All posts by AF Thornton

The market is balancing as anticipated today. Tempo is slow, and the range has settled into 4495 at the low end to 4515 at the high end. But after hitting 4514 at the open and then selling off to 4474, it looks like the S&P Futures 15-minute chart (excluding overnight trading) is forming a small ascending triangle projecting into the 4320 area (where the 21-day line, 21-week line, and the WEM High intersect):

Holding the market back is the NASDAQ 100, which is the first index to bump up against its downtrend line from early January. As a result, the S&P 500 is doing a little better than the NASDAQ 100 today, but those large-cap growth names need to run to help the market get over this resistance area.

I give the market 50/50 odds here, but even if we tag 4320, I expect many short sellers to give it a go off the 21-day line.

A.F. Thornton

Navigator Swing Strategy – 100% Cash

As contemplated in the morning outlook, we cashed our remaining Navigator swing positions in the SPY (at 450.75) and QQQ (at 364.50) at the open. We will monitor the market’s effort at conquering further resistance and look to reenter positions in the direction the price action and indicators decide to take us.

While there is some additional upside possible, I don’t want to be guilty of trying to squeeze the last drop. Pigs get fat, but hogs get slaughtered.

A.F. Thornton

Navigator Algorithm Swing Strategy – 5% SPY and 5% QQQ Call Spreads

Who says you can’t predict the future? Let’s first review our Decennial Roadmap highlighted in the 2022 outlook video:

While it doesn’t exactly show an ominous January, it cautions that bearish pressure won’t abate until mid-year if the past years ending in “2” are any guide.

But it is the Hurst Cycles that have always been a critical component of timing corrections and bottoms. It is amazing how consistent these cycles have been over my career:

Interestingly, J.M. Hurst wrote his seminal book on stock market cycles in 1970. As recently illustrated, the 17-year trading range that developed in the inflationary processes of the 1970s sabotaged any so-called “buy and hold” strategy. Mr. Hurst discovered that predicting lows in that mostly 25% trading range was invaluable in a market where money managers had to “trade” to make money. After 17 years in a trading range, the public hated stocks.

I always laugh a bit when I remember that “Mutual Funds” used to be called “Unit Trusts.” They changed the name in the late 1970s because Unit Trusts had a bad record and a bad rap with investors. Never forget, success in life is marketing.

Back to the future, the NASDAQ 100 already tagged its Expected Move High for the week and is approaching its downtrend line, and the S&P 500 closed just below its Expected Move High yesterday. I am inclined to sell the final half of our positions this morning, given that the easy money off the lows is behind us.

If I am reluctant to take profits this morning (and I am not), the reversal theory seems to be moving towards consensus. I like to avoid “Groupthink” because it is typically wrong. So I want to keep an open mind as to more bullish outcomes.

As we welcome February, our Navigator Algorithm swing strategy $10,000 account finished January with a $4,900 gain, also a 49% return. Even a non-leveraged cash account was up $1,200 or 1.2%. The S&P 500 index, in its worst month since the China Virus crash in March 2020, finished down 5.5% on a closing basis. Peak to trough, the index lost almost 12% at the January 24th spike low.

Nevertheless, the easy money off the bottom is behind us now. Supporting a contrary view to rolling over again, yesterday’s price action and volume qualified as a follow-through day on the broad NASDAQ and the NYSE indices. Both indexes saw significant gains more than four days after their Monday spike lows on increased volume over the prior session. The S&P 500 rose significantly above the 200-day line, though the NASDAQ 100 has some work to do to accomplish the same. Also, we now have two strong bull bars nearly stacked on top of each other.

The last few day’s activities reflect institutional buying, not just short-covering. Without the participation of hedge and mutual funds, the rally attempt from the recent lows will fail.

The caveat to the caveat is that yesterday was month-end, in a particularly gruesome month. So the volume might also be reflective of money manager window dressing. Not every follow-through day leads to a bottom. But the follow-through day supports keeping an open mind to both bullish and bearish outcomes in the next few weeks.

In my experience, the Fed’s third rate hike is the one that usually destroys the market, and they have not even started the first one. This overvalued market may be more vulnerable to an earlier turn lower – so the three-hike rule may be inapplicable.

And what else might go wrong to wreck the economy and ease up on the Fed?

1. Stimulus has worn out,
2. Pending homes sales have declined,
3. Merchants are stockpiling and pre-ordering everything,
4. Retail sales are falling,
5. There is a major deceleration in govt spending,
6. The declining working age population will reduce productivity, and
7. There is no more tapping home equity via refinancing at a lower rate.

For now, let’s see how much the market struggles in the resistance zone, and we will go from there on the Navigator Swing Strategy. At the 4520 or so level, we have the daily and weekly 21-day lines, the 89-day line, the Weekly Expected Move high, the 50% retracement of the correction, etc.

At 4600 or so, we have the downtrend line, the middle of the weekly channel (usually resistance), and the .618 Fibonacci retracement. If the S&P 500 were to decisively clear 4520 for a few days, I might become a believer.

Later today, I will put out some commentary on how this correction developed beginning last May in the broad market and how it may have ended a week ago when the large-cap growth stocks finally caved. It has been a textbook correction in that sense thus far. We don’t know if it is over, but we will have a better idea in the next few weeks.

Not to beat the drum, but the market might be setting up a trading range. Markets don’t typically instantly shift from bull to bear. They usually transition in a topping process. The Russell 2000 is a great and recent example of this:

Day Traders

Overnight inventory is balanced. We are already above the NASDAQ 100 WEM high and rapidly approaching the 4520 S&P 500 Futures WEM high. While the indexes have conquered their steepest trendlines, the market may be starting to target the primary downtrend line drawn from the January 4th peak.

The resistance intersection above price, including the downsloping 21-day line, is considerable. The market typically rejects the first touch, and you can often short it.

Today could easily be an inside balance day with the past two-day range expansion. Watch for slower tempo and more two-sided trade if an inside day is at hand. It might be best to approach trade more responsively rather than initiate moves, at least until the picture is clear.

If the rally continues, it should take out yesterday’s high at 4514.50 on a fast tempo and hold it (find acceptance above). Target the moving averages mentioned in the commentary above in such a case.

Halfback at 4455 is the critical level for your bull/bear bias. The market should not breach the midpoint of yesterday’s session for the rally and tone to remain intact. There is significant potential for short-sellers to reemerge should this level be breached.

A.F. Thornton

Long-Term Perspective – 100-years of History

While it is rare to have successive down years in the market, it does happen. The market experienced it four times in the last 100-years as marked on the chart below. What causes us to be cautious, besides common sense, is the longer-term position of the indexes. For example, the Dow has reached the top of its 100-year channel on the yearly chart below.

Then we can observe that the indexes share the top of the 100-year channel with the top of the 2009 bull market (monthly) channel – using the S&P 500 Continuous Futures Contract as our proxy.

As if we could top all of that, the weekly or intermediate channel is peaking at the same intersection.

So to say the market is overbought, overvalued, stretched, or whatever your favorite term might be is an understatement. What investors will now begin to experience is regression to the mean. Even if we were optimistic enough to believe that the markets will hug the top of their trading channels for a while, and they might, rising interest rates and inflation would negatively impact future returns.

Am I predicting a crash? No. Unexpected, exogenous events typically drive crashes. No doubt, we may see a few along the future path. And how does that path look? Let’s review the 1965 to 1984 Dow chart from this morning once more.

Now go back to the first chart above, 100-years of Dow history, and notice how the index traveled from the middle of its long-term channel back to the lower channel line over 16 years. Now you can see the associated volatility (otherwise known as painful corrections) in the detailed chart immediately above.

I believe that we are starting the process of moving toward the middle of the long-term 100-year Dow channel. Interest rates don’t typically fall to zero. We have experienced 40-years of declining interest rates. The investing future is likely to be different. A long-term (buy and hold) investor might find themselves in one of those directionless 10-year periods or lost decades as the market regresses to its long-term mean.

So strap in. We have a pretty wild ride in front of us. But at least you now understand where we find ourselves on the market roadmap.

A.F. Thornton

Navigator Swing Strategy – 5% SPY and 5% QQQ (Call Spreads)

We are up so much so fast on our Friday positions; we are taking some profits. We cut futures and calls on the S&P 500 and NASDAQ 100 in half, from 10% back to 5% of our balance. As for the SPY or QQQ without leverage, we would wait for an intermediate Navigator sell signal and/or the sale of the other half of Friday’s positions.

A.F. Thornton

Navigator Algorithm Swing Trading Strategy – 10% SPY and 10% QQQ (call spreads)

Today is the last trading day of an ugly January for the markets. I typically won’t day trade on the final day of the month or calendar quarter. Money managers are likely to be dressing up their portfolios today, and it will take a lot of lipstick after such a brutal month. The cross-currents can trip up otherwise reliable indicators -especially as we head into the close.

The S&P 500 is down 8% on the month. Our $10,000 starting account is up about 30% with our well-timed entry on Friday. We are using leverage and call spreads to achieve the return, and if it can be up 30% – so can it go down when we are wrong. A cash account (no leverage) would be up about 1% on the month, an excellent 9% spread over the index.

My weekly outlook video is at the top of this blog and has all the detailed information you will need to trade this week. Take some time and watch it – it is well worth the 20-minutes to prepare you for the week ahead with lots of details.

Day Traders

Again, the last day of the month is not my favorite for day trading, But if you must, overnight inventory is very balanced, and we will open close to the settlement. There is little indication of how opening prices will move, except that we stalled at the 200-day line at Friday’s close, and there is a lot of resistance around that level. Given the significant move off Friday’s low, some profit-taking could be in the cards before we get anywhere this morning. The shorts may also be motivated to sell rallies, as it has paid off over the past month.

As the overnight low (4395) is above the base of Friday’s spike into the close (4385.75), the spike is being accepted (see Spike Rules), which would be bullish. I would be looking to go long on pullbacks that hold above these two levels. Monitor for continuation and target the VPOC and other target levels above discussed in last night’s video – all converging around the Weekly Expected Move high at 4521.

Any acceptance below the base of the spike can potentially change the tone back to negative.

There is an old saying (isn’t there always?) – as goes January, so goes the year. This hypothesis might indeed be applicable this year. The Decennial pattern for years that end in “2” counsels us to expect a tough first half of the year, with recovery after this summer:

I have found these patterns to be quite accurate over the years.

Watch Apple as a good market proxy. It was strong on Friday. Google reports this week which should be interesting.

A.F. Thornton

Navigator Swing Strategy – 20% Long

Price closed above the 5-EMA and triangle on a short squeeze into the close as anticipated. The best observation is that we likely have a short-term low in place. I would emphasize that it is “A” low but not likely “THE” low.

The market ran out of runway today so we landed on the 200-day line but did not conquer it. I also remind myself that short-covering is not buying.

I need to see follow-through buying by institutions to become a true believer. Even with that, the market may only recover half of the corrective decline before rolling over again.

There are many differences between this corrective decline and the garden variety pullback. We are likely to visit these levels again, though it may be on a longer cycle trough out in front of us.

As I always say, let the evidence take us where the market wants to go. Strong opinions have a way of coming back to haunt us.

A.F. Thornton

The next hurdle for the market (S&P 500 Index Futures) is t0 break the top of the triangle and close above the 5-day EMA on the day. The market is pausing to reflect on the task, as seen in the 15-minute Candle S&P 500 Futures chart above.

I know I am going a bit out on a limb, but I suggest that this first corrective phase from the January 4th peak has bottomed. Now we will see how much we can recover and whether another leg down will be necessary.

I doubt I will have anything further today—time to ride the wave.

A.F. Thornton