All posts by AF Thornton

Navigator™ Signals for Day Traders

Pre-Market Outlook – 6/23/2021

AF Thornton 0 Comment

While momentum buyers have been in control the past few sessions, the S&P 500 index has hit its Weekly Expected Move (“WEM”) high for the week and will likely be rangebound through Friday, with the WEM level around 4250 acting as a magnet. The index may be able to squeak out a new all-time high above 4258, but it would have to punch through the WEM high at 4250, and there is a 70% probability the index will end the week at or below that level.

It also appears that whatever fear Fed Chairman Powell and Fed Governor Bullard may have temporarily injected into the market, traders are discounting/ignoring the coming QE “taper”  in a big way.

Globex activity failed to test the single prints of yesterday’s regular session. And yesterday’s distribution came down to the same level as the overnight low and rallied from there. Between yesterday and Monday, there is a lot of emotional trading (short-covering) and poor structure below the current level for the market to repair and carry forward potentially.

Last night’s overnight distribution also stopped sellers just shy of yesterday’s Point of Control (POC) at 4230.75. Markets that test visual and mechanical (not to mention nuanced) references like this are controlled by short-term traders rather than longer-term investors. This is not necessarily negative or unsustainable. If anything, one might see it as bullish as this faction of traders has not proven to be easily shaken and can stay in charge for long stretches.

Coming into today’s session, we have a key level above us that is noteworthy and could be the key to higher prices should it be taken out. The overnight high at 4248.25 stopped right at the same price where two recent day sessions also topped out. Use this as a potential go/no-go break-out level, keeping the WEM high at 4250 on your radar too.

Yesterday’s single prints also should be entered into the larger narrative, even if they aren’t exactly key levels today.

Assume buyers are in control and will continue to be today. Pullback buys are probably the best strategy unless the market signals otherwise. Watch the 30-minute range first. Also, after two trend days, a range day is in the cards.

Any breach of the overnight high level puts the all-time high at 4258 into play. That all-time high was made in an overnight session which makes it less secure. The market will likely pull back to the WEM high on a pivot lower even if the index breaks out. The NASDAQ 100 is almost at its WEM high as well.

A.F. Thornton

Founder's Trading Journal

Pre-Market Update 2 – 6/22/2021

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It is not too late for the market to take a spill here, but it is not happening. Importantly, 4230 on the 24 Hour S&P 500 Futures index (about 4237 on the cash index) is the max tolerance for a short trade. That is the 78% retracement of the decline which defines the down vs. up trend. With the NASDAQ 100 at new highs, and the S&P 500 cash index already above its equivalent 78% retracement, buyers have taken control.

While this continued rally is unexpected, we have to consider that the math is such on the S&P 500 index that the big cap tech and growth stocks have enough weight to carry the index higher, even though the majority of stocks are declining in the broad market.

The behavior creates the breadth divergences we often see at tops. But I won’t argue with it until we are there. So we are stopping out of our short position for a very small loss, and will regroup tonight after we see the close.

We are approaching the Navigator buy trigger on the daily S&P 500 chart. If the short didn’t work, lets see whether we can trip a buy signal. Again, this is not what I had expected, but I never argue with price. If the reversal pattern is taking, we are only halfway to the minimum target, with 60 S&P 500 points to go. 

The bears had their chance to press their case at the low today and failed. There just are not enough sellers yet to take us lower.

My next update will come before the open tomorrow. There is nothing that is likely to change between now and the close. If there is, I will let you know.

Look at the reversal pattern on the S&P 500 Index Futures chart using 24 hour data and 2-Hr candles. It is hard to argue with what I see, even though it was not my first choice.

A.F. Thornton

Navigator™ Signals for Day Traders

Mid-Day Report – 6/22/2021

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The NASDAQ 100 had managed to best the overnight high and yesterday’s high to achieve a new, all-time high (at least intraday). So far, price is finding acceptance in the NASDAQ 100 expanded range. The S&P 500 has achieved the same besting of the ONH and yesterday’s high, but not the all-time high.

The Founder’s Group has maintained its small, initial short position and is looking to add to it late today, depending on how the rest of the day goes. We were very close to getting stopped out on the last hourly bar – but squeaked through thus far.

The price movement has been impressive, but the internals are lousy. Nothing has changed significantly in the macro picture outlined in our View from the Top discussion earlier this week. If I am wrong on a slightly bearish call here, it will be because we are being undermined by the capitalization math of the tech stocks. If that turns out to be the case, then I will move from the index itself to a narrower target like the sector or some sector leaders. That is my personal, unofficial position for the Founders Group.

The Navigator swing strategy remains 100% cash for now. 

For day traders, we did have another nice breakout trade from the initial 30-min range today, just like yesterday. I will post it at the end of the day.

A.F. Thornton

Founder's Trading Journal

Pre-Market Update – 6/22/2021

AF Thornton 0 Comment

Looking at our market proxy, the S&P 500 index, the overnight low (also near the Daily 5 and 21 EMAs) held a test for the 24-Hour S&P 500 index futures thus far this morning. We are now at the top end of the range testing yesterday’s high. 

Internals started the day negative, and have improved to mixed. The cumulative tick is turning from negative territory. But decliners still outpace advancers by almost 2 to 1 on the NYSE and 1.5 to 1 on the broad NASDAQ indices. Most of the gain continues to be driven by the big tech names as can be seen from the heat map above.

The market is right at our trigger stop line for the Founders Group unofficial short position from yesterday. A close of the hourly chart above that level will put our short position to bed for a small loss and then we will regroup.

A.F. Thornton

Navigator™ Signals for Day Traders

Pre-Market Outlook – 6/22/2021

AF Thornton 0 Comment

I feel like I am living in three different worlds at the moment. First, there is the NASDAQ 100, growth stock, and tech world where all seems well. Then there are nine out of the 11 S&P 500 sectors that have been correcting for a month. Finally, there is the S&P 500 index itself trying to ride the fence.

Was yesterday a “key reversal?” Did one Fed Governor’s comments Friday send the market reeling, only to recover yesterday on seemingly opposing comments from a different Fed governor? Did the publication of Fed Chairman Powell’s proposed Congressional testimony overnight help preserve yesterday’s gains? Was Friday just another one-off bounce to the 50-day line and back? 

When I look across the correcting sectors, I would argue for yesterday’s action to be a dead cat bounce. Those are the bounces that suck amateurs back into the market while the professionals sell their inventory to them and then pound the market down. Of course, nothing is ever quite that simple.

In the chart above, the most optimistic scenario is that we just keep going today and challenge the old highs on the S&P 500. The middle ground is that we continue to form the reversal pattern mentioned yesterday and outlined on the hourly chart above. The pessimistic scenario is that we retraced a little more than half the sell-off and we continue down to new lows.

The Founders Group took a small, unofficial short position at 4215 on the index yesterday. Unofficial means that this is not a formal, announced Navigator trade. We are simply sharing our thinking out loud.

Sometimes, you want to nibble at establishing a short position when the index is ripping higher as the premium is rich enough to give you an extra boost. The initial stop was the old high, but now we have lowered that to a close above the Navigator trigger line. The trigger line is dynamic, currently 4225 at this writing. As far as we are concerned, this was a low-risk entry point for a short (if nothing else) with a reasonable stop.

If my conviction was high, I would be more aggressive, but the jury is still out a bit on whether the NASDAQ 100 and growth will pull us out of the broad market, stealth correction. Or, alternatively, will the broad market eventually pull the narrow growth=style group down to new lows. Let’s just see what happens and let price guide us.

24-Hour S&P 500 Index Futures - Volume / Market Profiles

Today’s Plan

The size of yesterday’s reversal was a bit of a surprise to the bears, leading to poor structure in the distribution range, which was roughly 60% single prints. These singles are caused by panic short-covering.

Today’s session will be all about whether or not these higher prices are accepted or not. As of now, they have been accepted in the overnight session – but see the discussion above.

Continue to carry the single prints forward until they are tested. Holding above them is bullish and nips the odds of heading lower. Testing them increases those odds. I will be watching how the market handles the overnight high at 4226.25, settlement (also the value area high at 4219), and 4202 which is the top of the single prints.

It’s common after an expansion of range to balance a bit which is what we could have in today’s session. As of now, overnight activity is already doing so and the regular sessions often follow the tone of the overnight. If so, assume responsive trade. As mentioned above, only acceptance below the top of the single prints brings potential for change.

Founder's Trading Journal

Epilogue 6/21/2021

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S&P 500 Cash Index (SPX) - 5-Minute Candles

The trade I set up this morning is illustrated in the chart above. We had two long, day trade entries on the S&P 500 this morning. The first manifested on a cross of the 5-minute Navigator Algo trigger. The second came using the 30-minute breakout range setup I described pre-market. The market has not done much since the sell signal on the cross back below the Navigator Algo trigger on the chart above.

What confirmed these longs were the strong internals today – almost the reverse of Friday. There were 4 gainers for every loser on the NYSE and nearly 2 for one on the NASDAQ. NYSE tick distribution was positive all morning, as was the S&P 500 A/D line, which pegged at about 462 positive out of the 500 members. All of this supported a positive intraday trend day for day traders – carrying to our second target circa the 4200 area.

On the negative side, volume dropped over 40% from Friday’s down day. Admittedly, Friday’s volume was boosted by options expiration, but the drop in volume today is notable.

We would expect resistance exactly where the market rests at this writing if the downtrend has cemented itself. In that regard, I suggested this is a good position to begin shorting if you are a bear (and I am at the moment). We need a definitive close above the daily 21-EMA to argue for new high prices and an end to the pullback/correction. Today’s move back above the 50-day line does cause some bear indigestion, but nobody said this would be easy.

The sharp recovery could also indicate that Friday’s move was a one-off aberration. Recall I said that strange things happen on quadruple witching. It would be a cruel joke if that is the case and the market rocks on. As set forth in “View from the Top” this morning, we have been in a rotational correction since late April, it is not inconceivable that it ended Friday, but the probability is that there is more to go along the lines of the synchronous downdraft we experienced late last week.

As always, stay tuned and I remain open to all possibilities. I will provide a more extensive update as you sleep blissfully tonight. That is the advantage of being half a day ahead of the U.S. on this side of the world.

A.F. Thornton

However

Navigator™ Signals for Day Traders

Mid-Day Outlook – 6/21/2021

AF Thornton 0 Comment

If you followed the morning plan, today was textbook of the 30-min breakout range I described. Strong internals, strong breakout, but to me it is a shorting opportunity as I believe that the trend is now down.

If you are in the bearish camp, as I am, this is where you can start to short the market. You can buy at the money puts, as I will. I am starting here. I am starting with the S&P 500, but you could get more bang for the buck from the NASDAQ 100. If either index goes higher, you can do more but start conservatively. Your stop is a new closing high in either index. You can go out to the July 16th monthly expirations or beyond. July 20th would be a perfect candidate for the 18-month cycle trough – but calling it to the day is nearly impossible – but it is in the zone. 

After the first down leg (which I believe ended Friday), you can expect the market to retrace most of it before it rolls over again. Call premiums are still high if you want to sell calls, but consider a vertical spread so you have some protection. I am not a fan of selling a naked call.

As in life there are no guarantees. When you buy a put, your risk is what you paid for it. As always, remember I can be wrong and certainly have been wrong at times. You have to make your own decisions.

Start slow.

A.F. Thornton

Navigator™ Signals for Day Traders

Pre-Market Outlook – 6/21/2021

AF Thornton 0 Comment

Neighborhood Watch Chart

24-Hr S&P 500 Index Futures - 2-Hour Candles

Let’s start with the 2-hour candle chart above. I have been using a 2-hour chart as my master chart for day trading lately. I will change that from time to time, but it is working well for now. In this chart, I define the neighborhood where the market will hang out this week. You know what they say. You need to know your neighborhood, and trading is no different.

What is nice is that the neighborhood (highlighted in gray above) is defined by the Weekly Expected Move. There is a 70% probability of staying within the Weekly Expected Move range each week. In fact, multiple billions are betting that price will stay inside this range. Also, each week, there is a high probability that the price will tag one end of the range. Once you have established the week’s direction, the corresponding end of the move is your ultimate target.

I will always do my best to help you prioritize the support and resistance you will encounter each day. In so doing, I look at the market from two perspectives. First, we have the traditional chart perspective as outlined in the normal price chart above. Second, we will look at the market/volume profile perspective, which measures volume and time at a price.

In creating your chart, then, start by calculating the Weekly Expected Move and drawing it in. Then, using monthly, weekly and daily charts, draw in any major support or resistance that you will encounter in the range. I usually market these on the right with an “M,” “W,” or “D.” Also, look for important moving averages you may encounter in the week’s range from the monthly, weekly, and daily charts.

Normally, you will contend merely with the 5-day line from the daily chart. In a larger correction (such as the one unfolding now), you may encounter the daily 21, daily 50, and weekly 21.

I draw or program all of this into my 2-hour chart. As stated above, I like my 2-hour chart to at least be readable. Even if it appears cluttered at first, I can step down to a 5 or 15-minute trading chart which will be uncluttered but have all the relevant lines I need to day trade.

Also, recall from our discussion last week, you always want to paint yesterday’s high and low and the overnight high and low (if you are trading the futures chart). Initially, traders will move the market towards these key levels to test strength or weakness for direction. You can pivot at one of these levels or breakthrough it as the case may be. Breaks can be fake-outs – so monitoring for acceptance and continuation at the new levels is important. Often, you are applying one or more of the setup rules I point out pre-market.

Today’s Plan – Micro Narrative

This morning, the market will open with overnight inventory balanced and prices in the upper 1/3 of Friday’s range. Having said that, overnight range expanded Friday’s range lower overnight, so carry that forward today as well. About half of the overnight trading is above and half below Friday’s settlement. In such cases, nothing tips us as to the market’s initial direction. Accordingly, I will mark the top and bottom of the first 30-minutes and take a trade in the direction of the first breakout, but only after the market pulls back from the initial breakout. I look for a price pivot on the pullback. A good target, assuming nothing else is in the way, is double the range. This is not easy and can be tricky at times. The market can change direction several times before it settles down. Usually, by 10:30 am EST, there is a 70% probability that the high or low of the day has been established.

Overnight we have somewhat of a “V” bottom. That leaves the potential for a reversal pattern to go higher. All of Friday’s identified “support” levels will now act as resistance if the market attempts to go higher. If the market can take out the overnight high at 4177.50, I would target the former breakdown low around 4185.50, all the way up to the 21-day and downtrend line from the top, which both congregate around 4200. Be cognizant, though, that the market could not punch through the 50-day line on Friday, which is about the same level as the overnight high at 4177.50. That level could act as a magnet or center line to prices today, but that is a wild guess.

On the downside, target Friday’s settlement at 4151.25, also the overnight halfback. Then focus on the overnight low at 4126.75.

As stated before, the default direction of the market every day is sideways or rangebound once a range is established. Market internals can help you determine this. Mixed internals usually mean rangebound or what we call “responsive” trading. You buy and/or short when you get to the end of the daily range and pivot. The safest trade is to get out at the middle of the range. That is where running a daily Volume Weighted Average Price (VWAP) line can be helpful. It gives you the middle in rangebound conditions. You can run standard deviation bands on the indicator to help identify the range boundaries.

I have highlighted the WEM range in the gray box above. So if you see the gray highlight in a 5-minute chart later today, you will know what it is. As a side note, the safest calculation for the WEM is the hand calculation on the SPX Cash Index. The cash index is also the best place to calculate your support and resistance. There is a lot of premium in the new September futures contract – so the cash index levels will not correspond well to the futures. It turns out that the SPX cash index actually did pound against the expected move on Friday, before the index rolled over. I missed that occurrence in the cash index because I was not allowing for the extra premium in the new futures contract.

I will publish a quick primer on determining a price turn with some precision later this week. It is unwise to put on trades simply because you are at support or resistance. There is a method to confirm a turn. Once you know it, you can watch the price to determine its probability of pivoting before you commit to the move. And as stated before, some support and resistance are more important than others. Usually, that will be where multiple support and resistance zones congregate.

Last week’s decline from the Fed meeting is impulsive and has exceeded the typical, symmetrical a-b-c wave. The “c” portion of the wave extended, increasing the probability that the market’s top is in. The market ended Friday very oversold on the intraday charts, so a bounce this morning is not surprising. However, the S&P 500 index is not yet oversold on the daily charts, so caution is warranted for longs.

Good luck today. I don’t trade Mondays typically, as I often state. Weird behavior often follows weekends, as it follows a Friday of quadruple witching expiration.

My fingers are tired from typing anyway this morning. The next update will come out about Noon EST. Have a great trading day.

A.F. Thornton

Founder's Trading Journal

View from the Top – 6/21/2021

AF Thornton 0 Comment
24-Hour S&P 500 Index Futres - Daily Candles

Introduction

As always, please permit me to remind you that most analysts (including myself) enjoy pontificating on everything that has occurred on the left side of the charts. The only thing we enjoy more than that is bragging about our good decisions while minimizing any discussion of our bad calls. I do my best not to be one of the latter-described analysts. When I am right, I am right, and when I am wrong, I am wrong, period.

When I am wrong, as all of us should, I figure out what I missed and try not to repeat mistakes. I share those lessons with you as openly as possible. Sometimes, being wrong is not anybody’s “fault,” but simply the consequence of a random, unanticipated event that intervenes. We need to be ready for that too, which is why stops and sound money-management principles are important. In the end, I am always humbled by the fact that there is an even chance of being right or wrong on any call about the direction of the market. So, I can never be sure if I was correct or just plain lucky. That tends to keep both of my feet planted firmly on the ground.

So, please recognize that the discussions on these pages make trading look easier than it really is in real-time. We don’t drive our cars using our rear-view mirror, nor do we trade similarly. We deal with the right side of our charts, not the left side. If you haven’t noticed, the right side is a blank canvas.

We use probabilities and not certainties to make our decisions. Thus, we must always remember that the behavior of price itself as it unfolds in front of us is the best indicator of the future. And we must always keep an open mind to possibilities outside the most likely outcome, staying flexible at all times.

Macro Narrative

We have been in the final stages of the latest intermediate leg of the bull market that began in 2009. This latest run began at the bottom of the China Virus low in March 2020. The March 2020 low was a nest of all nominal cycles of 54 months or less, so it was a very important trough and juncture. At that time and using quantitative analysis, we predicted that the nominal 18-month cycle in the broad market (S&P 500 index) would likely peak around May 8, 2021.

The computer does not distinguish between trading and non-trading days. May 8th was a Saturday, and the S&P 500 put in an all-time high of 4238.25 on Monday, May 10th. While the index slightly bested that high last week, it immediately rolled over into what I now believe to be the more obvious manifestation of the 18-month cycle intermediate correction. In reality, the correction started with Consumer Cyclicals (XLC) and Utilities (XLU) in late April.

There have been many signs that the intermediate trend was waning. We had the formal, Navigator sell signal on the S&P 500 on May 10th, with a second sell signal on the failed rally attempt on June 16th. There were momentum, strength and breadth divergences throughout May and June. Offense/defense ratios failed to confirm the marginal new high. Some risk-on and risk off measures had been weakening. Sentiment had grown complacent, even in the very short-term sell-offs. I have pointed these factors out as they unfolded.

The correction has slowly swept into the 11 Sectors of the S&P 500 Index. The earliest sector to roll over was Consumer Cyclicals (XLY) on 4/19. Utilities were next on 4/21. Industrials (XLI) and Basic Materials (XLB) peaked along with the broad market on 5/10. Health-Care (XLV) peaked on 5/21. Financials (XLF) peaked on 6/3. Consumer Staples (XLP) peaked on 6/4. Real Estate and Energy peaked on 6/10. Communications (XLC) peaked on 6/15, and Technology (XLK) peaked on 6/17, but neither the XLK or XLC has definitively rolled over as yet, remaining above or still in the vicinity of their 21-day means.

In the Founders Group, we had been trying to reconcile the market price action, bond rally, and early rollover of the reflation sectors such as Basic Materials (XLB) and Industrials (XLI) to potential inflation pressures. How does the behavior of these sectors make sense if inflation is out of the box and out of control? I would harken back to my 2021 forecast. I expected inflation to heat up and it did. 

On the one hand, I think the rally in bonds, decline in reflation sectors, and rally in the dollar reflects defensive posturing in the financial markets, just like we confirmed in the SKEW and other indicators last week. However, with the Consumer Cyclical (XLY) sector being the first to peak in late April, one cannot exclude the possibility that the economy (and inflation) are peaking.

The heavy sovereign and corporate debt burden across the U.S., Europe and Japan stifles economic growth. And while the Fed has injected a lot of liquidity into the banking system, that is not the same as “printing money.” The Fed action is only the first stage. The actual creation of money comes when the banks make loans. That is step two in the velocity chain, and it is not happening.

Monthly Chart - Total Loan to Deposit Ratio - Commercial Banks

We have to observe all of the sectors as the correction unfolds. Ultimately, fund flows off the bottom will tell us a lot about future inflation expectations.

Intermediate corrections along the lines of the nominal 18-month cycle can go on for several months and can take the S&P 500 index all the way to its 200-day line. Keep in mind that we are already a month into this correction, as we look in 20/20 hindsight.

The 200-day line sits at 3800 today, slightly more than a 10% correction from the top. The size of such a decline would be quite reasonable in the circumstances. The index won’t likely go straight there but usually zigzags down. Also, the 200-day line will continue to rise as the index works its way down or sideways, depending on the scenario. 

The ideal low should occur in early August, but there is quite a bit of variance in which the low might occur in a nominal 18-month decline.  It is best to let the correction unfold and use our usual measures, including the algorithm, to find the bottom.

Now, is it possible that the correction has yet to start, and we are simply experiencing some higher volatility while the NASDAQ 100 pulls the rest of the market higher? Yes, it is possible, but that is a minimal probability forecast.

Should we expect a crash, as some have forecast since the beginning of the year? Again, that is not the most probable outcome, but we don’t have to know that answer. You should either be in cash at this stage or consider shorting rallies. Obviously, shorting rallies is a strategy for more sophisticated investors. But there is no reason to get caught in a crash if you are in cash and patient.

I would also acknowledge that the divergence in the performance between the NASDAQ 100 and S&P 500 right now is very unusual, to say the least. Some would see an opportunity to short the NASDAQ 100, as it may catch up to the correction rather than pull the market higher. At the moment, I will choose to look at the indices independently. We have nine of the 11 S&P 500 sectors in full-blown correction mode. Tech and Communications are influential, making up a third of the index weight. Also, they have been consolidating since last fall. I won’t exclude the possibility that the two sectors will buck the trend. But I would not (and will not) bet on it.

Stay tuned…

A.F. Thornton

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