Category Navigator™ Signals for Day Traders

Morning Headlines Into Liquidation Break

While traders might blame the unfolding tragedy in Afghanistan for the liquidation break this morning, the truth is that Fed Governor Kaplan jawboning ahead of the Jackson Hole meeting might have a lot more to do with this. The key level identified this morning did hold at 4476.25, though we did dip into the single prints a bit before it turned around.

I am watching whether the current reversal and bounce is merely an ABC, two-step correction on the 5-minute chart. I am long from the trigger line buy signal at 4476.50 – also near the measured move low. We are bumping the 15-min, 21 EMA mean, and I would pay attention and sell if we cannot break above that.

The way I see it now, the key to the break is WWSHD – when what should happen doesn’t. We did not even get down into the Gap from a few days ago. All we got was a measured move down from the opening range, also supported by some of our key levels. It should have been much worse, especially in a news-driven break. The buyers have been very aggressive so far.

Until suggested otherwise, the bulls are still in control. But today and tomorrow will continue to be volatile.

This morning supports the necessity and vigilance of using stops. Don’t leave home without them.

Remember, the catalyst to eventually bring the market down will be anything else we haven’t thought about that could go wrong.

A.F. Thornton

I touched on something yesterday that bears some attention this morning. I pointed out that the S&P 500 Index Futures overnight action is speculative, as the underlying stocks are not trading. That is why Globex trading has to be kept in perspective.

Related to that concept, the S&P 500 Futures Contract and even the SPY Index ETF are parasites on the index even during the regular session. Through constant arbitrage, these instruments are kept in line with the “cash” index, which is the pure mathematical construction of how the underlying index members, slightly more than 500 of them, are trading at any given moment.

As parasites, the futures and SPY tend to move slightly above and slightly below the index throughout the day, giving a bit rougher appearance to their candles when compared to the cash index. With futures, when you include the overnight action on the daily candles, the action can really look rougher than the cash index. The point is, it bears to pay attention to the cash index, so I plot both in all of my analyses.

To that end, I spent some time last night on the cash index, trying hard as I can to justify higher prices. It was a useful exercise. As you will see from the chart above, we are in striking distance now of the top bull channel line, which comes in around 4600 on the monthly chart.

Moreover, using standard price movement and measured move techniques, if you project the breakup of the China Virus decline from its peak, the number also comes in right around 4600. And that is not all, as 4600 projects the A wave as the C wave from the B retracement of the rally that has ensued from the China Virus bottom. This is so much clearer on the cash than the futures index, and the coincidence of this intersection is stunning. Of course, there are no coincidences. The big boys and girls will tune a lot of computers to these levels.

Given that we are approaching 4500 on the index this morning, 4600 is only 100 index points above us, which is not much in the scheme of things. And there is no guarantee we achieve the target, but it is more probable than not. I am communicating this when market internals continue to deteriorate even though the index is hitting new highs.

Just because we hit the target does not mean we crash. Look at the 2014 period where the monthly range was tight and hugged the top channel line for some time. Given the strength of this market and the new spending spree coming out of Congress, I am not predicting Armageddon. I would be happy with a 10% correction to get some cash invested and sit for a while. So awareness is the key.

For now, the market held up overnight and is marking time until Friday’s Fed talk. I am still focused on the overnight swing low from the 24th as the main downside level to watch today. As with yesterday, there can be no change in tone unless this level is broken. If it is, monitor for continuation and see if the single prints and gap sections below us come into play or not.

Otherwise, let’s see if we have a range day or not and continue to buy the dips.

A.F. Thornton

Well, what do you know, more trending today? O.k. by me, as long as I am on the right side of it. I am long from two buy points marked above. We took out the Globex achieved all-time-high at 4492, and that was my bull threshold point. Having said that, I am mindful of the channel top above us and the 4500 level, which is psychological. Then 4537 is the projection of the China Virus decline mentioned last week, as we are now in the “C” portion of the recovery leg. Technically, that is using regular session data only. But you know the zone, at minimum.

So I am long the small pullback bull microchannel until it breaks – which is likely soon – and, usually, I’m not particularly eager to hold over NYSE and CME lunchtime. The opening range breach and measured move are 4497 or so. Also, 10 points a contract is not bad for any day-trading day.

No changes to the macro picture. We have to break into a new channel or ride this one. The Founder’s Group might be game for an ever so brief swing trade if we move above and into a new channel.

Stay tuned.

A.F. Thornton

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?

This is a good day to run your VWAP and bands, as well as a volume profile. The boundaries in a balanced range day such as this are good measures for overbought and oversold. Also, don’t go long unless you are in the bottom 1/3 of the range and vice versa on shorts. Once you determine the kind of day you are trading, adjust your tactics accordingly.

“Pointing out any negatives for stocks over the past 9 months has been an aggravating exercise in futility. Whatever is happening to drive the indexes higher [insert favorite excuse here], it continues unabated. For the first time in a long time, long-term breadth is negative, it’s been persisting for months, and it’s even worse on the Nasdaq. And yet buyers return to drive the indexes immediately to new highs, with the Nasdaq among the best performers on Monday. This is a heckuva mixed-up market, where nothing but blindly buying seems to work.” Sentiment Trader – 8/24/2021

I thought that statement summed up the current situation well this morning. As I had suspected, we have a range day thus far. Range days are hard to trade – and are best left to professionals. Limit order traders tend to do the best – but you have to know what you are doing and have speedy, timely data. I don’t lose significant sums often, but it is usually in a range day when I do.

For now, the range is best framed by 4479 or so on the low side (also the measured move from the current breakdown) and the 4488 peak we put in this morning. After the strong recovery from Thursday’s intraday low, a range day was in the cards.

But there is also the problem illustrated on the weekly chart above. We are at the top of the current channel on the daily and weekly charts. Either we have to ride the top channel line like a vine wrapped around it. That can be miserable – because it tends to be mostly range trading. This year, we have had a lot of that kind of price action after the big two or three-day trend moves end. Think of it as a trading range with a slight, positive slope. But, as I said before, trading ranges can be tough.

Alternatively, we can break into a new channel above the current one. It happens, especially in a blow-off top. So I won’t exclude the possibility – though the monthly chart already pushed the outide of the 3-ATR bands. We saw that in 2017, coming off the last nominal four-year cycle low.

I am also duly mindful that nobody alive has experienced a Fed like we have now, and there is no historical precedent either. Maybe it works, maybe it doesn’t. But trading is not the best place to be an adventurous trail blazer. I prefer familiar ground.

This is why I prefer to day trade, for now, leaving the swing trading to follow the next major low. We are at the historical upper limit of the number of trading days since the S&P 500 has visited the 200-day line. The line currently sits at 4022, roughly 10% below current levels. Why not a brief visit? 10% is a normal correction – nothing to be alarmed about. But who knows? One can only recognize the risks at hand – it will take a catalyst to bring the risks forward.

Like my recent dream (see View From The Top Down yesterday), when the crash came I said to myself – “of course, it was so obvious, how could anyone have missed it?”

Are we the proverbial frogs in the boiling water?

A.F. Thornton

We have been in a trading paradise for the last week or so. Yesterday was a classic example of Rule #1 under Gap Rules. The Gap and Go scenario morphed into a trading range, an application of Rule #2. This is a good example for your notebook. The range had a slight upward tilt and the entire day acted almost like a spike and bull channel under the Spike and Channel Rules. If you think about it, spikes and gaps are close cousins.

Gap and Go scenarios are rare when the Gap is more than 20 points. Keep that in mind.

With only one bear bar out of the first nine, you can expect the first pullback to be minor and it was. With more than 20 bars above the mean, you can usually expect the first visit to the mean to be a good long trade and it was. Even with trend lines and wedges, you were splitting hairs to trade unless you used a lot of size. It was one of those days where it paid to stay put until lunch.

Also, when the market failed to breakout above two wedges in a row, you can expect another pullback to the mean with at least three bear bars and usually a close below the mean. The market delivered almost to the letter.

Not much more happened after lunch set in other than a slight trend reversal from a lower high late in the day. At such a nice gain and touching new all-time highs, it is not unusual for some profit-taking into the close. The day completed the loop from the 40-day cycle low last Thursday. There were almost no surprises and textbook behavior for the last week, save that head-scratcher, relentless bull micro channel last Monday before the 40-day cycle dip got underway in earnest.

The issue now is that while one of our last two targets has been achieved, where does the market go unless it breaks out into a new channel above the current one? That is possible if we are about to enter a blow-off stage. But breadth continues to warn of trouble ahead.

There is only one time that the Summation Index on the S&P 500 fell below zero while the index was hitting new highs that the market survived for very long. Otherwise, the market is poised to take a big spill. But there have never been Fed cocaine-like money supplies like we have now. Incidentally, the Summation Index on the NASDAQ is even worse.

So today is a new day. Day trading is fine. Don’t forget your stops. But I remain reluctant to hold any overnight positions. Let’s see how the rest of the week goes. We are in one of the slowest trading periods of the year. Everyone is in the Hamptons – except me.

A.F. Thornton

As I had suspected, yesterday was somewhat of an anomaly, making me highly suspicious that the Fed intervened in the market to cushion the Afghanistan news.

So it appears that the 40-day cycle markdown has resumed. But with the CBOE Put/Call ratio at the highest level we have seen all year, I do expect a short-covering rally at some point today, perhaps even into the close.

I would target the 21-day EMA on the daily chart as the first reference point and target for the cycle low. From there, you can double the decline if the 21 does not hold and then target the 50-day line.

A.F. Thornton