Archives 2022

We are bouncing off the Weekly Expected Move low, and the Founders Group is adding a couple more February monthly expiration call debit spreads for a trade.

This is a high-risk trade, as the tape is still decidedly negative.

A.F. Thornton

We opened with 1500+ downticks and 458 decliners out of the S&P 500. We are first testing the overnight futures low at 4319. We will see how it goes from there. Commodities, Gold, and Treasuries are the only green on my screen thus far.

A.F. Thornton

Navigator Algorithm – 100% Cash – On Buy Alert

The markets will open down 2% this morning, but with yesterday under our belt, that is just a blip on the radar screen – no problem right? We have our big boy pants on now.

But in reality, price is retracing about half of yesterday’s spike low, so still in the realm of recovery. And I suspect there are a lot of shorts still out there hoping for a crash that will run for the hills on any strength today. Again, patience is a virtue for a good swing trade. We will see what the Navigator Algo telegraphs.

For day traders, I would focus on the spike base at 4346. There is potential for more short covering should prices get above it and find acceptance there.

Should sellers maintain control this morning, traders should note halfback at 4311.50 and the Volume POC / WEM low at 4275 or so, both of which would be downside targets short of yesterday’s low at 4212.75.

Yesterday’s sellers broke the October low and breezed right past the 10% correction before reversing course on the “mystery put seller” and closing well above both levels. The significant spike left at the end of the session puts spike rules into play this morning. With the current 70 handle gap down, the most bearish outcome of the spike would be to open below it, which appears unlikely at this writing.

Although we are opening within range, we closed at the highs yesterday on emotional buying. To open this far away from that settlement would imply that there will be some disappointed longs at the open who are suffering from poor location.

Wherever we go from here, we will probably retest yesterday’s low in a few days to shake out any weak hands left in the market. Typically we would rally a bit further first, perhaps to test the 200-day line from underneath. I am betting traders will extend the rally to the WEM high at 4489 before rolling over into a 5th wave down.

Russia / Ukraine is still the wildcard. We will hear from the Fed tomorrow. Perhaps the market will bide its time and do nothing until we hear from them.

A.F. Thornton

I think it was clear from my commentary today that I was on high alert for a turn. The post mortem is that there was still a hangover from Friday’s options expiration at the open today. The number of LEAP options (Long-Term Equity) expiring was the second-highest in history on Friday.

I won’t bore you with the technicals, but there was still delta hedging in the futures market at the open today. As there was no attempt to fade the gap higher, it was clear that sellers were firmly in control of the tape. Market Makers were still selling futures to neutralize their portfolio deltas from Friday.

After plunging more than 4%, stocks staged a furious rally, the likes of which have been seen only on a handful of occasions, before closing green. Putting today’s historic reversal in context, this was only the sixth time since 1988 that the Nasdaq reversed a 4%+ intraday drop to close higher. The other days were 10/28/97, 10/26/00, 7/15/02, 10/10/08, and 11/13/08. As for the S&P, this was the biggest intraday comeback since November 2008, when the US was in the middle of the biggest financial crisis in recent history.

The Founders Group covered the short position from Friday when the market was down about 3%. Simultaneously, I sent out an alert to subscribers that it was advisable to close any short positions.

As soon as the European markets closed mid-morning, some of the more aggressive sectors, such as the IWM (small company stocks) and the DIA (Dow Industrials), began to show relative strength into the final stages of the plunge. Then there was a divergence on the advance/decline line and downticks by about noon EST. This behavior typically leads a low – so the Founders Group picked up a couple of call debit spreads.

Then a colossal put seller (betting the market was bottoming) came into the market and triggered the short-covering rally (see the blue line in the chart from SpotGamma below). Was it the Fed Plunge Protection team? We will never know for sure, but I suspect it was.

The Founders Group then picked up a futures contract on the first slight dip after the low, but a bit higher than we paid for the calls. I closed out the futures contract right before the close and am still holding the call debit spreads overnight. I put out the trades to subscribers from my phone – though the communication was a bit unpolished. The new phone app will be available to subscribers starting Monday from Pro Trading Room.

As to swing trades, the Navigator Algo flashed an “E” exhaustion signal, along with a “Trend Reversal Imminent” signal on the system panel (see below). These signals eventually led to a preliminary buy signal and green arrow at the close. But I would like to see some follow-through (and perhaps an upward break of the Algo line) before issuing a Navigator Algo swing buy. I was encouraged by many good setups as I scanned through the major stocks and sectors tonight.

I have a couple of short videos coming out tomorrow with additional detail. Here are the sectors today in order of return, so you can see where the money flowed:

Since a lot of this was short-covering, I am not sure this tells us too much about future fund flows quite yet. We need to watch leadership in any follow-through rally for additional clues (if we get the follow-through). Value stocks are likely to lead growth stocks for a bit longer, but we shall see. The offense sectors did lead defense today, a preliminary change.

At best, we may have an oversold bounce to monitor for continuation into the rest of the week. We also need to get past the Fed meeting Wednesday and some leading tech stocks reporting earnings later this week.

If this is a bear, we will likely recover only half of the total decline from December before we roll into another leg down. Even before that, we may still need to retest today’s low in the next week before traders and money managers have the confidence to buy in earnest.

The Weekly Expected Move high sits around 4489 on the S&P 500 Futures and 448.84 on the SPY, which may cap gains for the rest of the week.

Of course, we may wake up to more consternation tomorrow, but it is less likely after such a strong comeback and reversal. And then there is Russia and Ukraine.

Strap in, and I will keep you posted.

A.F. Thornton

Short covering rally into the close – a character change. More tonight. Sending from my phone – apologies for the repeats from this morning. Need to get better at this phone app.

A.F. Thornton

(Published at 8:30 AM PST / 11:30 AM EST to Paid Subscribers)

We are likely to see a short-covering rally begin soon. The market is in a logical place for a rally and turn. It is inadvisable to establish further short positions and day traders should be preparing to go long.

Breadth is leaning toward oversold, though new 52-week lows are still expanding.

(Published at 8:00 AM PST / 11:00 AM EST to Paid Subscribers)

Sellers remain firmly in control this morning. The fact that we did not get a gap fill at the open was uberly negative as mentioned in the pre-market outlook. But when the crowd gets too negative, a relief rally likely is close at hand. At this writing, the 10-day Put/Call ratio is exceeding the Covid crash high:

The VIX volatility (fear) index is above the December 2021 high:

CNN’s diversified Fear/Greed Index is back to fear, just not extreme yet:

Money Managers have raised considerable cash – which often occurs as we approach a low:

So, should we buy the dip? When the correction carves this deep and goes beyond the typical A/B/C wave, you can expect a retest of any low about a week out. So there will be a low, likely a short-covering rally, and then a retest of the low. To stimulate your memory, we will then need follow-through in a rally to confirm that real buying is at hand, as opposed to short-covering.

We don’t have a low yet, and there is no guarantee that any such low will be successfully retested. Even when we see a tradable rally, we typically only recover about half of the entire decline before we take another leg down.

In other words, strap in because the character of the market has changed. There is a lot of money to be made, but patience will be the key.

A.F. Thornton

Navigator Swing Strategy – 100% Cash

The Navigator Algorithm is approaching an extreme oversold position, but the indicators have yet to drive the Algo into a buy signal. Exogenous events, such as the Russian / Ukraine situation and Wednesday’s upcoming Fed meeting complicate any attempt to establish a short-term low.

Yet, the monthly options turn, along with the nominal 20-week cycle, counsel us to be on alert for a turn perhaps corresponding to the Fed’s Wednesday meeting and announcement, but from where? All major indices are now trading below their 200-day lines. And three of the four majors, except the S&P 500, are all trading below the October lows this morning.

Friday’s option expiration was brutal, as has been the case for monthly expirations this past year. More than 3.2 million LEAPS (Long Term Options) expired and exerted more downward pressure than usual.

There were signs of bottoming toward Friday’s close, with positive divergences on the 15-minute chart. And the stock futures markets were rallying at the open last night, but the rally fizzled when Europe opened. But since the options expiration long play has been the Monday/Tuesday following Friday monthly expiration, one needs to keep an open mind over the next few sessions.

The Fed meeting Wednesday complicates an early turn today or tomorrow a bit. In one sense, the market has done the Fed’s bidding for it based on their “Forward Guidance” plan. We have corrections greater than 10%. And the risks of a Russian invasion of Ukraine further inhibit aggressive Fed action. As of the 19th last week, the Fed Balance Sheet was still growing. Given the circumstances, I expect the Fed to stick to the last plan they announced rather than get more aggressive. Inflation expectations will tend to focus on supply chain issues that can eventually resolve. Demand will fall away quickly with current circumstances.

Of all the risks on the table, the Russian invasion of Ukraine likely disturbs the global order enough to scare investors the most. Can you even imagine a conflict with Russia with the goons in charge that helped us exit Afghanistan?

The markets are otherwise oversold by just about every measure and due for a bounce. The slope is approaching waterfall status. Fear gauges are high. The Weekly Expected Move and October low are at 4272 (the market makers got it wrong last week, so their calculations may prove wrong again). That is less than 50 points from where the futures are trading (4317) at this writing. The S&P 500 is well under its 200-day line (4325).

For day traders, overnight inventory is net short, and we will open with a true gap down, so Gap Rules apply. That leaves the potential for advanced traders to attempt an early fade. Highs of the first one-minute bar or crosses back up through the open after an opening drive lower are usually solid setups.

All traders should always note what type of fade (if any) the market delivers to gauge early strength or weakness. No fade higher indicates a lot of weakness. Should there be a full gap fill that manages to enter the range, price action above the settlement could bring in further short covering as “screens go green” around the world and everyone sees the same thing. Monitor for continuation.

A gap and go trending day scenario is tricky to predict premarket and often even once the session commences (gap rule #4). To that end, pick your starting location very carefully and know the ultimate target at the October-Weekly Expected Move low.

The Founders Group had a slight loss on Friday’s “day trade” but removed the long portion of the call spread, leaving us net short this morning. We will cover that position at the open and that should start us in the green for the week, which is the nice part of using spreads.

I am out this morning for a dental appointment but will be monitoring by phone. I will update you on any significant events.

A.F. Thornton

The 10-Year Treasury Rate is resisting its 200-week line to go higher…

While the S&P 500 Index is fighting its 200-day line to go lower…

The stock market declines are likely not over but oversold short-term conditions prevail.

Absent a significant event, I am out for the rest of the day but will update you by Sunday night.

A.F. Thornton

It is ugly this morning, but the Founders Group is picking up a small call debit spread (long) position in the SPY (S&P 500 ETF) with the February 18th expiration. We will liquidate on a short-covering rally. The Put/Call ratio is at an extreme – and the daily chart is finally approaching oversold.

This is a trade – there is still no swing long buy signal on the Algo.