Category Founder’s Trading Journal

Pre-Market Outlook – 7/9/2021

Flip the script! We are slated to gap open with overnight inventory that is net long, so gap rules are in play, but this time heading north. Opening at these levels is still within yesterday’s gap down. Could this possibly leave a bullish island reversal on the 5-minute RTH chart? That would be a positive for the bulls.

Moving north again, you have the overnight high at 4237, the top of the gap at 4748, and then the old resistance around 4350 or so with the all-time high at 4252.25. I am looking for a trading range as a potential outcome of this week’s break of the bull microchannel, so I am reticent to be long above the recent highs. But there is an equal chance that the bull channel is still up, just wider now. Again, all of that applies if the market continues on the northerly route.

However, with long overnight inventories, look for the gap to potentially fade back to yesterday’s RTH high at 4323.50 on any inventory adjustments after the open. Don’t forget the WWSHD trade if there is no fade. You can buy one tick above the first one-minute bar on the way back up if the fade is faint. 

If the market continues south, on the other hand, then you can look to yesterday’s VPOC around 4309 on down to the halfback at 4301 for support. In a very negative pinch, yesterday’s low at 4280.25 should also provide support. Reference to our collection of other key levels should help if the market ventures even further south – which is doubtful today. Though the market has been horribly inefficient lately, the WEM low at 4300 should hold the downside in place before weekly options expiration on the close.

As always, watch internals for cues. There has been a lot of good trading this week with the wide swings, but that is atypical. A sideways market is overdue on the intraday charts.

Good luck today. I don’t typically trade Fridays unless something jumps off the screen to tempt me.

A.F. Thornton 

Pre-Epilogue – 6/8/2021

Something is Amiss...

These are just some preliminary thoughts about today’s session. I will make the detailed trade illustrations later tonight. The only trade I did today was a short in the S&P 500 futures in Globex, as I was not in front of the screens during regular hours. Nevertheless, I can illustrate some trades I would have taken. Both Tuesday and Wednesday were good roadmaps for today.

We held at the Weekly Expected Move low after dipping below it. But we closed under the 5-day line and right on the Algo trigger, so not quite the full recovery we have experienced the last few sessions. But nothing terrible happened either.

My concern, however, is the rip-your-face-off rally in U.S. Treasuries – e.g., the TLT (ETF Treasury Sector Fund). The TLT has blown through its WEM high for four weeks in a row. The converse of the treasury rally is lower interest rates. Contrast the TLT gains with the breakdown in Homebuilders (XHB) and Transports (IYT) – both economically sensitive and down nearly 3% today. How does that make sense? Why are treasuries rallying so hard and economically sensitive sectors breaking down? Is this just rotation? I am not so sure. All of this points to economic weakness ahead, but why? I need to get to the bottom of this. 

Generally, treasuries and stocks don’t rally together for very long as they have these past few weeks. This is exactly what happened in January 2020 – right before Covid hit. Granted, the NASDAQ 100 and growth stocks have benefitted from the lower interest rates, which makes sense more than economically sensitive stocks breaking down. 

But why are the FAANGMAN+T stocks carrying the market again? Is this simply a reflection of lower interest rates, or Is this a reflection of the new China Virus variant concerns? Why is *President Biden sending people door to door to check on and encourage vaccinations?

I have never seen such an obsession with vaccinating people in my lifetime – especially when the U.S. survival rate for those that get the China Virus is 99.7%. Is this just a control thing? Is it political, some kind of power grab? Is there really a nanochip in the vaccine? Or, more likely, does the government know something about this manufactured bioweapon that they are not telling us – such as it will morph into something far worse than we expect? Did you see Warren Buffett’s warning about worse pandemics to come over the weekend?

The dislocation in the Reverse Repo market is equally concerning. There are too many unused (un-loaned) “bank deposits” in the system, choking the overnight Repo market. This is very complicated stuff – but concerning nonetheless.

I know these are random thoughts, but when things don’t make sense and two markets cannot be simultaneously correct, something is amiss. At these valuation levels, there is not much room for error in the stock market. 

If you have any thoughts, drop me an email at info@bluprinttrading.com.

Anyway, second-quarter earnings are just around the corner.

More later…

A.F. Thornton

Mid-Day Outlook – 6/8/2021

24-Hr S&P 500 Index Futures - Daily Candles

So far this looks like the same playbook as the last two sessions, just from a lower level. This time, however, we got the real liquidation break and we are cleaning up a lot of the mess underneath us. 

This could qualify as a test of the 3-month break-out, depending on how you draw it (see chart above). From all appearances, the WEM low and Algo trigger line are pulling us back up out of the hole, and there was support just above the 21-day line and last week’s low at 4277.

RTH S&P 500 Futures - 5-Min Candles

As has been the case mid-day lately, we are pushing the fib retracements to see how high we can get. The 5-day line, now significantly violated, could now be resistance which would also be the 50% retracement of the decline this morning. In my opinion, the easy money off the double-bottom has been made. But we will see what they can do with the afternoon drive.

The short-term bottom looks even more solid with the Globex data in place, so you had a great long this morning. I am not quite ready to go for a swing long as yet, but I will see how we close.

A.F. Thornton

Pre-Market Outlook -6/8/2021

Murphy’s law, I decided to venture out a bit today, so here I sit harborside at a Cafe in Sami, Kefolonia, Greece sipping a frosty Mythos. I am doing the outlook from my phone – so there are a few limitations.

Naturally, here comes the liquidation break I have been harping about for days. So there will be a true gap down at the open, and gap rules apply (bluprintquantitative.tempurl.host/glossary/gap). Inventory is net short so an initial gap fade is possible.

A potential cycle top looms, and this could finally be it. Absent that, a trading range or wider bull channel is the most likely outcome of the daily chart micro bull channel morphing on us – so don’t get too bearish too quick. It will not be unlike yesterday’s 5-min chart that morphed into a trading range, but now the same will happen on the daily time frame.

You know all your levels below here. Keep the daily 21 and 50 in mind as pivot points.

You will find the gap rules here. Remember that large gaps tend to stall and move sideways the rest of the day. Ideally, we will retest the breakout from the three-month trading range around 4250 or so. I will be tempted to do a swing trade there.

I am not trading today, but will still post the possible trades in the Epilogue later tonight. 

Be careful today, it has the potential to get wild. 

A.F. Thornton 

Mid-Day Update – 6/7/2021

So far, all you had to do this morning is follow the Epilogue from yesterday. We had a textbook Breach and Retreat trade, weak internals, a test of the LT uptrend line, a test of yesterday’s VPOC, and a sell climax (almost tagging the ETH 5-day EMA and tagging the RTH 5-day line). 

The only question now is whether the market will get through and maintain the 50%, 62%, and 78% retracements, or roll over again. Draw your Fib retracements. We are testing the 21-period mean at the moment on the 5-minute. 

We may now have a trading range, which is the typical transition from a bull microchannel. Excellent trades again so far – 30 points per contract. 

My next update will come after the close, as I am wrapped up for the day and headed to a dinner. I will mark the trades I took, and the rest of the trades that I would have taken had I been here, after the close.

A.F. Thornton

View from the Top Down

In This Series, We Examine the Stock Market From a Big-Picture, Swing-Trading Perspective
24-Hour S&P 500 Index Futures Daily Candles

As it did in the last writing, the analysis starts this week with the failed bear breakdown back on 6/18. Granted, it was a quadruple witching Friday, leaving a few doubts about the validity of the anticipated decline. But what has followed has been a virtual melt-up in the NASDAQ 100 and S&P 500 indexes, which are now throwing exhaustion and “Trend Reversal Imminent” signals on the Navigator Algo as you will see when you click on and enlarge the S&P 500 index chart above. 

If you were quick to the punch, this was a classic, “When What Should Happen Doesn’t” buy signal. Shorting the rally at the former high failed twice for me in the following week. As well, the Navigator Algorithm itself threw a weak buy signal on 6/24. 

Nevertheless, the Founders Group chose to ignore the potential swing buy signals instead favoring short-term day trading rather than a longer-term position. Most of any long positions we have taken from the daily 5-EMA have been home runs – though many of the buys were in Globex. When I am back in the States, such signals won’t be as easy to execute as they have been in the European time zone.

Our reluctance to take swing positions was simple. This high into an intermediate trend, you can get caught in a liquidation break that can wipe out several weeks of gains before the close of a given day, when most swing traders (not sitting at their computers) could lose all the benefits of their trading gains. Worse, the break could start in Globex, giving you no ability to preserve your gains before the open. Stops are helpful, except there are no stops on call options.

The weak structure underpinning the rally so far continues to support a large liquidation break ahead. Immediately below us are unfilled gaps and untested points of control. As presented in the Chart below and viewed from a year-to-date perspective, there is a virtual “air pocket” between 4100 and 3900 on the volume profile. We have discussed these low-volume nodes before. When the market enters these zones, it moves very quickly until it finds another high-volume node to hold it.

24-Hour S&P 500 Index Futures / YTD Volume Profile

Also under consideration is the stealth correction occurring under the surface in the value or cyclical names. Accompanied by a rally in treasuries, the lower interest rates have boosted tech and growth stocks at the expense of Financials (XLF) and (XLE) Energy. (You could try some long calls on the latter two sectors on the theory they will play catch-up). Absent that, the negative breadth, strength, and momentum divergences on the S&P 500 Index itself cast some doubt on whether this rally is sustainable before a good-sized break. 

Those divergences would need to right themselves this week to keep this uptrend going, but sentiment extremes and the 18-month cycle also still loom as negatives. Unfortunately, they give us very little guidance on timing the peak.

NASDAQ 100 Cash Index (QQQ)

One other carry forward continues to be the butterfly topping (harmonic pattern) in the NASDAQ 100 (QQQ) shown above. This pattern would support the intermediate peak we are expecting at or near point “D,” particularly when the NASDAQ 100 is the lead player in this rally. That gives us a bit more headroom, but not much.

My ideal scenario is a peak, intermediate correction, and then a continuation of the bull into the end of the year, or at least a transition to a trading range. Bull channels, especially tight ones, tend to morph into trading ranges, and that would not surprise me before summer is over.

My swing-trading outlook remains neutral to slightly bearish. I do not see anything cataclysmic on the horizon, just a market that is short-term overdone and in need of an intermediate decline of about 10% to 15% to reset. If you examine the Volume Profile Chart above, that would take us to the high volume node around 3850 (also the 200-day moving average) at the extreme. The June low might hold us in place as well, perhaps avoiding the air pocket that causes me some concern.

The main thing to remember at this stage is that the declines will come swiftly and may carve deeper than the time it takes for you to get back to your computer to push a button. They could happen overnight in Globex before you wake up. This is not a concern when you use stops. However, you cannot set a stop on an option, so keep that in mind.

My mid-year outlook video will be out by Friday.

A.F. Thornton

Mid-Day Outlook – 6/29/2021

So far, we have had a rangebound snooze-fest this morning. The overnight high had held until a few minutes ago, so the market likely is headed down for some buy orders sitting at yesterday’s high at 4282 (or perhaps lower). Internals are mixed, as we typically find on range days.

If we do head back inside yesterday’s range and fill the small gap higher this morning, look for a pivot from one of the levels identified in the Pre-Market Outlook.

In summary, there is nothing particularly good or bad so far. With nearly six up days in a row behind us, the market could rest today. The next update will be after the close. Having said that, the close for futures just got a bit more complicated now that they will stay open until 5pm EST. We will see how that works out.

A.F. Thornton

Epilogue – 4/28/2021

Bulls 3 - Bears 0 - A Happy Finish

As measured by the S&P 500 index, the market did the two-step liquidation breakdance into the 5-day EMA (just slightly below the Globex low we identified as the key line in the sand today). By this time, the bears had made three attempts to turn the market in their direction and failed each time.

Just after I published the Mid-Day Outlook, the Algos kicked into gear, and the market rallied nearly 15 points into the close.

I will have more to say in the morning, but the bull survived another day. There were three good short trades, one sloppy long, one mediocre long, and one final fabulous long. I will lay them out in the morning as well. It was a fantastic day-trading day.

A.F. Thornton

Mid-Day Update – 6/28/2021

The NASDAQ 100 diverged higher once again as the liquidation break in the S&P 500 arrived right on schedule. The two-hour 24-Hr S&P 500 Index futures chart, our master day-trading chart, is now in a sell signal, favoring shorting rallies on the compacted 5 and 15-minute time frames. 

Now, the question is whether today will deliver a one or two-step liquidation. If a two-step, there will be another down leg later this afternoon equal to the one this morning, the only question being from what starting point. For now, our line in the sand held at the Globex low at 4268.50 (they ran the stops right below the level).

We stopped one-time-framing lower on the 30-min chart a few minutes ago on a very slow turn higher. But we would need to take out 4274.50 to keep last week’s rally going. We are rangebound, but note the descending triangle on the 5-minute chart. After the liquidation break, we slowed to a crawl. At the moment, internals remain weak on the NYSE but not too bad on the NASDAQ. Oil and financials have broken back to the downside, with industrials and small caps declining on their heels. 

It is a growth-style tech show again today. But with the negative internals on the NYSE, how long can the market hold together with the FAANG+T stocks carrying all the weight? I will remain a trader here – no swing trades are coming up yet. I have one good short, one barely profitable short, and one barely profitable long trade under my belt so far, and I don’t typically trade Mondays.

A.F. Thornton

View from the Top – 6/28/2021

Daily Chart - 24-Hr S&P 500 Index Futures

We end the month and the second calendar quarter on Wednesday. This also brings us to the mid-point of the year. There may be some window dressing by money managers to complicate life this week, so carry that forward. I will be coming out with a mid-year outlook video later this week.

At this time a week ago, we were hanging by a thread – with most indications set to take us lower. Of course, a lot of the immediate negatives were established on quadruple witching Friday. So the reliability of what we observed came with a question mark. But there were also macro signs of deterioration and some early warning signals for an intermediate top. Instead of following through to the downside, the market made a complete turnaround.

It is possible that the early warning signs of a deteriorating market developed on expectations of a more negative outcome for the Fed meeting than occurred. After sputtering (and a lot of back-peddling), perhaps the Fed pronouncements were better than expected. All we can do is theorize. Some of the internal market deterioration has turned around, but much has not. Certainly, the situation has improved over the previous week at this writing. But we must also guard against a bull trap.

As well. The previous week’s price action blew out the downside of the expected move. This past week blew through the upside of the expected move. So market makers have taken it on the chin for two weeks in a row. With option pricing models missing the mark, we are navigating an inefficient market at present. 

This week, the market makers have set a 53 point range up or down from last week’s close. The previous week the range was 90 points. That is a huge difference in forecast volatility – especially when the market is exceeding the estimates. Such behavior has led to corrections in the past – and that should be noted.

Volume was pathetic all last week, including on the break-out to marginal new highs. With all the institutional trading in dark pools these days, it is difficult to gauge whether the lack of volume will be meaningful, but it should be noted. Also, the lack of volume could be attributed to the summer doldrums. We like to see markets break out on good volume. It gives us more confidence. 

But I have also noted that the short-term crowd dominates the trading right now, rather than institutions. The short-term traders are considered “weak hands.” As such, the market is vulnerable to sharp liquidation breaks. Keep your guard up. 

Over the past few weeks, the dilemma has been whether the FAANGMAN+T growth leaders could stimulate a broader-based rally. I don’t think we have quite confirmed that they have – but we are closer to that outcome. One of the possibilities I have considered is whether the 18-month cycle correction just bottomed, with the cycle trough more apparent in the individual stocks and sectors than the major indexes like the S&P 500. That is not the most probable case, but keep the possibility in your back pocket.

On the monthly charts, we see a buying climax at 3 ATRs from the mean. There is also a 3 ATR climax on the weekly charts. We also have a Navigator sell signal on the weekly charts, which is rare. The Daily chart still shows a rising wedge within a rising wedge. While there is a weak Navigator buy signal on the daily chart, it is not coming from oversold territory. All of this suggests that we be very cautious about taking long trades. The risk is high, as it has been the past month.

In summary, then, I cannot see becoming overly bullish on the turnaround last week any more than it made sense to get overly bearish a week ago. I remain neutral, to slightly bearish based on everything I see at the moment. I need a bit more evidence of a solid, sustainable break to new highs in the S&P 500 to dip my toe in the water. 

If I am going to drop a line in the water, I want to do it on a liquidation break – which likely is close at hand. I sometimes like to buy a single call or put on the SPY (S&P 500 Index ETF). I literally view it like fishing. It gives me a better feel for the market than simply sitting in cash. Last week, I bought a put twice, testing two different levels for short positions. Both failed, and it cost me about $150 to fish. But it helped me get a better feel for the situation at hand. And had there been a good pull on the line, I would have been aggressive.

Summarizing where we are, there is no definitive intermediate top yet in the S&P 500 index, just many early warning signals that we may be close. And conditions are such that we might expect one. We have discussed that incessantly. But we have to trade what is unfolding directly in front of us. Right now, that is bullish. We are better able to take advantage of this in the day-trading strategy without exposing ourselves as we do in the swing-trading model.

If we get a decisive breakout, and the situation appears solid, we have about 200 points or 5% of a measured move to explore overhead. On the downside, the intermediate line in the sand has developed to be the low we had a week ago Friday, now last week’s low and likely the low for June. That level is 4126.75 in the futures. To get there, we would have to take out the 5, 21, and 50-day EMAs and the Navigator trigger line. That would not be easy, except in an intermediate decline that moved down decisively and quickly.

If you are long, set a tight stop – maybe the 5-day line on the S&P 500 or other instruments you are trading. If you are in cash, we will let you know if a good swing-trading signal develops early this week on a dip.

A.F. Thornton

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