Archives 2022

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

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

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

It was a simple plan. Act like Russia would invade Ukraine even though you knew they wouldn’t. Hit the Country with more fear (having practiced so much with the China Virus). Then act like your deft diplomatic experience saved the day! That ought to boost dismal approval ratings, Sayeth the Raven. But once you lose the nation’s confidence, it is hard to get it back.

The latest news is that Russia is pulling back from Ukraine, having achieved its goals of preventing the West from planting NATO and its missiles in its backyard. We did something similar with Cuba so many years ago – which is why I have had difficulty seeing the problem with Russia’s requests. With the West so focused on wokeism and other nonsense, all it took was a good bluff with a weak U.S. President for Putin to succeed. Perhaps a bloody conflict has been avoided. We will see what happens. For now, watch the lamestream media confuse who was the better diplomat, Putin or Biden?

Meanwhile, back at the market, I have been advising daytraders to keep position size small (and by all means always use stops) until the VIX volatility index gets back to a reasonable level. Yesterday was an excellent example of the importance of the concepts. Ukraine’s President Zalensky sarcastically stated that Russia would invade today. The correct context was lost in translation. The Dow lost 500 points in the next few minutes and never fully recovered on the day.

Interestingly, the major indices held well above the January lows in a good test run of difficult circumstances. The indices have turned around considerably overnight on news that Russia may be withdrawing troops. Oil prices have sharply reversed this morning, down 3%. The S&P 500 will open with a large gap higher, above both its five and 200-day lines. We shall see if the market can hold these gains, as the gains will be attributable to short-covering again.

But the minute we see oil prices reverse lower and global tensions calm, interest rates jump again, and we are back to the inflation problem. So there will be no rest for the weary in the circumstances. The January PPI (Producer Price Index) comes out later today. We shall see how wholesale inflation is measuring up as it leads to consumer inflation.

I remain open to a potential swing trade for cash and leveraged accounts. I like the potential “h” reversal pattern in the SPY and QQQ. I am also pondering Bitcoin’s better performance than (and decoupling from the S&P 500). Is this a leading indicator for “risk-on” assets? It was on the way down. Let’s see what the day brings.

Day Traders

As was the case a few days ago, resistance remains at 4500 and 4520. Support lies at 4450 and 4400. Recall that we are approaching monthly options expiration on Friday, which has pulled the market down into some of its deepest troughs over the last year. But it may be different this time.

As we approach Friday, the trading range should tighten around the 4500 area. An extended rally fueled by declining implied volatility and put decay could push markets back up into the 4520-4550 area by Thursday, which is back to where I noted heavy resistance last week.

Today, it appears that 25% of SPY/SPX/QQQ negative gamma pressure will expire Friday, which should remove some net negative gamma by Monday. As this is a heavy put expiration, the decay, and closing of these puts could keep a tailwind for markets through Friday at the expense of some “lower bound” support (currently at 4370) into month-end. This lower bound idea is that, essentially, markets are now too well-hedged to have a material decline.

Mark all your key levels, including the abovementioned ones, the overnight high and low (4468 and 4381.75), the overnight halfback at 4424.50, and yesterday’s high at 4420. Don’t forget to mark the regular session open.

Have a keen awareness of critical moving averages nearby, including the five and 200-day lines near 4450 and the 21-day line (mean) around 4500. The influence of these lines can supersede other levels.

Also, note the ‘h’ reversal patterns on the daily SPY and QQQ. These patterns look bearish and often fool inexperienced traders. The pattern can be bullish as the retest of the recent low approaches.

The market will open with a large, true gap higher on inventory that is almost 100% net long with many shorts that could undoubtedly hit the panic button and buy. Gap Rules apply – especially numbers two and four.

But I have highlighted the area that the market will open into, and there is quite a bit of resistance to overcome, including the downtrend/supply line from February 10th. Recall that we broke this line once and failed.

Use any gap fill, and the extent of the filling, as your initial sentiment indicator. Assume sellers remain in control if the gap fills and there is acceptance within yesterday’s range. If the market punches through the aforementioned resistance zone, target 4500. If it fails, target 4400 but monitor for continuation after each support level is breached or not.

With the overnight high pushing the endpoint of single prints, you can use the level (4468) as a potential long trigger. If the gap fills and there is acceptance within yesterday’s range, this is not a meaningful reversal.

A.F. Thornton

Happy Valentines Day. The market was down again this morning but has recovered on news that Putin is still willing to talk solutions to the Ukraine problem. I had some technical issues with the video last night, so it will be out later today. But let’s face it – you already know the issues.

Our 7.5% inflation rate is now the same as Mexico’s. Under the old formula, it is nearly 14%. So interest rates have risen, and the Fed will begin to catch up with them in their March meeting. The bond market has already set them. Whether rates continue to rise depends on future economic data and geopolitical risks – e.g., Russia invading Ukraine. Anybody who says they know what will happen is a fool. All of this will be data (and news) driven.

A large inflation component, Oil prices are approaching $100 per barrel. In part, higher prices are due to the Biden administration’s ill-conceived policies. But there is also a component of geopolitical risk in the price. How do I know that? Contango.

No, contango is not a new kind of dance. It means I can buy oil futures for year-end in the $80 per barrel range even though the price is close to $100 now. Normally, future prices are higher than current prices. So the market sees a short-term rather than long-term oil price risk.

The stock market is coming off a multi-timeframe channel top, including the 100-year channel. It overshot the mean to the upside with the friendliest Fed policy fuel ever conceived. The market has been waiting for a catalyst to start the ball rolling in the other direction. Now the market needs to snap back like a rubber band.

The market is likely beginning its journey to the middle of the 100-year channel, and we hope it doesn’t overshoot it like 1929. Certainly, the market could crash into the middle of the channel (unlikely). It can move sideways over several years (likely). Price could ride the top of the channel for longer (unlikely). In rare cases, the market can form an even higher channel (very unlikely).

Today, the middle of the 100-year channel is roughly 2200 on the S&P 500. The middle of the 2009 bull market channel is 3500. These numbers will rise over time, but the market will eventually work its way somewhere in between those levels. This is all normal.

I will continue to post the chart below as examples of the different ways the stock market has resolved this rubber band snap back concept in the past:

And here is the current picture on close-up:

That’s it. You have everything you need except a travel guide if you understand the analysis above. I will be your travel guide with the help of the algorithms I have developed over the past 35 years.

Already this morning, Putin has agreed to more talks, and the stock market has snapped back from overnight losses (see heatmap chart below). But short-term interest rates jumped on the news that war might not be available to tamp down interest rates. Get used to the volatility.

We are 100% cash for now in our intermediate and long-term strategies. We will continue to look for a new entry point if the strategies can endure the current volatility. I prefer to keep the round trips minimal in those strategies, if possible in the current environment.

Day Traders

Always mark the previous week and month’s open, high, and low on your screens. Mark the overnight high and low as well. These are inflection points. Price is not always near these levels, but they are important when nearby. For example, Friday saw the price drop below the weekly and monthly open to turn both candles red.

Overnight inventory is net short which may boost the open. I see major resistance today at 4397, 4410, and then 4500. Major support lies at 4344 and 4300.

Monitor geopolitical events carefully and use stops. Remember that Bad-Cop Fed Governor Bullard is already out with more hawkish comments on Fed tightening pre-market. European Central Bank President Lagarde speaks starting at 11:15 am EST. Also, the monthly options expiration is Friday, which has generally resulted in a dip over the last year. I will have more analysis on expiration as we get closer.

There are a lot of puts in the market, and the put/call ratio ended Friday’s session elevated. At current implied volatility (IV) levels, incrementally large moves are required for puts to payoff. This may deter put buyers and may incentivize put sellers to step up. Long puts closed could lead to positive delta hedging, which would support the market.

Current high IV is linked with large IV swings (vol of vol), which in turn can lead to rapid, amplified hedge adjustments (IV down = buy hedges, IV up = sell hedge). In other words, we do not need a change in large put positions but just a repricing of put positions to initiate large hedging flows.

If IV declines and the market does start to rally, use a break of the overnight high at 4428 as your first hurdle, then the 200-day line at 4450, then the 21-day line at 4500. As always, monitor for acceptance. If the puts run for cover, the move could be quick and decisive. The S&P 500 would require a few closes above the 21-day line and Friday’s high at 4520 to start a new leg higher.

Moving south, taking out the overnight spike low at 4354 gets the ball rolling for a test of the rising trendlines, Weekly Expected Move low, and January lows, as pointed out last night. For now, my best judgment is that it would take something the market does not know to drive below the January low today. This morning, Putin’s agreement to further talks could easily reverse, and all bets would be off. Here is the updated daily chart:

Here are my key levels. Everything I monitor is on the chart, but I emphasize following the roadmap and numbers outlined in the paragraphs above.

Good luck today!

A.F. Thornton

I cannot remember observing such panic in the press or financial markets as has been building this weekend. Notably, the put/call ratio finished high on Friday. But I don’t need any fear gauges to sense that panic is in the air over the Fed and Ukraine.

Oil is approaching $100 a barrel because of the tensions in Ukraine. Interest rates have already spiked because the Fed needs to raise them. If Russia were to invade Ukraine, it would put the Fed rate increases on hold anyway.

I will have a video out in a few hours, but in the meantime, here are a few thoughts and my current Day Trading Screen:

I will republish the screen with key levels tomorrow morning and detailed options information, including the Gamma Flip level and the Volatility Trigger.

We have the Weekly Expected Move and January lows plus two important uptrend lines, all in the same region to support the market. I don’t expect the market to punch through the area except in a full-on panic and Ukraine invasion. Then, and only then, would I target a C-wave move (equal to the first down leg) that would temporarily take the market to the 4000 region.

Week after week, we observe how powerful the Weekly Expected Moves are on both ends of the range. These critical levels limit most weekly rallies and declines. Look no further than last week, when the WEM low stopped the slide despite the Friday panic. And even in the early week rally, the WEM high stopped the advance (see below).

In the famous movie line, Gordon Gecko emphatically stated that “Greed is Good.” He had it dead wrong respecting the stock market. “Fear” is good for the market, and there is plenty of it to go around right now. This moment could morph into that “sold the rumor – buy the news” opportunity.

We sold the rumor, and our strategies are 100% cash. We have had exceptional gains for the year so far. But cash is trash in a low-interest rate, inflationary environment. We will patiently await the right moment to redeploy some of our cash.

There are powerful short-covering rallies when fear has run its course, even in a bear market.

A.F. Thornton

Here is the week in review, with all of Friday’s critical levels drawn in. The market closed on the low today and below the critical 200-day line – a bearish outcome. The weekly and monthly candles are now bear bars and red.

We finally found support at the second support level mentioned this morning, 4404, near the Weekly Expected Move low. Bulls should be thankful for market makers, as there was a lot of blue sky below 4400 without them.

We know the market is overvalued and correcting. As such, it is also vulnerable to bad news. How a market reacts to news can be an indicator in and of itself. It is close to a bottom when the indexes stop going down on negative news. As the market keeps puking, we are not yet close to THE bottom.

The news would include Fed Governor Bullards comments yesterday, which were not well-received by the market or his colleagues:

“Federal Reserve officials, both privately and publicly, are pushing back against calls by St. Louis Fed President Jim Bullard Thursday for super-sized rate hikes and instead suggesting the central bank is likely to embark initially on a more measured path.” Source: Bloomberg.

And in the tradition of “Wag the Dog,” today, the Biden administration gave us another dose of fear porn about Russia invading Ukraine, which was not well-received by the markets or the Kremlin:

“The White House hysteria is more revealing than ever. The Anglo-Saxons need a war. At any cost. Provocations, disinformation, and threats are favorite methods of solving their own problems,” she wrote in a post on her Telegram channel. “Road roller of the American military-political machine is ready to go through people’s lives. The whole world is watching how militarism, imperial ambitions denounce themselves. And a propaganda brigade chaired by Bloomberg serving all this.” Source: Kremlin.

The market catches all the terrible news but ignores the pushback.

I will endeavor to put out the weekend video tomorrow. It will be necessary and positive for traders to breathe and digest all of this over the weekend.

While stocks may be tumbling, 2022 inflows into stocks – both institutional and retail – are soaring. According to EPFR data compiled by Bank of America, cumulative equity flows YTD in 2022 had hit a record $153bn, exceeding the pace of early-2021 (when the year started with $151bn in inflows, ahead of a record year of more than $1tn inflows). Who says it is lonely at the top? Somebody has to turn the lights off.

And to cap this otherwise dismal week, we got the sad January Consumer Confidence Report from the University of Michigan:

The monthly chart reminded me of the declining trend in President Biden’s approval ratings. There is an astounding correlation. But perhaps the report will help comfort the Fed that the economy will slow of its own accord. Unhappy and pessimistic consumers don’t spend much money. And they have less to spend with 7.5% (likely closer to 14%) inflation. Consumer spending is 75% of the economy.

A.F. Thornton

Supposedly a “bloody, Russian invasion of Ukraine is imminent. The Fed has called a previously unscheduled closed-door meeting for Monday. The initial fear was that the Fed would call for an emergency rate hike. But the meeting could also relate to the Russia / Ukraine situation.

Both Gold and Oil are spiking on the invasion fears, with oil approaching $95 per barrel.

In less than 24 hours, the S&P 500 has moved from the Weekly Expected Move High to Low:

One hopes that the WEM Low is enough to hold the market. It sliced through all other important support levels. Otherwise, lookout below.

A.F. Thornton

I have notified subscribers in non-leveraged accounts to liquidate remaining positions and return to cash when the QQQ was 357.75, and the SPY was 449 50 for a very nice profit. All strategies are now 100% cash.

It will be challenging to take more swing positions until the volatility decreases. We will be limiting ourselves to day trading in the short term.

Listening to the Sunday video this weekend will be critical to understanding this market and what risks manifest.

With direction somewhat uncertain, and risks very high, it is prudent to step back and take another look at the big picture.

A.F. Thornton

The market has recovered the overnight losses and will open back inside yesterday’s range. Overnight inventory is 100% net short, so some profit-taking at the open may boost prices a bit and may even be underway pre-market.

While the overall bias is bearish below our key 21-day and week lines, the overnight low held within the recent balance area low, and I would use Balance Rules if we revisit the lower level today. Note the high volume node around 4475 overnight as possible support before the balance area low at 4450.

With the overnight low around 4454. and the bottom end of balance at 4450, any test and failure is the absolute line in the sand to stay bullish today. Remember that 4500 is now likely to be resistant per our recent options gamma and open interest discussions. Also, note that 4500 is the high volume node on the 20-day cumulative volume profile to the right in the chart above. If the market miraculously moves north of that level, then target halfback and the volatility trigger at 4530-35 and monitor for acceptance.

Remember that the monthly candle turns green above 4492, and the weekly candle turns green above 4497. Those are key areas to mark on your screens.

Volatility is higher today, with the Expected Move projected at about 45 points on either side of yesterday’s close (4504.08). The implied volatility range (4459 – 4549) is interesting since we already breached the lower level at the 4454 overnight low.

Options-driven resistance lies at 4500 as recently discussed, then 4530. Options support is at 4464, then 4404. As it is weekly expiration today, 20% of SPX and QQQ gamma expires. That could pin the market around 4500, give or take 10 points, as this substantial volume of options either expire or roll.

Significant put positions were added to the S&P 500 and QQQ yesterday, but new calls are still light. So flows will be influenced mainly around buying puts (driving prices lower) and selling puts (driving prices higher).

The fact that overnight follow-through has been negated and futures are trading positive now is an important piece of market-generated information to bring into today’s session. Short-covering could easily kick in if we don’t get a decisive break near the open. But in any rally, the top of the balance range at the 4530-35 target may prove formidable.

Cash accounts should stay tuned for any alerts, as we nearly tested the Navigator sell trigger overnight.

A.F. Thornton