex trading, use a couple of ticks below the top of yesterday’s gaps (the gap tops are 49.25 on the XLE and 32.86 on the XLF). Use a close below the levels for now as your stop, rather than an intraday violation.

I want to add to positions if the right opportunity presents. Otherwise, I am satisfied with our current mix. Last night, the S&P 500 futures pulled back to the 21 EMA, but I slept through it.  If I had been up, I would have moved us to 50% invested proportionately.

Today’s Plan

Overnight inventory is balanced, giving little indication of the market’s direction this morning. I would let the market settle a bit before forming an opinion. On the S&P 500, key levels will be 3870, where the shark pattern projects a potential reversal, and the downtrend line comes in from the all-time high. Again, use 3870 as your line in the sand for bullish versus bearish bias. If we manage to conquer that level, we would need to conquer yesterday’s high at 3912.50 – then the Weekly Expected Move high for this week at 3936 which is right above yesterday’s high, and likely to be an obstacle for the remainder of the week.

We can exceed the WEM high, at least early in the week, but the price is likely to anchor us for the rest of the week. Nevertheless, when and if we conquer 3912 or 3936 meaningfully, then we go up to challenge the all-time high at 3959.25.

Settlement yesterday was 3899.50 on the S&P 500. On the downside, we should encounter support at the halfback of 3885, then 3881.50 for the top of the single prints, then the 3866 overnight low, and then yesterday’s gap high at 3859 or so. The daily 5-day and 8-day exponential moving averages should provide support along the way.

We remain in lofty territory, risks are high, and the shark pattern projection at 3870 could be a bearish turning point for the market. That would be the market’s ultimate revenge. We think all is well after such a great day, only to see the market reverse and crater. I specialize in unintended consequences – so I think about these things.

Balanced trading frequently follows a large up day as yesterday, so the overnight range may be repeated in today’s trading.

A.F. Thornton

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