Category Navigator™ Signals for Day Traders

There is no perfect vacation for a trader. So let me drop a quick note.

The trading range I had expected is well underway. And we did bounce on the “Options Expiration” pivot I talked about on Sunday night.

The Navigator shifted back to a buy signal at 4531.75 on Monday morning. You can see the turn on the daily chart above, and we saw some follow-through yesterday and today. Here is a granular look at the buy signal and turn:

The Founders Group is on vacation, so we are not partaking in the run these past few days. As we say at the office, there is always another train leaving the station.

We are now at the top of the trading range – or close to it. Given the brick wall that we have seen at 4700 these past four weeks, it is doubtful we will see a breakout. Also, we are near the Weekly Expected Move High of 4708 on the cash index.

That we might not break out is just an opinion, of course. But the statistical probability of a breakout failure is 80%. We will see how it goes, but I would not be surprised to see another loop back down. Price action always rules opinion anyway.

A lot of this price movement is short covering. Sentiment got too negative for further declines, as I pointed out last Sunday. And we always have to be mindful of manipulation in light, holiday volume. So it is not advisable to jump in at the top of this range.

Perhaps the market is in the process of forming an ascending triangle.

We know from history that when Fed policy begins to shift, the market tends to stall into a trading range. Markets don’t typically roll from bull to bear immediately. Usually, a trading range precedes the transition.

Anyway, this market has yet to violate the recent bull uptrend and may find support again on the trendline if we loop back down. Therein lies your makings of an ascending triangle.

The bullish price action belies all this talk of crashes and such that I read. Nevertheless, I fully expect considerably more volatility in 2022 than we have experienced recently.

I hope this quick update keeps you alert as we get ready for the new year.

Again, Merry Christmas and Happy New Year

A.F. Thornton

The Founder’s Group just nibbled on a swing buy with the SPY at 469. We used a January monthly expiration call debit spread. We targeted a 25% position with a 468.25 stop. Futures or purchasing cash shares are fine too, depending on your leverage tolerance. Yes, it feels like jumping into the deep end holding my nose. But when the market rallies on bad news, you do what you have to do.

Navigator™ Swing Strategy – Buy on Dips to the 5-Day Line / Navigator™ Day Trading Strategy – Bias is Long – Looking for a Partial Gap Fill

It turns out my uber-aggressive long position was THE bottom last Friday afternoon. And I continue to regret not keeping my call debit spread position beyond Monday. Sure, 60 points were great, but 160 would have been better. Let there be no doubt that I am human – the fear infects me sometimes (even with my Crystal Ball).

Yesterday went as predicted. 15-minutes into the gap, the market pinned. The Gap and Go trade per Rules #2 and #4 was successful but rendered fewer gains than would have been the case without the overnight burglary. And there was a hell of a lot of merciless, painful short-covering yesterday. All of us have been there at least once in our career, and it hurts badly.

That reminds me of an important point. Two-thirds of yesterday’s gains occurred in the overnight session on negligible volume. That leaves a lot of white space on any invasion of the gap, something that usually follows in a few days. It will be an unpleasant visit into the gap zone without a parachute, as is typically the case.

Moreover, the evidence suggests that yesterday was primarily short-covering. There were also a lot of corporate buybacks last week. But retail traders were scarce, as were the institutions. We need follow-through “real buying” on good volume to ensure that the institutions are as foolish as the rest of us running into this House of Cards.

There are still those China Real Estate Collapse, Consumer Confidence, Flattening Yield Curve, Taiwan, and Ukraine things, lest you get too happy about yesterday. Those risks don’t even account for the severe damage and broken stocks under the hood.

And that reminds me, President Biden says he yelled at Putin yesterday. Biden threatened to cut Putin off from U.S. banking if Putin invaded Ukraine. Putin likely thought to himself, “I will keep my gold rather than your worthless paper money system, thank you.”

My theory of the macro case remains a trading range, if not new all-time highs. But the Elliott folks still have a “2” wave up argument here, with a “3” wave down ahead. The 78% retracement is the usual line in the sand, and we did stall there yesterday. I don’t completely discount the argument – and it would fool most people betting on new highs.

Tinfoil Hat Traders

Sure, we were expecting Santa Claus soon. But one could argue that the Fed is juicing the markets into next week’s meeting so that they can introduce a faster taper of QE Infinity and carpet bomb the markets.

It goes back to my Orange County/John Wayne Airport takeoff analogy. They are full throttle at the Fed’s Plunge Protection Team before shutting the engines down and the jet stalls.

Fed buying might also be the explanation for the Junk Bond jump yesterday. How much junk do you want at 4% interest? Other than short covering, only the Fed wants to be under-compensated for that kind of sizable risk.

Swing Traders

When the smoke clears, the market did exactly what it should do to retain the uptrend. It came down and tested the November breakout and pivoted higher. Nothing to see here, as the bull market is very much intact.

Unbelievably, we are short-term overbought in a single day but still closer to structurally oversold in the bigger picture. With the Navigator™ now on a long signal, I am looking to add positions on pivots connecting from the five-day line (about 4640 today).

The market is at 4687 at this writing. There is a coincident group of support lines between 4620 and 4640 for a good, long entry on a pivot. Refer to yesterday’s discussion of the zone, and it would be lucky for us to get the opportunity.

Unfortunately, the market triggered the Navigator™ signal line overnight, so we were not awake to execute. That is why we are looking for an entry point. Note that traders could be fighting the market makers on any longs above the Weekly Expected Move high at 4675 until Friday’s close.

I will give the buy signal when it presents. Otherwise, we would be chasing the market here in the short term and could very well regret it. Heaven help you if you did not cover your short positions on Monday morning’s initial weakness as I counseled.

Day Traders

We made a slight new high overnight, and inventory is net long. So we have a 70% chance of a counter auction at the open. Other than that, there is little to guide us except to recognize that we are short-term overbought with a lot of resistance above us and the Weekly Expected Move high below us at 4675 to draw us lower into Friday’s expiration.

Market makers will fight hard to bring the market down to 4675 or below to flatten their weekly expiration risk. They could not have expected us to blow through the WEM high in a million years, having already doubled the usual volatility range.

With the VIX still above 20, watch position size. We have been experiencing wide daily swings in the indexes.

The WEM high ar 4675 or so could form a center to trade around the rest of this week. The opinion assumes the shorts have finished covering their positions. Expected moves can be less reliable in this kind of volatility.

Also, note the 4700 roundie above us. It could not hold this level as hard as the market fought for several weeks going into the decline.

With all of this in mind, your initial playground today should be between 4700 and the WEM high at 4675.

Traders should treat any move above 4694 with suspicion given the 4700 roundie and all the trading/resistance there since October. With the magnet of the WEM high at 4675 below. It would be an excellent short to the WEM high on a pivot lower from the resistance zone.

There likely will be buyers (or more short-covering) below the WEM high. See if you can project a 30-minute clearing breach trade and target double the range. Also, look to the 4620 to 4640 area to cover shorts or go long – if we are fortunate enough to get there. All the lines I mentioned Monday coincide in that zone. Buyers are likely to congregate there.

Everything today depends on whether the shorts are done covering their positions. There were a ton of them short into the hole on Friday – more than we have seen in a year.

A.F. Thornton

Today is Pearl Harbor Day. As with most events of that era, we are now more than 80 years out from that Fourth Turning. 80-years is the magic cycle from Fourth Turning to Fourth Turning. As you can see from our own Fourth Turning thus far, these turnings are not fun. I simply hope this one will be over soon.

Today we will see how the President’s conversation with Vladimir Putin goes. Putin has now amassed nearly 200,000 troops on Ukraine’s border. If Putin invades, Biden has threatened to take Russia out of the “SWIFT” banking system. Since Russia holds real gold now instead of U.S. Treasury ‘paper”, I am not sure he cares. It is a bit like bringing a sword to a gunfight. Maybe arming Ukraine is a better idea.

In addition to the Russia wildcard, we still have China ready to forcibly take Taiwan. And they want to build a new military base on one of the harbors they foreclosed on in the Atlantic on the West Coast of Africa. Perceptibly, that is too close to home for the U.S., even though our military bases surround China. Who said life is fair? Anyway, Taiwan is more concerning because they make most of our semiconductors.

China probably won’t cause any trouble until after the Winter Olympics in Beijing early next year. By the way, our “diplomats” are not allowed to attend as punishment for China’s human rights abuses. Big deal.

China points to all the January 6th Trump supporters still sitting and abused as political prisoners in Washington D.C. As China says, we have no room to criticize them. But then, hypocrisy is plentiful in our nation’s capital these days. Maybe it has always been so.

Am I just griping? No. I am reminding you to use stops. We are one news story away from disaster. No matter what, I always use a “disaster” stop any time I am free trading in the market. It might be 15 points below – but it is always there.

Since the market is dynamic, I use a 3 ATR (Average True Range) stop. I will expand more on how to set these some other time. It is there just in case something comes out of left field (no pun intended), even though I am otherwise bullish (or bearish) as the case may be.

All the recent consternation stems from the Fed potentially accelerating the taper next week, but the European Central Bank has no similar plans. Accelerating the taper is not a negative, just less of a positive. The end of the taper in Q1 or Q2 is more problematic. Raising interest rates is even more challenging.

Regardless of this rally from deeply oversold conditions, please don’t lose sight of where we find ourselves. If the jet engines quit, It remains a long jump from 30,000 feet without a parachute.

Swing Traders

Refer to yesterday’s discussion as to why we are bouncing. We got the bounce and closed slightly above the 5-day line, a net positive, but also right below the Algo trigger and 21-day line. The Dow Industrials led, as I had suspected would be the case. The laggards led us down, so they are the first to recover.

I hope you took my advice and covered any short positions on the initial morning weakness. My long S&P 500 call spread trade from the close Friday afternoon bagged a 60+ point profit, but I wish I had held onto it now. Our Globex sisters rocked the market overnight, and we will gap right through buy signals this morning. Robbed in the middle of the night again!

So with follow through this morning, we have our Navigator Algorithm buy signal. But we cannot chase the market. Moreover, we could now be in a trading range – so I don’t necessarily expect a move to new highs. I will alert you to any entry points on a reconnect to the 5-day line. Also, we need to see if New York follows through on Asian and European enthusiasm.

While the major indices don’t seem to have corrected that much, they are disguising massive damage under the hood. For example. almost a third of the stocks in the Nasdaq Composite are down 50% from highs. It is a two-tiered market, a less than ideal scenario.

After the shorts run for the exits this morning, we may (and likely will) roll down again for a retest, perhaps into next week’s Fed meeting. Let’s see what happens, and I will alert you to any entries now that the Navigator has rendered a preliminary buy signal.

Day Traders

We will Gap open right to resistance at 4660, on inventory that is 100% long overnight. Gap Rules apply. Rule #4 seems most applicable this morning. While one would expect a counter auction on such heavy overnight inventory, a lot of the action could be short-covering and there will be plenty more this morning. That is why I refer back to Gap Rule #4.

And it seems we are only a stone’s throw from new highs given the volatility at hand. I am betting on a Gap-fill this morning, but I cannot guarantee it. There are a lot of shorts out there waiting to cover.

4700 is the next goal, and then the old high is just below 4750. I am sitting today out until a storyline emerges. It is too late to chase longs unless we get a complete gap fill, which is a distinct possibility. More probable is a pinned trading range.

A.F. Thornton

I took a profit on the uber-aggressive swing trade at the 5-day line. In at 4404 near the close Friday and out at 4565 at the open for 61 points. I am keeping things tight at the moment until the dust clears.

A.F. Thornton

Bull markets don’t die of old age. The Fed kills them. And with the Fed admitting last week that inflation is no longer transitory, the thought that the Fed is considering homicide has been infecting the markets from top to bottom. The damage is serious, and we deal with a deeply wounded market.

All time frames (Monthly, Weekly, and Daily) have ceased one-time framing higher for the first time this year. Again this week, options market makers are pricing in considerable volatility. The expected move is double the normal range in each direction from Friday’s close (120 points on the cash index). For the cash index, the WEM high is 4665, and the low is 4411. As one concern, weekly options pricing allows for a potential move to the October low before the market makers start losing any money. It is a great time to sell premium as an options trader.

However, now that the market has everyone’s attention, it may be ready for a bounce. I gave an uber-aggressive long “trade” signal late Friday at 4604 on the S&P 500 (apologies for the 4614 misprint). I am holding a call debit spread this morning, good through the 21st, and we will see if it becomes profitable. Using a spread to tamp down your Vega risk is critical, as a straight call profit can get muted if the volatility abates.

This aggressive swing trade is not supported by a Navigator buy signal, which has yet to materialize. This trade is more of a technical day/swing hybrid and oversold play that I will not hold for long. I may sell into any strength in the next few days. But it is useful to review the technical context.

The market sentiment is close to a short-term, negative extreme which is bullish. For example, the VIX and the Put/Call ratio are at the highest level for the year. The CNN Fear/Greed index is at an extreme as well. In other words, fear is back, which is positive for a bounce.

Price is intersecting with the weekly mean, the 50, 89, and 100-day lines, the weekly channel uptrend line, and a 50% retracement of the October to November rally. These are technical levels where institutions typically add to positions.

Additional bullish reads include the laggards (like the Dow (DIA) and Russell 2000 (IWM) bouncing Friday while the monsters of tech (NASDAQ 100 – QQQ) were finishing the initial phases of their declines. Neither the Dow nor the broad NYSE put in new lows, diverging from the other indices. So far, the DIA and IWM are holding their 200-day lines. Junk bonds are not confirming Friday’s lows either, and we had fewer decliners on the A/D line. There is more, but you get the picture.

This confluence gathers around the 4550 level, which should be the key level to watch for now. If 4550 does not hold, it is a quick trip to the next confluence of support at 4500. Short term, I expect a bounce up to 4625 or so, then another roll down to test last week’s low at 4492. All of this down leg should culminate in a final low or retest around the 15th when the Fed wraps up its latest meeting and announcements, and the 80-day cycle trough is due. The fact that cycles bottom around quarterly earnings and Fed meetings is no accident.

Swing Traders

You can watch for my technical setup signals, but the better wisdom is to enjoy the holiday season and wait for the Navigator Algorithm to reset on the daily timeframe. This is a dangerous market with a lot of volatility. Last week, we had 2% and 3% daily swings, which is stunning with five or 50 to one leverage on a futures contract. There are more of those swings in front of us.

This is not the typical correction we have seen over the last year. This decline is much more serious and could signal the onset of a cyclical bear market. However, bull markets rarely transmute to bear markets immediately. The market usually establishes a trading range first, and I could see such a range forming from the October low to the recent highs (roughly a 10% range). Otherwise, if this is merely a deep bull correction, we will see some spike lows (remember those?) and fireworks before the uptrend resumes.

Money managers and hedge funds still have record long positions and margins. Unwinding all of that, should these professionals head for the exits, will make last week look like a blip on the radar screen. As well, Libor Rates inverting and the crash in oil prices warn of a potential recession ahead. With Consumer Confidence in the proverbial toilet, a recession is definitely on the table. It all depends on the virus fear mongers, the Fed, and the fiscal stimulus coming out of Congress.

Day Traders

It does not get much better than this as far as volatility goes. However, no matter how it looks on your screen, these are huge price bars, even on a five-minute chart. Consider reducing position size (e.g., use micros rather than minis on your futures trades) with the volatility at hand.

What the market is doing right now is bouncing the laggards that led the market down while the large-cap tech stocks finish correcting. So your best trades could be the Dow and Russell Futures today, rather than the S&P 500 and NASDAQ 100 – both of which bear the brunt of the large-cap tech stocks catching up to the correction.

We will come into the open with overnight inventory net long – so expect some profit-taking first. Use Friday’s candle range as your balancing area. You are looking at a playground roughly from 4500 to 4600.

If we head north, watch your downtrend line which could stop any return to 4600. The 5-day line (currently at 4564) is the flex version of the downtrend line and has been provided considerable resistance since the decline started. Closing above this flex line (and trendline) will be the first step to bringing back the bulls.

Going south, the intermediate, weekly channel uptrend line can also stop any return to 4500. The 100-day line is the flex version of the weekly channel bottom/uptrend line. Closing below those lines bolsters the bear case, likely to establish a trading range from the October low.

Use a break above the overnight high at 4572 or below the overnight low at 4531 as your first directional clues. Breaks of the trendlines also help you determine direction but watch for fakeouts. As always, monitor for continuation, which is best accomplished using a market and volume profile chart. When you see volume and time at price confirming direction, you have the “continuation” we look to confirm.

The bottom line is to consider long trades at the low end of the balancing range and profits at the high end. Be very careful taking positions in the middle, which is where we are slated to open at this writing.

Short trades are off the table for now unless or until we start closing candles below Friday’s low at 4492 on the hourly chart. Even then, it would be a quick trip to 4450. Otherwise, the market is very oversold here, and you should consider covering any short positions on weakness. The lows of the last three trading sessions congregate around 4500, so it is an identifiable line in the sand.

Also, keep in mind that we tend to put in lows on Monday and turn it around on Tuesdays. This is a notably strong seasonal period for stocks. However, the Santa Claus rally may not ensue until after the Fed meeting on the 15th.

Be very, very careful here. Don’t box yourself into a corner and watch position size in this volatility.

A.F. Thornton

Very, very aggressive swing traders, this is your moment at 4604 with a 15 point stop. The put/call ratio is approaching 1.0. as the market puts in a short-term double bottom. I am using a wide stop to allow for a flush. This trade could go for a couple of days. There is no Navigator buy signal – this is a more technical setup trade. At the very least, I would cover any short positions.

A.F. Thornton