All posts by AF Thornton

Navigator Algorithm Models – 100% Invested

Overnight, the Asians followed through on late afternoon selling in the U.S., but the Europeans scooped up the bargain right off the S&P 500 futures’ 5-day exponential moving average (“EMA”). So, the last three days left us with a triangle pattern on the 24-hour chart. 

Triangles are usually bullish, continuation patterns, likely to give us one more thrust to the upside to test last week’s hockey stick high. Notably, the Weekly Expected Move high and the 10-day volume profile value area high all congregate with the hockey stick high around 3665. The lower line of the triangle continues to ride the 5-day EMA to keep this rally leg alive.

With the holidays arriving soon, it is time to set some targets. At this writing, the S&P 500 futures are trading at 3613. We are out on this last buy signal at a profit target of 3662. Alternatively, if we experience an hourly close below the 5-day EMA during a regular day session, we will honor that as a stop signal.  The 5-day EMA sits at 3593.81 at this writing. Unlike our target price, the stop level it is a moving target – so stay alert.

I will update the target and stop as necessary, but honor these levels until further notice.

Navigator Algorithm Models – Fully Invested

As if 2020 could not possibly get stranger, the World Economic Forum (“WEM”) headquartered in Davos, Switzerland, tweeted a new video on the “Great Reset” yesterday. The video has already been deleted – as the WEM’s transparency wasn’t well-received. While the WEM claims no partisan leanings, there is no question that the forum leans left.

While leftist, the WEM is no fringe group. In the introduction to the featured video, Canadian Prime Minister Pierre Trudeau is prominently featured. President Trump and other US Presidents have both attended and spoken at the annual meeting, usually held in January. Naturally, President Trump’s 2020 speech to the group was not well-received. The next meeting has been postponed until May 2021. 

You will be hearing more and more about the Great Reset in the coming days. In short, the Great Reset is the latest attempt to coerce the world into a single, authoritarian and communist government with control over every aspect of our lives. Two notable 2030 goals are outlined in the video. First, “you won’t own anything but you will be happy.” Second, the United States will no longer be the world’s leading superpower.

I could not possibly make this up, and I want to emphasize that this is not fringe stuff. This is mainstream leftism that may be forced upon us by our own leaders, as they surrender United States sovereignty for the “Greater Good.” I am beginning to wonder – did I awaken into an alternate universe from my three-day coma in July? Can I choose another level in the multiverse?

Meanwhile, back at the final frontier of capitalism, the US Stock Market, we experienced two, strong back-to-back sessions on Friday and Monday. I was pleased to see above-average volume supporting the climb yesterday. Breadth (participation) has been terrific. As just one example, the percentage of stocks above their 50 and 200-day lines rival records set the last few years. 

We are due for some backing and filling today, so a pullback is in order. I am expecting the S&P 500 to hold the 3600 level and continue the climb to the topline of the megaphone channel.

The toughest decision for me will be when the S&P 500 reaches the megaphone topline. I would rather sell into strength to cap off the year. But let’s see how it goes. Meanwhile, our target (mental) stop remains the 5-day exponential moving average, which sits around 3587 and provides support so far this morning.

On a housekeeping note, I am taking the rest of the year easy. So my writings will be limited to once a week, significant events or signals.

Navigator Algorithm Models = 100% Cash

This morning I will discuss the continuing divergence – or under performance – of the NASDAQ 100 relative to the S&P 500, Dow Industrial, and Russell 2000 indices. Divergences tend to lead peaks in the indices – but not always. I examine the current situation and potential for a melt-up, highlighting that the divergence may be tolerable in light of healthy sector rotation. More rotation follows this morning on another positive vaccine announcement from Moderna. But is all of this what the market has already anticipated, making a peak more likely? I assess this problem as well, as we approach the top line of the megaphone channel again.

Let’s begin with a trip down memory lane. When you can’t even get a price, the market is in trouble. On this day in 1999, the NASDAQ’s total trading volume pushed toward a record of 1.5 billion shares. The NASDAQ’s trading systems melted down under strain, and electronic quotes and trade reports were unavailable for 17 minutes in the late afternoon.

Was the market in a miserable correction? No. The market and the NASDAQ 100 were melting up into the tech bubble that peaked the following year. I don’t need to remind many of you what happened next. We did not find the first bottom of that fiasco until October 2002. And we tested that bottom again all the way out in March 2009, which is where our current bull likely began.

That is seven years of attempted progress only to boomerang to the same starting point. Depending on your circumstances and timing, that can put quite a negative spin on your “buy and hold” plan, especially if you retired in 2009. For a trader, however, it was all a dream come true.

Current parallels to 1999 are a bit unsettling. We saw the 1999 NASDAQ 100 index melt-up into the Internet stock bubble.  Perhaps the Internet stocks are close cousins to the rip-roaring, stay-at-home technology stocks of our time. 1999 saw record IPOs as now. Lest I forget, 1999 saw a soon to be contested Presidential election on the horizon. Haunting, isn’t it?

Back to the future, Moderna announced a nearly 95% effective rate for its new China Virus Vaccine this morning. Rumors of the announcement had already floated over the weekend. Not surprisingly then, the equity futures markets opened strong in the first 30 minutes of trading last night and remain near that level now. Using the S&P 500 futures as our market proxy, the index conquered 3600 again, just as it did a week ago on the Pfizer announcement. Vaccines before the end of the year are nothing short of extraordinary accomplishments in these extraordinary times.

For the markets, however, there is always a caveat. As the old Wall Street saying goes – “buy the rumor and sell the news.” The genesis of the axiom is this – the stock market is a leading indicator. It anticipates the future. But what happens when that future arrives? Has that future arrived? Should we bail here?

The fabulous rally that has ensued since March was fueled by a realignment of paradigms favoring stay-at-home technologies. This accelerated uptrends in stocks already poised to benefit. The earnings that followed have not disappointed. No doubt there was a dose of vaccine optimism, and a few false rotation starts, but nothing solid. In a sense, then, the future has somewhat arrived but not completely.

Investors all along maintained a healthy skepticism about vaccines and their timing. In light of this, investors left many real economy stocks behind. The latter group is now getting its day in the sun on the vaccine news. Rotation of profits from tech into real economy sectors, alone, is no reason to bail. In fact, this is exactly how a new bull market should unfold.

Personally, I am still conflicted as to whether this is a new bull market or a continuation of the old one. It likely does not matter. Broadening the rally’s wings as the climb unfolds keeps the patient healthy.

We will follow the algorithms, but it makes sense to let the catch-up rally manifest before running for the hills. We could even be entering a melt-up phase in the current market such as we experienced in 1999. If this were 1999, there was still gas in the tank before the 2000 peak. Just remember that the Internet Bubble did peak finally, as all bubbles do.

I have mentioned my personal focus on financial and energy stocks, but index investors also are spreading their wings into the Russell 2000 Small Cap Index (IWM is the ETF symbol), now on the verge of new, all-time highs. Investors also seem to be favoring the real-economy orientation of the Dow Jones Industrial Index (DIA is the ETF symbol). The Dow index just recently achieved all-time highs and is approaching 30,000 this morning, surely another milestone.

That brings me back to the divergence that is “gentle” on my mind. The NASDAQ 100 has continued to under perform the other major indices this morning and in Globex, just like last week. I think of the NASDAQ 100 as the generals and the stocks catching up as the soldiers. We often discussed that the market could not continue to live on a handful of tech stocks alone, just as you cannot fight a war with the generals alone. The soldiers must follow, and now they are.

So I am making some allowance for the NASDAQ 100 underperformance. Healthy profit-taking in these names is understandable, as long as the money rotates into the soldiers and does not leave the battlefield.

Regardless, I never sleep in the proverbial sense. I always have one eye open.

The NASDAQ 100 divergence requires our continued consideration, as do reasonable upside profit targets.

We are once again approaching the top channel line of the megaphone pattern. The line remains just under 3700 on the S&P 500 futures contract. We tagged 3668 as the all-time high on the S&P 500 futures a week ago today. Frankly, I am still straining to find another, higher target unless we are truly in a melt-up. I will continue to work at it.

What I could see happening is a looping crawl up and along the S&P 500 Index megaphone top channel line for a time. There have been other, rather long periods where the index hugs the upper channel line. Many of those periods also reflected a dose of rotation. Anyway, that is an optimistic view.

The alternative is a larger correction or continuation of the recent trading range. There is also the thought of some longer-term cycle, such as the 80-year cycle, coming down over the top of us, as we discussed last week. The possibility is no more pleasant than the roof caving in at your home. Consequently, we need to stay vigilant.

Truly, there is no rest for the weary in this undertaking of trading and investing. Yet, the endeavor remains an all-encompassing and alluring puzzle. It keeps me busy and my mind off the other craziness in the news.

For today, enjoy the market’s respite from the other problems in the spectrum. We will leave the bubble and cycle worries for another day.

Be careful.

Navigator Algorithms – 100% Cash

The market is grumpy. We have all been there. When our significant other is grumpy, is there anything you can say or do? She will filter the bad over the good. It is best to avoid him. It is that “get out of my way or I’ll kill you” kind of mood.

And so we have avoided this latest market down-leg while the indexes try to find their footing. Facebook, Apple, and Google reported yesterday. Was it good news? Well, that depends on your mood and your filter. They all blew out their numbers, but there was something to pick on if you are in a bad mood. There always is.

iPhone sales could be better. Google has regulatory fears. Amazon indicated that it might take more lockdowns than previously expected to take over the world.

We learned yesterday that Europe is aiming to please Amazon with more lockdowns. But Europe did report a nice third-quarter GDP overnight, about half of what the US reported yesterday. The US had the best quarterly GDP ever!

But wait, isn’t the GDP expected to pop up when you are climbing out of a hole? Anyway, none of this really matters because when the market is grumpy – there is no pleasing it. We all live with someone like that, right? You have to let go of what should happen and live in what is happening at some point.

Looking at the S&P 500 cash (as opposed to futures) index above, we rounded a slow turn yesterday off a less than ideal trendline and the weekly 21-EMA. This keeps the triangle consolidation scenario alive, albeit for one more day.

But despite the great GDP and FAANGMAN group earnings reported yesterday, the futures have been off significantly overnight (as much as -400 in Dow points). We began to recover a bit in the wee morning hours after the positive European GDP arrived. That left us a spiky spine on the overnight futures candle.

On a positive note, traders explored the territory below the trendline – but it bounced back. At this writing, we are still slated for a negative opening. We will see what happens as the morning wears on.

And that magenta 200-day line, our usual appointment when the 40-week cycle tops, looks like you could reach out and practically touch it. Were the cycle to come in right on cue (and they never do, or my computer would be trading for me), we would see this correction (such a polite term) end in the third week of November. One guess would be we go to the 200-day line, rally, then retest it for good measure after the election. It is fun to speculate, but we will let the Navigator tell us what to do next. And, in furthering the speculation, let’s briefly visit the cycle chart below.

You can see the projected, composite cycle path on the gray dotted line above. The whiskers at the bottom set the range for the 40-week cycle to land. Scientifically and mathematically then, the pressure should let up a few weeks after the election. But in the topsy turvy year of 2020, I don’t think the math really paints the picture.

So pick your poison. More lockdowns, the virus surge, China tensions, Marxists, looters, or States and Cities running out of money. When the market is in a bad mood, there is never a shortage of boogie men in the closet to support it.

But as I have learned over the past 33 years, when the 40-week cycle tops, the market corrects.  The pundits simply tag the decline with the latest bad news filter. It is the proverbial chicken and egg quandary. Granted, the magnitude of a 40-week cycle decline can be impacted by the news of the day, but the decline will happen regardless. You can take that to the bank, just as the moon, sun, and planets cycle dependably. One day, I will explain why. For this morning, I prefer to avoid the moody market and do something else.

Navigator Algorithms – 100% Cash

Are you enjoying a peaceful morning? If you are following these pages, you should be in cash, excepting perhaps a few of your own, long-term holdings that you hide under the pillow for a rainy day. It is ok to have a few of those. But otherwise, you should be culling your new buy list for the next run in the bull market. I am not quite ready to yield to the dystopian future that both sides promise us if the other side wins the election.

One way to enhance your returns is to always challenge every assumption in your arsenal. In a year where everything is topsy turvy, it is a useful exercise. So I was thinking this morning, what if the financial markets have the election backward too. Wall Street, comprised of greedy money-grubbers, has contributed mightily to the Biden campaign. Wall Street loves borderless Globalism. Governments can be pesky when it comes to cross border business. The fewer governments (and borders) the better. And as to China? C’mon, man, they aren’t such bad people!

Taken together, what if the market has been rallying in favor of a Biden, rather than a Trump victory. Why not? Nothing else has made sense all year? Maybe the market doesn’t favor the status quo normally associated with the incumbent.  Maybe President Trump’s late surge in the polls might be sending the market down! Who knows in these crazy times? However, given 200 years of documented history, let’s stick with our current “stock market poll” model. It has been right 87% of the time. In that model, we have moved from Trump Strongly Favored to Trump Mildly Favored as the Dow Jones Industrial Average parachutes to its 200-day line.

We all know Wall Street talks a good game. It must be quite a dilemma when the players get into the Voting Booth. On the one hand, they want open borders and Globalism – it is good for future business. On the other side, do you really think these millionaires and billionaires want to pay significantly higher taxes?

I would love to be a fly on that voting booth wall to see the lever that the wealth monikers actually pull! By the way, I drove up to Cheyenne, Wyoming, and voted yesterday. The lines were palatable. Of course, I think there are only 550,000 people in the entire State of Wyoming. We don’t need too many police either, as we are all well-armed. In a few dystopian TV dramas, Cheyenne becomes the capital of the Western States Alliance. Things that make you go mmm…

Back to the markets, the S&P 500 (our primary market proxy) managed to find support on the “weekly” 21-day line. That is the same line that stopped the August-September leg of the decline. Also, there was enough of a tilt on the daily chart yesterday to keep a triangle consolidation pattern in play.

Again, it is highly likely that the 40-week cycle topped in September. Confirmation of the 40-week trough would come if we actually tagged the 40-week future line of demarcation (FLD). 40 trading weeks and 200 trading days are the same number. Hence a trip to the 200-day line (magenta line in the chart above) is closely related to the cycle. The level is 3122 on the S&P 500 futures.

Trading ranges and consolidations are fickle so none of the cycle stuff is written in stone. Whether a triangle or rectangle, we could be defining a trading range that lasts a long, long time.

So let’s continue to enjoy our vacation from the tape. We will see how unemployment and third-quarter GDP reports influence the game in the next few days. Fear is rising – as the put/call ratio hit its highest level since June. A solid low is around the corner, albeit some fireworks could accompany it. Once a buy signal renders, you will be the first to know.

Navigator Algorithms – 100% Cash

I could not help the political reference as we wallow through the election quagmire for another week. Both campaigns have too much money at this point because there is very little white space left between political ads. I don’t know about anyone else, but I am in favor of longer terms rather than term limits. The insanity is too much to handle every two years with Congressional elections included.

But the analogy is somewhat accurate. After five trading days on the first floor (roughly S&P 500 Futures level 3417), we took a trip to the basement yesterday. We tagged 3356 intraday before turning around just a bit. Many people (including my own wife) have phobias about the basement – especially this time of year. Many a Halloween movie reminds us that there are evil things under the bed and in the basement. At least we were down here during the daylight. Overnight, we stayed near the top of the steps.

So what does a trip to the basement mean? Well, there is no press down here asking pesky questions. Whoops, that is a different topic. For the markets – particularly the S&P 500 and the NASDAQ 100 indexes, a trip to the basement meant that we took out every important level of support other than a single trendline that you can draw connecting the March and August lows. Alright then, a trendline is better than nothing, right? We were not searching for an underground waterfall. So we will take the basement floor around S&P 500 futures level 3350.

One way we can predict – or at least try to predict – what might unfold in terms of consolidation or correction – is to observe the wave pattern of the first decline. If the wave pattern is impulsive and subdivides into five distinct moves, that predicts a more ominous correction. But if it starts out as a three-wave pattern, that tends to predict something else. In the latter case, the market could likely to be forecasting a triangle.

A triangle is a healthy, consolidation pattern. It means that there are still some stocks going up and breaking out, while others are correcting. Believe me, the situation is more palatable than when nearly every stock is singing bass notes in unison.

By the way, isn’t the term “correction” such a polite word for losing money? Even in our business – there is certain political correctness in describing losses in polite circles – at least on the sell-side. The buy-side has much less polite vernacular and terms. Deplorables the buy siders are – as the saying goes.

So the classic “Bull Market” triangle pattern unfolds as follows:

Importantly, how that first decline leads to the “A” can tell you a lot about what lies ahead. No other pattern unfolds the same way. And that brings us to our current scenario:

The fact that the first decline in the current correction occurred in three distinct waves predicted the triangle pattern consolidation to a large extent. There is no other corrective pattern that begins with three waves or continues to subdivide into three waves. As always, we deal in probabilities, not certainties, so not every three-wave pattern rewards us with a triangle but most do. Another issue might be that our “C” leg is not quite done subdividing – indicating lower prices are still possible before we flip up to the “D” leg. Only time will tell.

The important point is that a triangle foretells consolidation rather than free fall. Bulls and bears have nearly equal power when we see such patterns. The pattern is healthy, implies some rotation, and is a much better way for the market to pause. In other words, we don’t need our parachutes in this kind of corrective pattern.

Now, as I am down here in the basement this morning I am noticing that other relic we have been discussing. On the first floor above the 3400ish level, President Trump is strongly favored to win the Presidency for a second term, but only mildly favored down here in the basement, For the numbers to flip to favor Vice President Biden, we would have to be in the bunker around 3200 or below. The analysis is based on financial market history. Socionomics Institute Director Matt Lampert is giving a seminar on the topic today at 2:30 PM MST – using the Dow Jones Industrial Average as his measure over the past 200 years. Given the lack of confidence in polls this year, the prediction promises to be interesting. One thing is for sure, Americans love a good horse race. You can register here.

And that leaves me with one, small housekeeping item. When you spend too much time in the basement, the Biden syndrome sets in and I am no exception. My senior moment was a misquote of the Navigator core model exit point and date. While the signal came intraday at 3501.75, for performance measurement we used the closing price of the day for our exit number which was 3471. The reason for this is simple – not everyone is next to the computer when the signal manifests. Moreover, the date was October 15th. Anyway, I need out of the basement to get some sunshine. Clearly, my brain needs it.

I am reminded of that old Chinese proverb. May you live in interesting times.

Navigator Algorithms – 100% Cash

Last Thursday, I introduced you to one of the best indicators around – WWSHD. When What Should Happen Doesn’t. On Weekends, I look at Friday’s S&P 500 candle, as well as the candle for the prior week. If those candles close in the upper third of the range, I expect some follow-through action in the same direction the following day, week, etc.. If the candle closes in the bottom third, I expect movement in a downward direction the next day, week, etc. If the close is in the middle of the candle – then my expectation stays neutral. There are other, important nuances better discussed in a video or class, but hopefully, you get the picture.

Last week, we were making a slow turn off some major support in the market consisting of the 21 and 50-day lines, the weekly expected move (“WEM”) low, and the previous week’s low all congregating around the roundie at S&P 500 3400. The weekly wandle and Friday’s candle all pointed to higher prices today and this week. Yet, the futures gapped down Sunday night in Globex, and promise to open this morning in decidedly negative territory.

Additionally, we are sitting at levels already tested last week and, by good arguments, levels we should not be revisiting this morning. The market will open below the 21-day line and already tested the uptrend line overnight. Think of it like that common retort we all make to our friends and family sometimes. Been There, Done That (“BTDT”). In the market, BTDT is not the retort we are looking for on what should be a follow-through day.

We also identified the slow turn off the important levels we reached last week as a slight change in market behavior. During the first phase of the China Virus rally that ended in August, the market would spend barely a nanosecond at the 21-day lines before bouncing off the level like a Super Ball (I put a link to define a Super Ball in case I am dating myself). Also, the turn stalled at the downtrend line connecting the candle tops from the latest peak on October 13, and from that level, the S&P 500 futures have been falling all night.

So, right out of the gate this morning the market is doing the opposite of what was expected. Globex trading occurs on light volume and is not always the end-all in predicting the next day. But the overnight price action is a contradiction not to be ignored. If the market drops below last week’s low, the only thing that will save it is the Expected Move Low down around 3387. The market makers will defend that price with their lives. Much below that price, even the market makers will bail and start selling futures to neutralize their portfolio deltas.

The Navigator Core S&P 500 index models are still 100% cash – not yet generating a buy signal. I am thankful for that this morning. I will drop a status report out to everyone mid-day.