Category Founder’s Trading Journal

There are four keys to the current bull market kingdom. The first key is Fed policy. The second is interest rates (a derivative of Fed policy assuming the Fed does not lose control of the bond market). The third is earnings (currently threatened by labor shortages, supply chain and transportation problems, inflation, and a potential economic contraction). The fourth and final key is global stability (currently threatened by Chinese military incursions into Taiwan).

The pressure is off the Fed to taper and/or raise rates due to the current stock market correction and economic contraction. But a disturbing, intermediate reversal pattern continues to develop on the 10-year treasury rate chart, and we need to monitor this pattern carefully. The developing pattern could reflect higher inflation expectations and portend a return to 2018 interest rate levels (double what rates are now).

Both inflation and China remain wildcards. As to earnings, strap in as third-quarter earnings – AND FORWARD GUIDANCE – are about to get underway. At least with September’s reversal of August’s stock market gains, the frosting is off the cake, and that is likely a good thing for the short term.

We successfully retested the September 20th low on Friday on short-term fear extremes. Thus the probabilities favor the 80-day cycle low is in place. Also, we were bumping up against the Navigator Algo buy trigger line at Friday’s close, and I will notify readers if it triggers today.

Amazingly, and as deep as the correction went Thursday night, market makers brought the market all the way back to the Weekly Expected Move low by Friday’s close. It is always important to monitor the expected move high and low each week. Knowing the level allowed me to ride a nice trade into the close from the depths of the early morning lows. I honestly expected the trade to fail, but that is why our algorithms are more important than my opinions.

All references to the stock market below use the S&P 500 index futures as the proxy.

The Monthly Chart

On the monthly Emini chart, September’s candlestick was a bear outside down bar closing near its low and below the August low. This is bearish, but the bull trend is strong. Traders will typically buy the first intermediate pullback and retest the high before resuming two to three months of sideways to down trading. The bar after an outside bar typically has a lot of overlap with the outside bar, so we do expect October’s price action to invade September’s candle to some extent, perhaps even retesting the September high. The probabilities do not favor new highs.

The Weekly Chart

The stock market has been in a small pullback bull trend for more than 60 bars (weeks) which is unusual, unsustainable, and climactic. But traders know that most reversal attempts in a strong bull trend are minor. That means they become either bull flags or the start of a trading range. Since this rally has been so extreme, a trading range for ten or more weeks is likely underway which should end in late November on the next major cycle low. Even if there is a marginal, new, all-time high in the next few months, traders should not expect a resumption of the bull trend until at least December.

Friday’s Action

Friday had a big bull body after breaking below the September 20th low. The bulls hope this 2nd reversal up from the 89-day EMA line will resumption the bull trend. They see this as a lower low, double bottom with the September 20 low.

But Friday had a big tail on top, and the September 23rd high is still a credible lower high trend reversal. It could also be the right shoulder of a head and shoulders top. Today, traders will be deciding if the 89-day line and support are more important than the 50-day line and resistance. As mentioned above, even on the daily chart, It is typical for a market to enter a trading range once it has a big reversal down from a buy climax.

Always remember that big up and down bars reflect directional confusion. It is that very confusion that typically results in a trading range. On close examination, the daily chart has essentially been consolidating since July. Traders are deciding if the September selloff is just a bear-leg in the trading range or the start of a bear trend.

A bear trend has a series of lower highs and lows. The bears need to do more before traders believe that the market is in a bear trend. When the chart is this unclear, the probability is usually about 50/50 for the bulls and bears, far from the “crash” talk prevailing on YouTube and other financial, social media. Traders need to see a strong break below Friday’s low or above the September 23 lower high before believing that the trading range is becoming a trend.

As always, stay tuned.

A.F. Thornton

The fear of just a few days ago has dissipated, as the Fed leaves well-enough alone. Gap Rules apply this morning. Overnight inventory is 100% long, so a fade is possible at the open. That means that your first focus should be on whether or not the gap between the open and yesterday’s high fills. Assume yesterday’s high is the cover-point and watch closely to see if prices move deeper into yesterday’s range or not.

Failure to fill the gap is a bullish signal and puts the Top of the Gap (the old one) and ONH (balance area low) into play, with an ultimate target of the downtrend line from the all-time high. Note that the last target changes trend on the daily chart which is very important. Corresponding strong internals would be a must.

A.F. Thornton

Price has flattened out but is struggling at the August swing low support identified this morning. Probabilities are that the 80-day cycle trough should launch in this time zone. If not today, certainly by mid-week. However, I want to remind you that our peg of July 19th for the 18-month cycle trough is still tentative and has implications for our current analysis. I am particularly bothered by the potential trend change indicated by the price action this morning, especially if the market continues to move lower.

Placement of the 18-month cycle low is important because the associated dip/correction tends to be the deepest we experience over the larger, 54-month cycle. A trip to the 200-day moving average and sometimes lower is typically in the cards. Today, the 200-day moving average sits around 4100 on the S&P 500 24-hr continuous futures contract. The unadjusted algorithm still places the projected 18-month cycle low towards the end of the year.

The 18-month cycle dip on the S&P 500 index (tentatively marked at 4215.25 on the S&P 500 24-Hour continuous futures contract and 4233 on the cash index) on July 19th was barely discernable in the index alone compared to the typical, expected magnitude. There is precedence for this milder-than-normal dip, such as we saw in 2017. And we tried to justify the mild dip as attributable to sector rotation. Also, the dip would be milder than normal coming out of an important low like March 2020. But we would expect the ensuing rally from the dip to be commensurately strong. This latter point is what has me a bit contemplative here.

We now have more price action since July to interpret and guide us on the S&P 500, our main market proxy. Also, I have been monitoring the behavior of foreign markets – such as the FTSE 100 in London. And I am watching other indexes here at home, such as the Dow Industrials.

One concern I have is that the rallies from the July 19th low are somewhat anemic for the typical first run out of an 18-month cycle trough. Also, unless the price reverses higher almost immediately, we are violating the 80-day cycle FLD (future line of demarcation) today, which would be an infrequent event on the first 80-day trough out of an 18-month cycle low.

If we close below the FLD, you can often expect another down leg equal to the distance just traveled from the all-time high. That would be another 200 S&P 500 points taking us to a potential low of 4150, which would somewhat coincide with the June low around 4120 or so. In the old days, this decline would come swiftly were it to occur here, in a spike waterfall decline. I am speculating somewhat, but it is vital to keep these possibilities in mind and respect the risk at hand.

This post-July anemic behavior could mean that the 18-month cycle low is still in front of us. Longer cycles have more expansive variation windows for bottoming, so they are harder to nail as to specific dates other than a range. We would know for sure that the 18-month cycle is still in play if the S&P 500 index low at 4224 on the continuous futures contract fails to hold in a further decline. Without such confirmation, placement of the cycle trough remains an open question for now.

We must keep this information in mind on this dip as it will influence how we interpret price action between now and the end of November when the next intermediate trough comes due on the 20-week cycle.

Recency bias would have us buy the dips, but this is a situation where you might buy the dip, get some immediate gratification, and then watch the market roll right over the top of you. It can be challenging if the price action rolls over hard overnight and before you wake up in the morning.

At this juncture, the tactics are the same whether the 18-month cycle is in front of us or behind. We should expect the 80-day cycle to bottom in this time zone – and the price will trough either way. It is how we handle the rally from that trough that requires potentially different tactics.

I will keep you posted on how the Founders Group handles the issue as we begin to deploy our cash again.

A.F. Thornton

We are waking up to an ugly market this morning, and perhaps a character change if the market does not make a quick turn. I have no predictions, but the pattern we have followed from options expiration lately has been a Monday blitz followed by a turnaround into Tuesday, so we shall see. All references below are to the S&P 500 continuous futures contract, which is our market proxy.

They say in the land of the blind, the one-eyed man is king. We had had our eye on the China and Evergrande problems before the crowd even noticed it. The Founders Group went back to a 100% cash position on September 10th as a result. The financial press will no doubt lay this decline at the feet of the China problems. But we know that the 80-day cycle dip is our culprit, and the blame game is a distraction.

So the reality is that we should be bottoming the 80-day cycle dip, which I have mentioned for a few weeks now. And even early last week, when the market attempted a one-day rally, I mentioned my skepticism about reaching the minimum price target for the decline while we still had time left on the clock. Now you can see why both time and price are essential aspects of predicting market behavior.

The market will tell us whether this is a buyable dip. We will observe the price action over the next 24 to 48 hours. Price needs to retake the 50, 21, and 5-day lines. But the lines will undoubtedly provide some resistance along the way. I am also watching the Navigator trigger line, currently showing a buy stop at 4483. We have a polarity trigger at 4455, but that is a very short-term indicator and not likely to end the correction.

We are opening at the August low at 4339.75, which should provide some support. That price is also the approximate measured move target for an ABC correction from the recent all-time high.

The character change mentioned above is that tagging last month’s low marks the first time we have a low in the recent sequence that is not higher than the previous short-term low. So that could portend a trend change to a sideways market or something worse like a complete trend reversal.

The analysis is a bit more complicated than that, however, in that the most crucial aspect is that this low is higher than the last 80-day cycle low, which takes us back to July 19th and 4262. This decline could simply be widening the price channel just a bit, leaving the intermediate trend intact. But the short-term trend is reversing.

Moreover, we are now opening well below the 21 and 50-day lines, also short-term bearish. And then there is the Fed Meeting Wednesday, etc., etc.

For this morning, then, Gap rules apply. These rules are essential, and they work.

Assume that there is potential for an early fade of the decline. Buy the high of the first one-minute bar, or buy the cross up through the open if the opening drive is lower. Monitor for continuation with an ultimate target of the Overnight Halfback at 4379.25.

An early short entry (assuming a gap and go) can be challenging to pull off. The better move will be to short the cross back down through the open with an initial fade. Or, draw an uptrend line from the first swing low of the day to any subsequent higher low. Then short any break of the trend line. Target the low of the day first and monitor for a continuation lower.

Please don’t get too bearish this morning. We are now well into the decline after two weeks. Watch the put/call ratio for an extreme to coincide with the price extreme. Also, if the ratio is above .80 into the close, look for a short squeeze.

A.F. Thornton

The S&P 500 survived a test of the 50-day line this morning, but traders have pounded it hard. No instant gratification bounce as we have experienced the past four months.

We are now moving into lunch, and we still have expirations going off into the close. These quadruple expiration days can be weird – so I won’t be drawing too many conclusions until next week.

Thus far, everything is consistent with the 80-day nominal cycle dip – slated to bottom next Tuesday – if the alignment times ideally (which is rare).

We are in the zone to bottom it, and the fact it is a bit deeper decline than recently experienced is no surprise.

Let’s see if traders can hold the 50-day line into the close.

A.F. Thornton

We have a quadruple expiration day on hand today, and it is not usually wise to day trade. We also have a looming Chinese economic meltdown, rumblings of World War III, the military general-led coup we recently discovered here at home, and a relentlessly stubborn bioweapon scamdemic still on tap. Other than that, all is well.

What should we do? Buy, buy, and buy more!

In all seriousness, we have a four-day balance area bounded to the north by 4483.50 and south at 4425.25. Perhaps not today, but we need to go with the break-out in either direction and target double the range. Of course, we will watch for the fakeout.

I will have more to say over the weekend, but it has paid to buy the dip once we have concluded the dip is ending. Lately, it has been ending with monthly options expiration. Today, we get weekly, monthly, and quarterly with both options and futures. Maybe that makes a difference, and maybe not.

Pull out your Balance Rules and use them on either end of the range. Otherwise, use responsive trading to day trade the range if you are inclined to trade today. Plot a VWAP or use a Volume Profile for responsive trading. You might even merge the four days in a volume profile on a separate screen.

Have a great weekend.

A.F. Thornton

Two thoughts this morning. First, I continue to have one eye on China. Their potential real estate and debt implosion (absent a government bailout) still have the potential to disrupt the global economy. The Taiwan threat (and its potential to distract social unrest at home) looms large. Japan is now beginning to react to the China rhetoric. So far this is noise – but it could easily become signal.

My second thought is that U.S. junk bonds are doing just fine. Given that China’s debt problems have disrupted their junk bond market (yields approaching 13%), our market is not flashing any risk-off signals as yet at 3% yields. This also has me leaning toward the current market dip being resolved soon and favorably.

U.S. interest rates seem to be moving lower from their recent consolidation. That has been challenging for Energy and Financials this year, but now Energy may be leaning forward again based on the last few sessions. Financials are still basing and failed to break out last week. Bank buybacks are helping the sector.

In a sense though, the 11 S&P 500 sectors have been all over the place – with leadership in tech and new economy stocks remaining strong.

Where that leaves us this morning is that the S&P 500, our market proxy, reached the 80-day cycle line (FLD) yesterday and made a nice pivot. But while the price has achieved the minimum target, time is still left on the clock. We will know more if we get follow-through today on yesterday’s rally. Also, we need to see if we can move past the midpoint of the recent decline without another down leg.

It seems too easy that we would just continue the same pattern as the past four months. The market loves to lull us into a pattern only to morph. My best guess is that we run the clock into next week with a small rally, some sideways action, and another leg down or retest of yesterday’s low into the Fed meeting.

So conquering the 21-day line and recent highs around 4478.50 hands the ball back to the bulls. A close below 4425.25 swing low keeps the sellers in charge as they had been before yesterday’s pivot. Today, I will stay with a bull bias as long as the overnight low holds at 4462.50, also the top of the single prints. I am looking for acceptance above 4462.50 and preferably above 4478.50.

The NASDAQ 100 is stronger than the S&P 500, having held at the 21-day line while the S&P 500 nearly tagged its 50-day line yesterday. As long as interest rates behave, this relative strength will likely maintain.

U.S. Retail sales exceeded expectations this morning. That is good news for the economy. Initial jobless claims were in line with expectations. But 332,000 is still a lot of claims – especially when we are told that there are a record 10 million plus job openings out there. I am still wondering how mandatory vaccines might impact the job market.

Stay tuned,

A.F. Thornton

We are overdue for a bounce, but it is safe to assume that sellers remain in control unless we take out the ONH at 4448.50. Use caution on early trades as the open is very close to the settlement and overnight inventory is very balanced. I usually prefer to wait for the market to settle in before I trade in the circumstances.

Any movement below the RTH Low should target the 50-day line at 4413. The 50-day line should offer strong support initially, even if we are starting a larger correction. Failure to do so would potentially be a longer-term bearish signal.

My best guess is that we find support on the 50-day line, flip back higher, then put in a second leg down into the 80-day cycle low in a week. The second leg could be a double bottom but is more likely than not to take us lower to put some fear into the bulls.

Don’t forget the blow-off scenario mentioned yesterday if we make a quick move to 4600.

A.F. Thornton

One of the global events unfolding is the implosion of China’s private real estate market and an associated debt crisis. The Chinese government may be stepping in with a rescue and bailout package similar to the U.S. in 2008. What governments typically do to maintain power when their economy is teetering is to create a diversion. Combine this fuel with the Biden Administration’s surrender to the Taliban, and you have the worst of all worlds.

China (through the CCP’s Global Times) announced yesterday that they will now be exercising sovereignty over Taiwan’s airspace, a first. As you will read from the editorial, the CCP threatens an all-out war if Taiwan shoots down China’s fighter jets.

The West is heavily dependent on Taiwan for all kinds of computer chips. As there is already a chip shortage now, we can only imagine what a conflict over Taiwan would portend. And that is not the worst of it. Suppose the U.S. and Japan do not take a firm stand. Surrendering to China could shift the balance of world power. I have little confidence in our own leaders. Make no mistake; China owns many a US politician through bribery or blackmail, or both.

Weakness invites war, as it has many times in the past. Our exit from Afghanistan weakened our position in the world considerably. Wars typically accompany Fourth Turnings. So I am monitoring events carefully.

This news will not make the mainstream news right away, as most of our illustrious media don’t read the Global Times every day.

I will expand on this news later, as I am sending this bulletin from my phone.

Stay tuned,

A.F. Thornton