Category Navigator™ Signals for Swing Traders

We started the day at the top of the daily channel, circled in the daily chart of the S&P 500 Futures above. We are at the target unless we are ready to stack a channel on top of this one, perhaps in a blow-off top. I cannot exclude the latter as a possibility. But I think it was reasonable to expect the market to stall today after three trend days. A stall usually manifests as a trading range of some kind. I pointed that out as my bias in the Pre-Market Outlook.

My day trading strategy is based on reversion to the mean. In trading a 5-minute chart, I am always focused on the mean, which I define to be the 21-period EMA line. As well, I also monitor the mean on the daily, hourly, and 15-minute charts. When the price is above the mean on all time frames, those are your best long trades, and you have your bullish bias. When the opposite is true, your best short trades materialize.

But keeping it simple and just sticking to the regular session 5-minute chart, I plan nearly everything around that mean. I have to decide if we will have a trend day, trading range day, or combination each day. Most days are trading range days or some combination.

Where does the mean fit in? On an uptrend day, you initiate long trades at or near the mean. On a downtrend day, you initiate short trades at or near the mean. On most range days, the mean cuts right through the center of the action.

I also like to run a VWAP with standard deviation bands (the VWAP will also serve as the mean) on range days. I like to short at the upper bands and cover at the mean. I like to go long at the lower bands and sell at the mean. You can try to trade from one outer band to the other, but the probabilities of success diminish.

You can also use a volume/market profile and trade the value area high and low on range days. So there are many tools to help you trade a range day once you decide that it has been presented. I also remind traders to plot the open. Range days often trade around the open and revisit the open in the afternoon. Sometimes it is a good proxy for the center of the range, but not always.

So here is how today looked pre-market, at the most basic level:

So what jumps off the page? Today has not started, but I see that the market was in a trading range at the close yesterday. We closed near the mean, though slightly below it. In a sense, the mean is the center of price action that will act as a magnet all day. Another way to look at it is that it is in balance if the market is in a trading range.

The next thing I want to know is what happened overnight and how we will open in relationship to it. That could affect the open.

You see my comments every morning. I don’t give a lot of credence to low-volume, overnight trading. It is not real. Recall that the S&P 500 index is the composite of 500 individual stocks that are trading individually. They don’t trade overnight. So overnight futures index trading is a proxy at best, sometimes impacted by an early morning economic report, perhaps after-hours or pre-market earnings reports, and maybe even a global event. But the action is not sacrosanct by any means. Many a day session will completely ignore what happened overnight.

I simply want to know whether overnight trading is net long or short as the market-makers and traders might take profits at the open. Also, if there is a gap, that might result in an imbalance until the market finds equilibrium again. That is really it.

As you will see from the chart above this morning, we were still in yesterday’s afternoon trading range overnight, with a brief look above the range (also a new all-time high). All I want to do is mark the Globex high and low, yesterday’s high and low, and where the market opens in the regular session. I turn the overnight data off at that point.

While the chart below shows today’s price action, before that even occurred, I projected yesterday afternoon’s trading range based on yesterday’s high and low, as well as the Globex high and low, and now I had my reference points. Due to overnight trading being somewhat calm, and given that we had three trend days in a row, my bias started with expecting a range day. Also, the price was back at the top of the daily trading channel, so I did not see anywhere for the price to go up this morning (see my comments and the first chart above).

The stock market is a continuous auction. That means that prices are always trying to find the level that attracts the most two-sided trading. We call that the point of control. But the market conducts that search in a particular way. It moves to the previous day’s high and low and the overnight high and low (on the futures) to find the path of least resistance. So as price moves away from the mean in either direction, it tests these levels. If the range is going to expand (trend), then the market conquers the level and moves on. If not, the price heads back in the other direction in the same testing process.

Today, we already had a trading range established yesterday (Monday) afternoon. So with all the information above, here is how the day went:

First, the market wedged into the top of the trading range. The wedge was tight and spikey, which is difficult to trade. Those are the telltale signs of limit order traders and increases the likelihood of a trading range day. The wedge reversing just above yesterday’s high was a heads up, but the good short came on the double top breakdown. Rule #1 for shorting a potential range day, make sure you are in the upper 1/3 of the projected range. We were.

The implications from this first run higher were that the market could not find acceptance above yesterday’s high, much less get up to the Globex high. Those are signs of weakness and increases the likelihood of a trip in the other direction. Rarely does the market not take out one of either end of the Globex range on a given day.

The green shaded areas mark the mini-ranges, and then the measured moves on the breakdown or break up from the range. Wedges have their own rules and measured moves, but they frequently appear in day trading. So the target for the first short was the measured move from the range breakdown. Also, it was a test of the base of the morning rising wedge.

Then, we had a micro wedge into the measured move low. So that is where you want to cover your shorts and, if mentally capable, go long. Rule #1, don’t go long on a range day unless you are in the lower 1/3 of the range. We were. Sometimes, it isn’t easy to work on both sides of the market. It is all about what works for you.

Also, wedges and micro-wedges often morph into head and shoulders reversal patterns, and that was the case here. The right shoulder came right in to test a break above the mean. That is also a good place to go long or add to longs. From there, we saw a micro, small pullback bull channel up to the measured move, also the top of the range, and a test of the morning highs. Sitting still on your long trade was the best strategy. Sell at the measured move.

From there, the market almost duplicated the morning lower high, double top reversal. But we knew something else too. Where was the open? What does the market like to do in the afternoon on a range day? It likes to return to the open.

Knowing this, there was a good short from the break below the mean. Rule #1, I was in the top 1/3 of the range, so the short was valid. I covered at the measured move and open, but the price actually went a bit lower. As I repeat often, I don’t like to be in positions during the last 30 minutes into the close, with few exceptions.

Stops are always placed a few ticks above your reversal bar. You can move them to lock in your profits in a variety of different ways. It is somewhat personal, but you are mindful of the range of the bars to your left. Larger range bars and more volatility require wider stops.

Also, note from the charts above that the NYSE open cut right through the center of the range all day. That was the battle. Would there be a red bear or green bull bar for the day? This is based on whether we closed above or below the open.

As mentioned above and as a sign of weakness, the market could not reach the Globex high today. But it could not reach the Globex low or yesterday’s low either. So the market remained rangebound all day, confirming that neither the bulls nor bears had control, and the auction price was just about right at the open for this range today.

Tomorrow, the process begins anew. But we are still at the top of that channel on the daily chart. We could wind around that line higher at a slow pace, almost like a trading range with a slight upward tilt. We saw a lot of this in June and July. Or we blow through the top channel line to form a new, steeper channel that matches the earlier pace of the market before March of this year. I drew that upper line in the first chart above.

Did I forget to mention, we could also take our raft over the waterfall? That is an unpleasant thought. I would rather have a double top into a much wider trading range on the daily chart. But there are many warning signs that the possibility of a sharp decline, perhaps a visit to the 200-day line around 4025, is real.

It does not line up with the cycle data. That would cuddle price at the July 19th low of 4225 or so – posited as the 18-month cycle low. But that might be wrong, and the 18-month low could still be ahead of us.

You know what they say, “decisions, decisions. I say, “one day at a time.”

Maybe the Fed announcements after Jackson Hole Friday will have some influence. I will also check in with my spirit guide. I hope for no nightmares tonight.

We shall see.

A.F. Thornton?

Let’s sell the other half of our XLF position. It is parabolic at the WEM high and we can always buy it back.

Now that the XLF is at its old high and has made the measured move from its breakout base let’s sell 1/2 the position cutting it from 10% to 5%. This locks in profit and will help if the XLF fails to break to new highs.

Yesterday was another trading range day, but the market did its job of holding Friday’s breakout.

There were some large bear surprise bars this morning after a nice rally and breakout to new highs. So far, we have moved back into yesterday’s range.

The bear surprise sell-off bars this morning could be a one-off event. Nevertheless, we need to pay attention. This could also put us back in a trading range for the rest of today’s session.

Rising wedge patterns concern me on the daily charts (e.g., the NASDAQ 100). After the S&P 500 reaches the 4450 measured move, I am concerned that we will move into the next 40-day trough due the second or third week of August. That could be a hard down and might finally give us a 5% to 10% trading range.

We will be selling our SPY and SPY calls when the SPY reaches just below 445.

The XLE is picking up steam this morning and remains a hold for now.

Rotation is full-on this morning, with the NASDAQ 100 yielding to Financials and Energy. The latter two companions seem to be linking up again.

As previously indicated, I am out this week but promised to keep you updated.

A.F. Thornton

Amazon Missed and The Markets Hissed

Yesterday saw a bull trend from the open reverse mid-day at the top of the trading channel. My chart notes appear above. Amazon is getting the blame for missing their numbers and guiding lower for the third quarter. As it is one of the highest market-cap stocks in the indices, it has a big impact on the numbers this morning.

But that doesn’t explain everything. The market reversed midday, not after the bell. After the bell, it just accelerated. Instead, the market struggles to get from the lower back into the upper half of its longer-term channel. Can it? Will it? That is the question for August.

That brings us to our five-day line stop for the S&P 500 futures Navigator Swing position. The Founder’s Group stopped out last night at 4393.75 for a nice profit. Since there is no overnight stop for calls, I am advising you to hold those positions today. Month-end and the first few days of the month typically have a positive bias. As long as the market holds above the daily 21-line, and given that our stops were triggered in the overnight market, it makes sense to give the market a day to digest everything. When dealing with futures and the accompanying leverage, there are no such luxuries. The market hit an all-time high yesterday, so getting too negative too quickly makes no sense.

Today’s Plan

The market will open with a true gap down, so Gap Rules apply this morning. Overnight inventory is 100% net short, and it won’t take much to spook these traders. While the current 29 handles lower is noteworthy against the backdrop of new highs, there is plenty of context around that price that tells us that it could certainly be far worse.

We are currently 15 points from the ONL at 4370.75, and that ONL has four TPO’s across, telling us that sellers had difficulty getting prices lower past that level. Furthermore, we are opening out of balance with yesterday’s RTH range, but certainly still well within where value has developed over the last four sessions.

Note how the ONH topped out very close to settlement, which was also the multi-session high yesterday. Continue to carry this level forward as it is still in play. Overnight halfback is also making an appearance today as it’s always noteworthy on expanded overnight ranges that are gapping strongly.

When considering early trade, note how far from the ONL we have already come. This reduces some of the shock and awe as overnight inventory is somewhat already corrected. This makes sense as the gap is due to a single stock that impacted the NASDAQ 100, thereby also impacting the S&P 500. This is different from a more systemic catalyst which would have driven futures much lower.

Watch the overnight halfback closely at 4388 as an early barometer of strength. An opening drive that can overtake the line and hold it could easily have overnight shorts on the run. Today is the last trading day of the month and weekly options expiration. So month-end money manager shifts could distort normal price action.

A.F. Thornton

Overnight inventory is balanced, and we are currently trading inside yesterday’s range. The daily chart implications are an overall triangle balance area starting with the 7/27 (Tuesday) base between 4416.75 (now the all-time-high) and the low at 4364.75. Then we have yesterday’s (Wednesday) inside Fed range day balanced between 4407.75 and 4377.50. Now we have the overnight range inside both Tuesday and Wednesday’s range and bounded by 4403 and 4480.50.

So what we have is a classic three-day triangle into the GDP and employment reports this morning, which included the widely followed price deflator inflation gauge. That may be why yesterday’s Fed day finished smack in the middle of the range and ended up as a yawner of sorts. With the market still inside this range at this writing, we can take Monday’s approximate 50 point range triangle base and roughly project it from the middle of the triangle.

On a break to the upside, we get to a minimum target of 4440, and perhaps eventually to our 4460 Weekly Expected Move high by tomorrow. On the downside, we visit a target of 4340, right below the Weekly Expected Move low at 4346 and close to the 21-day line and mean trading this morning at 4345.

Triangles generally are continuation patterns, so the upside is more likely than the downside. However, an upside break would also take us to the upper three ATR K-Band on the daily chart, an overbought extreme.

On the other side, visiting the 21-day line would not be out of the ordinary either and would complete a two-step corrective pattern off the last rally on the daily chart. But there are other potentially negative chart implications of visiting the 21-day line today or tomorrow to leave for another (hopefully unnecessary) discussion.

I will mention the potential expanding triangle topping pattern that began to form from a 7/2 daily base candle. I don’t think the pattern is legitimate, with an 18-month cycle trough in the middle of it, but I will mention it as a potential carry forward in your narrative. A negative break in the current three-day triangle would force my stops on the Navigator swing trades, a disappointment, to be sure.

Both the GDP and Initial Jobless Claims numbers missed their estimates this morning. That may be good news on the inflation front but less than good news on the economic front. The GDP number missed significantly, coming in at 6.5% versus an estimate of 8.4%. The jobless claims came in at 400,000 versus consensus estimates of 384,000. Continuing claims also are higher than expected at 3.269 million versus consensus estimates of 3.183 million. The GDP deflator came in higher than expected as well at 6% versus estimates of 5.4%. So inflation remains high, but perhaps slowing growth will tame it as predicted by the recent fall in 10-year treasury yields.

At this writing, none of this has managed to move us out of the overnight range, though we are trading in the upper third of the range and near the top. That still gives us no clues about how to trade the open, so it is better to get some price action under our belts before taking positions.

Keep in mind that the weekly open, defining a red or green candle for the week, is 4400.50. That will make the open an important level today. Also, tomorrow is the last trading day of July. The end of the month always results in some window dressing by money managers and sometimes strange market behavior. But there is a positive bias associated with the last few days of the current month and the first few days of a new month.

The bottom line is that Monday’s low at 4364.75 is THE line in the sand. Taking out the ONH at 4403.25 or the ONL at 4380.25 starts the ball rolling in the commensurate direction, then yesterday’s high or low, followed by Monday’s high or low and so on.

I will be using yesterday’s RTH high at 4707.75 as my threshold to look for long trades. As an abundance of caution, I will watch the middle of the range and yesterday’s settlement at 4391.50 as a threshold for weakness to begin presenting for shorts. Whatever the ensuing direction, monitor for continuation.

Good luck today.

A.F. Thornton

It can be difficult to know where you are going if you don’t know where you are. I will be covering this in more detail in the video I hope to finish today. As today is a Fed meeting, I won’t be trading.

I hope you will glean from the monthly chart of the S&P 500 index above that we just bottomed the 18-month cycle on the 19th (last Monday). And because we launched a new, 54-month cycle at the pandemic low in March 2020, the trough is barely noticeable, just like the last two similar spots in 2013 and 2017. The broad market peaked in April and should be bottoming here as long as the low at 4224 on the continuous futures contract, and 4233 on the cash index holds. Since the market has been rotational, we have to move back and forth between the various sectors in and out of favor.

You will also see from the chart above that we are headed for the top channel line of the 2009 bull market. Whether you project the channel line, or the A leg of the ABC pattern leading this market, the projection is roughly 5380. It all depends on how fast we get there, but I expect a less steep slope going forward, with some additional consolidation ranges. A normal slope is an angle of about 15%.

Drilling down to the daily chart above, we can make some short-term projections that should take us to our next target, around 4500. We already achieved our first target at 4404 before yesterday’s dip and retest. I also included a comparison, lower graph showing the percentage of NYSE stocks above their 50-day moving average. It does a better job of capturing the broad market, 18-month cycle trough.

Drilling down one more level to the two-hour chart, we see a bit more detail. Yesterday’s dip came right on schedule for the 5-day cycle. You can see the cycle toping on the lower momentum/strength chart ahead of the dip. The market behaved normally, and volume barely picked up on the dip. Once again, you can see the projected targets from the various recent ranges.

With the Delta China Virus variant rearing its head, it is doubtful that the Fed will raise rates. Most indicators, especially the 10-year treasury rate, are projecting some slower growth ahead, which should satisfy the Fed. Of course, rates could bottom again here, as we see the next rotation from tech and growth back to cyclical and value. A lot depends on this latest China Virus scare.

Again, I will cover this in more detail in the video. But at least this discussion gives you the big picture. The July 19th lows mentioned above are the line in the sand. We have moved the Navigator swing strategy long against this low. We are hoping to pick up a rotation back into financials (XLF) and energy (XLE), but the Delta variant will have a big impact on whether or not that materializes.

AF Thornton

While I would not bet my life on it, we may have just put in the low of the day when only 52 contracts traded at our old triple POC low around 4368.25. We will see if the next move can break the intraday bear microchannel.

Clearly, the laws of gravity still apply, and this is a much-needed and understandable pullback. The NASDAQ 100 bears the brunt of the losses, as another rotation is underway just as we had anticipated.

Both the XLF and XLE are beneficiaries. The Founder’s Group is bringing those positions up to 10% each on the pullbacks, and we are adding another 5% to our S&P 500 position. This will put our targets at 10% XLF, 10% XLE, and 55% S&P 500.

You can use futures or at-the-money August or September options on the XLF, XLE, or SPY. You can also use the cash ETFs.

I do not expect this sell-off to bottom until tomorrow, but it makes sense to nibble just a bit on this first decline. Stops remain very important, and I would keep stops about 4 ticks below the low we just put in around 12:15 EST on any new positions.

Inevitably, when you are investing at an inflection point, there is less risk to loss and less certainty in the outcome.

As always, do your own homework,

A.F. Thornton

We have new buy signals on the XLF (Financials) and XLE (Energy) ETFs. You can either buy the ETFs for cash or consider August or September monthly at-the-money calls.

There will be more to follow in the video later today.

A.F. Thornton