Archives February 2022

Gold or Bitcoin?

When I saw the inflation potential a year ago, and perhaps as general advice, I advised subscribers to buy physical gold as both a hedge and alternative “crisis” currency to have around for a rainy day. I argued with many about the “Bitcoin” alternative, which I viewed as somewhat of a mania. The more things change, the more they stay the same. Gold is breaking out to new highs in the current challenging environment:

Source – Zero Hedge

How about Bitcoin?

Source – Market Ear

How much Bitcoin does it take to buy a loaf of bread when there is no electricity or Internet? Manias come and go, and Bitcoin is no different. However, Blockchain Technology is awesome and will survive. A wise investor would focus on the technology rather than the coins.

A.F. Thornton

Day Trading Levels – 2/18/2022

Major support lies at 4400 and 4345. Major resistance stands at 4430, 4450, and 4500. Other key levels today:

Today is monthly and weekly options expiration. There are better days to day trade than today. But if you must, be aware that the market is in high volatility mode. VIX term structure inverted again yesterday.

With yesterday’s activity, gamma has moved down to 4400, with roughly 25% of SPY and QQQ gamma or nearly $2 trillion expiring today. 4400 should now act as a magnet.

Most positions expiring today are puts, which is normally short-term bullish. In the intermediate-term, however, expiration is reducing some hedge protection. Monday’s holiday (President’s Day) throws some additional uncertainty into the mix.

As is typical when the VIX is this high, liquidity is low which induces even more volatility.

Geopolitical events will amplify risk in this high implied volatility and negative gamma environment. Any short-term bounce today on good news coming out of Ukraine likely would be temporary. Interest rate policy is more of a driver of price movement and won’t be resolved until the next Fed meeting in March.

Yesterday’s regular session low at 4367.50 is poor and in need of repair. The overnight session breach does not count towards repair so the market reaches back up to 4367.50 to repair the poor low, it can be an initiating short trade. If the opportunity presents, target the overnight low from February 13th at 4354 and monitor for continuation.

I would use the overnight high at 4414 as the line in the sand today to change the tone from bearish to more neutral. Prices remaining below that level keep sellers in control.

Review last night’s commentary for the big picture. The S&P 500 and NASDAQ 100 are on the verge of breaking their triangles to the downside.

A Sad State of Affairs – Morning Outlook 2/18/2022

Housekeeping

As a quick housekeeping item, I have to make a few changes for the remainder of the time I am on the left coast in the Pacific Time Zone. As you probably know, a lot of work goes into each morning outlook – several hours at the very least.

I have been getting up at 4 am and rushing to get this out at the last minute. It doesn’t give day traders much time to digest the information, and it is wearing me out. Then I have to correct typos after rushing out the commentary, and I am hardly ready to trade myself.

Needless to say, I got spoiled in Europe, where the U.S. stock market opens at 4:30 in the afternoon, and I have all day to prepare and write. I will be returning to Europe in late March or early April.

I wait to write the analysis until the morning to add the overnight futures data to the report. But I realize that micro-level information is not important to most of you. For our non-leveraged swing strategy and those interested in the big picture, I will now be writing the macro perspective in the evening after the close.

I will then publish the chart of important micro levels for day traders in the morning with a few relevant comments. This saves a lot of time and allows me to deliver the information more timely.

Day traders are a specialized, technical audience. This change also complements the new day trader subscription service, which adds the trading plan for the day, live comments/alerts, and the trading room. You will need our ProTrading App for the additional alerts. Drop me an email at info@BluPrintTrading.com if you are interested. There will be a formal announcement soon.

With housekeeping out of the way, let’s move on to the big picture analysis.

Current Market Analysis

As I have been communicating, the stock market is best described as regressing to its long-term mean from the top of its multi-timeframe channels, including the 100-year pathway:

I don’t mean to beat a proverbial dead horse, but this perspective is important to understand why the market is so volatile, and declines could exceed recent experience. The long-term channel is another way to look at valuation, which is historically and unsustainably high.

But nothing goes straight down – except maybe once in 1929. Our Navigator Swing Algorithm Strategy has recently been in cash, with positive year-to-date returns that have significantly outperformed the benchmark S&P 500 index. We are awaiting another tradable swing low to deploy cash, which we expect soon.

The market has been rising out of the 20-week cycle trough. The trough is due about now, but the first low came in a bit early in January. A full retest of the low is not unusual in such cases and might be underway. Perhaps the orthodox low is not in place yet and will happen in the next few sessions.

Alternatively, the cycle could have had an early peak associated with “left translation.” We could be heading to significant new lows in such circumstances – the most bearish outcome.

Today, the 4406 lower support boundary identified in this morning’s report failed to hold, triggering a break through the Put Wall and putting the market algos into a negative gamma spiral, as can be seen in the 5-minute S&P 500 Futures chart immediately below:

While there are always buyers and sellers in the market, options trading volume has grown so exponentially that it influences day-to-day price action considerably. I keep abreast of key levels where most put and call options congregate.

The big picture is that market makers/dealers have to sell futures on a break of the Put Wall to handle the negative gamma (movement). Selling futures to guard the volatility of dealer inventories exacerbates the decline. The Put Wall is the price location of the largest amount of put gamma where dealers are short. More often than not, the wall provides support as dealers unwind hedges and restructure trades.

When what should happen doesn’t (WWSHD), we need to pay attention. The failure to hold the Put Wall becomes a bearish signal in and of itself.

The cause of the accelerating bearishness is a combination of Fed Policy concern, uncertainty around Russia invading Ukraine, and unstable authoritarianism in Canada. Truly, I don’t know whether Russia will invade or not. What disappoints me is that I cannot believe or trust my own government.

This administration (and certainly many others that came before it) has done nothing but lie and distort everything from China Virus and vaccine information to monthly economic data. They seem to be in the “fear” business rather than running the government – which is in shambles. The fear-mongering is so bad that it is now called “fear porn.” It is a psychological strategy to keep the population off-kilter and dependent on the current rulers. Understandably, the market puked on President Biden’s assurances today that Russia will imminently invade Ukraine.

But what will the administration do about it? I hear many threats to Russia, but what will they do to help our Country and citizens? As one example, what will the administration do to ease oil prices? Will they allow our domestic oil industry to gear up? Will they allow the Keystone Pipeline? Any such move would take some wind out of President Putin’s sails.

This administration caused almost all of the exigent circumstances we are currently experiencing. Their attacks on our own energy industry have enriched Russia with near $100 per barrel oil prices. Russia’s debt to GDP is 17%. Ours is a record 135%.

Presidential administrations encounter economic cycles and forces beyond their control in the usual situation. A President’s success or failure can frequently be the luck of timing in the credit and economic cycles. But that is not the case now. The situation at hand can directly trace back to this administration’s decisions and policies over the past year.

Both Russia and Ukraine dispute the Biden Administration’s invasion analysis. Supporting that view, oil prices fell significantly yesterday and today (-7%), as you can see in the crude oil futures chart below:

One would not expect oil prices to be falling if Russia was about to invade. But gold just hit 7-month highs, and treasuries are rallying. Upward bias in these safe-haven investments might indicate a fear trade to “risk-off” assets. I am also following the Russian Stock Market ETF (RSX). Like our stock market, the RSX ETF was weak today. Accordingly, the money flow signals are mixed.

Is it inflation? Fed Policy? Russia? What is truly influencing the price of risk and riskless assets? To me, the best proxy to follow for an invasion is the price of oil – which is declining for now.

In the final analysis, I give more credence to institutional money flows than dubious government rhetoric. I will continue to observe oil prices, the RSX, and other objective measures to help us make good decisions in the days ahead. I know for sure what Ben Franklin deftly observed so many years ago. As difficult as it is, you have to “buy on the canons and sell on the trumpets.”

The various support levels below the market are marked with green lines in the S&P 500 Futures 5-minute chart above. Below is a macro view of the lines on the S&P 500 futures daily chart with labels:

The market could find support at any one of these levels or violate all of them. The most important level to test is 4211, the recent January low (also the October 2021 low). If the market gets to that level in the next few sessions (it may even briefly dip below it and run the stops), I would be very interested in redeploying some cash.

The weight of the evidence suggests that there will be lower prices from today’s low. But there are always countervailing forces, levels, and short-covering rallies. Most of the monthly options expire tomorrow at 4500. That could put some light tailwinds on price, though it did not seem to help today. And even if it does, the lift might only be a one or two-day wonder.

The 4211 low is a good target and will hold in the short term, in my best judgment. It should give us another good rally leg to work that lasts more than a few days, like the first rally from the January low. But I won’t know until we get there. We need to look for the usual positive divergences in momentum, breadth, volatility, etc., compared to the January low. It is one of those “I know it when I see it” moments.

Further irresponsible political rhetoric or a real Ukraine invasion could cause a crash. But that is the lowest probability outcome – with the volatility index (VIX) already trading near 30. I wish I could brush aside crash concerns, but I have to keep the slight possibility on our radar.

With monthly and weekly options expiration tomorrow, it is not a good session to day trade, as there can be price movement distortions associated with expirations.

Summarizing then, we believe that a tradable swing low is close at hand. The most likely level to target is a retest of the January low at 4211. But we need to keep an open mind and watch how the market reacts to the trendlines slightly above the target. Government fear-mongering will keep volatility high. A full-on crash is unlikely unless a serious conflict between Russia and Ukraine breaks out.

Don’t confuse a waterfall decline and spike low to test the 4211 level with a crash. Both are unpleasant, but one is a correction, and the other telegraphs economic calamity and a serious bear market.

Anything is possible, but now you know what is probable.

A.F. Thornton

Canada Bank Run

Google Trends shows Canadians have panic searched “bank run.” The search term first jumped on Tuesday then went parabolic on Wednesday, right around the time the bank outages I mentioned this morning were reported.

There were countless stories of banking customers who experienced trouble accessing their funds yesterday evening. No bank explained the source of the outrage, but it follows King Trudeau invoking the Canadian Emergencies Act.

A.F. Thornton

Lies, Damn Lies, and Statistics – Morning Outlook 2/17/2022

Retail Sales came out yesterday. The headline number was higher than expected – up +3.5%. Only two problems. The number was not adjusted for inflation and had another (becoming infamous) Biden Administration “seasonal adjustment.” What is the true number? Retail Sales were down -18%!

Then we go up to our friends to the north, Canada. All the major Canadian banks were offline most of the night? Why? There is some fear of hackers, but there is also a run on the banks. After King Trudeau declared his emergency powers to seize the funds supporting those mean truckers, ordinary Canadians started withdrawing their bank deposits and closing their accounts. What would you do in similar circumstances here? We call it the ‘Law of Unintended Consequences.” Others call it Karma.

Finally, we are told that shots were fired in Ukraine last night. At this point, I don’t know who or what to believe. But one thing I do believe is the price action. Oil prices gapped down yesterday from $96 back to $90 a barrel. That is the opposite of what prices would do in a breakout of the conflict. I will watch oil as my temperature gauge for Ukraine.

In the meantime, S&P Futures stayed in yesterday’s range overnight but are back down near yesterday’s low this morning, erasing the “Fed Minute” rally from yesterday afternoon. Futures are trading at 4440 at this writing.

There should be a positive drift back toward 4500 today and tomorrow due to the huge number of options expiring at that level at Friday’s monthly/weekly options expiration. But I would not exactly call this rocket fuel. A lot depends on these various exogenous events.

So our strategies remain 100% cash for now, but we are looking for a swing low contemporaneous with all of these crazy events.

Day Traders

There is a small reduction in volatility expectations from yesterday. We should see resistance at 4475 and 4500. Support lies at 4455 and 4406. Put decay and/or expiration should lead to Dealers buying rather than selling Delta.

The market seems to be balanced going into options expiration tomorrow. There is nothing to incentivize an opening trade. Wait for the picture to become clearer later today. Where value develops as the day unfolds may add insight into price direction or ranges. Watch the larger triangle pattern developing.

Use yesterday’s high and low as your breakout zone. I will use yesterday’s halfback around 4450 as my bull/bear threshold.

Watch all your key moving averages converging around 4450 as they will tend to override other support and resistance levels.

A.F. Thornton

Buy the Dip? Morning Outlook 2/16/2022

In yesterday’s celebration of easing global tensions and the accompanying short-covering rally, a 10% wholesale inflation report floated right by, and the stock market seemed to ignore it. When the street mistranslated the President of Ukraine’s comments a few days ago (to mean Russia would be invading Ukraine today), the stock market dipped but did not even get close to the January low.

And then there is this: the Smart Money is bullish, and the Dumb Money is bearish.

Institutional fund flows are positive, but they understandably show a preference for stocks that have already been correcting for a year and are down 50%. Bitcoin, an asset I follow to measure “risk-on” behavior, has been outperforming the S&P 500 the past few weeks. However, Bitcoin could also be the beneficiary of fund flows related to global tensions, including Canada’s draconian implementation of Marshall Law and bank account seizures. They need to control the racist truckers threatening Democracy! By the way, I am running out of conspiracy theories because they all keep coming true.

The point is, there are lots of reasons that the market should have already puked here, but it hasn’t. The demand rose out of the nominal 20-week cycle low, which I pointed out might have arrived ahead of schedule on January 24th. It is technically due about now.

Typically when the cycle low comes in early, the market retests it closer to the due date. I believe that is what is happening now. Given the history of corrections and bear markets, there is only a one in five (20%) chance that this is one. Most bear markets are associated with recessions. While everyone can opine about what the Fed might do or the yield curve, we are not in a recession yet. We have mixed indicators at the moment. Nobody can know for sure what comes next.

I have already stated that I believe inflation is peaking. I stand on my record. When I predicted the inflation we have now (more than a year ago), the crowd was on the other side. Inflation has a cycle like everything else (5.5 years trough to trough). I don’t want to give away all my secrets, but my cycle indicators for the Consumer Price Index show we are near a peak.

The prognosticators tell us that this is the highest inflation since 1982. Does anyone remember what happened in 1982? The stock market began the greatest bull market in history until the 2000 Dot Com bubble burst. The inflation spike may sell headlines, but the pundits miss a few details. Sure, there are many differences between 1982 and now, but we need to look past current headlines.

Even if the stock market is putting in a long-term top, and I believe it is, it is a process. Only on one occasion did the market crash to the bottom of the 100-year channel, 1929. It isn’t logical to plan portfolios around a single, outlier event. I am looking for a trading range to establish itself first. Perversely, there may ve too many hedges to allow the market to fall much below 4300 before Friday’s expiration.

For all of the reasons mentioned above, I believe we are getting close to a tradable swing low bottom. Let’s see how the day goes. I prefer to enter closer to the Weekly Expected Move low and projected lower channel line around 4300. Then, we could ride the move up to test the middle or top of the range potentially.

The market can still get a lot uglier here before it bottoms, and it may do so. But we need to keep an open mind to all possibilities. When traders and talking heads get panicky as we have recently seen, we are closer to a trough than a peak in my experience.

The main task the rest of this week is to get through the monthly options expiration on Friday.

Day Traders

Be mindful of the retail sales numbers and Fed minutes coming out today. The cash indices were wedging into the close yesterday, indicating a potential decline before any further rally. But realistically, the market does not have a lot of conviction in either direction.

Continue to expect high volatility (a close roughly 83 points in either direction from the open). Resistance starts first at 4470 and then at 4500. Note that the IWM and QQQ are close to their Weekly Expected Move highs (208 and 358, respectively).

There is some support around 4450, including the 200-day line, with strong support at 4400. Unlike recent monthly expiration drawdowns, Friday’s expiration is still put heavy, and the decay of the puts should help support markets into Friday’s monthly options expiration and close.

Either way, S&P Futures 4400 should remain as solid short-term support.

Although overnight futures tested levels above yesterday’s range, they are in balance. There is no indication of how prices will react near the open (other than the rising wedge pattern mentioned above). With Fed minutes also looming, better trades will develop later rather than earlier in today’s session.

While the overnight activity took out yesterday’s double top at 4451 and fell back into range, buyers still have the potential to get active on a retest of this area. Yesterday’s regular session activity left an unfilled gap (top is 4436 and bottom is 4420) and an untouched volume point of control (VPOC) around 4394.50.

S&P Futures 4500 is a formidable obstacle, but positive gamma kicks in above it. Watch the VIX, as relief in implied volatility could help drive the market through 4500. The likelihood is that this area will not clear until next week. The volatility trigger is at 4470 – meaning positive gamma kicks in at the level.

Today, I will use the overnight low at 4441 as my bull/bear bias line.

A.F. Thornton

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