Founder's Trading Journal

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Yesterday saw an impressive recovery in all of the indexes, and for once, there was some real volume behind it. We saw follow-through in Europe and Asia, but starting at about 6:00 am EST, profit-taking kicked in, leaving the NASDAQ 100 negative (from plus 80 to down 80 at this writing) and the S&P 500 just slightly positive (from up 20 to up 7 at this writing).

That said, we need some follow-through today to ensure that this rally attempt succeeds where the last one stalled. There is a good argument that wave structure supports yesterday’s turn. But as we saw with the head and shoulders reversal pattern that appears to have failed, a certain number of traders will jump in on the wave structure too – but we need consensus to pull us higher.

Today, the downside is guarded on the S&P 500 at yesterday’s low, coincident with its 50-day moving average and Weekly Expected Move low. Yesterday’s low in the Nasdaq 100 is a bull/bear threshold as well, supported by the bottom line of a triangle unfolding on the daily charts.

This is a short-term trader’s market for now, so swing-trading is inadvisable. I will continue to share our trades, but if you are not in front of a computer all day, I don’t advise getting involved here quite yet. And that does not even account for what can happen overnight.

Consumer spending came out a bit lower than expected this morning, and it was down for February, putting a damper on the higher interest rate arguments. As well, Angela Merkel, Germany’s Chancellor, says, “We are now basically in a new pandemic. The British mutation has become dominant.” She goes on to say, “Fundamentally, we face a new virus of the same kind but with very different characteristics,” she said. “More deadly, more infectious, and infectious for longer.”

Suffice it to say that Europe is having a whole different experience than the U.S., returning to strict lockdowns and economic distress. U.S. cases are on the rise as well over the past few days. It is hard to see the kind of economic growth on the horizon that would continue to pressure interest rates if we are about to experience the third wave of a more lethal virus. Global growth also will be snuffed out without Europe’s participation. There are also murmurings from China about another, more lethal virus wave.

Day Trading Plan

I don’t trade on Fridays due to weekly options expiration and associated cross-currents. But the key issue today is to hold yesterday’s lows.

The NASDAQ 100 is coming into the open with overnight inventory balanced. The index managed to poke above yesterday’s high overnight but could not hold the level. We will open in the middle of the overnight range, so the better trades will likely come later once a direction has been established. Expect the index to test either or both ends to of the range to see where the path of least resistance lies.

The S&P 500 is a similar story, opening in the middle of the overnight range. At least the S&P 500 has managed to hold above yesterday’s high overnight, indicating relative strength over the NASDAQ 100.

As previously discussed here, we are coming into the end of the 1st calendar quarter, and money managers may dump tech to put some cyclical names on their quarterly reports. So the NASDAQ 100 and typical growth names may continue to suffer through month-end, at least in terms of relative performance. That is what I mean by window-dressing.

We continue to have seasonal and cyclical strength through early April. Both seasonal and cyclical tendencies should begin to assert the downward pressure I have been anticipating and discussing incessantly in these writings. I could argue that the NASDAQ 100 is forming a triangle on the daily charts, so be aware of the bottom triangle lines.

A.F. Thornton

Founder's Trading Journal

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We acquired another 25% S&P 500 at 3882.50 for the Founder’s Group mid-day, bringing us up to a 50% position in the core index.

The XLF (Financials) and the XLE (energy) ETFs look like pullback buys with W bottoms. The XLE is just above its 50-day EMA, and the XLF is finding support at the 21-day EMA. Both have had their first decent pullbacks since the January runs started, and this may be a good place to nibble. The Founders Group has taken a 5% position in each ETF using “at the money” (strike price near the current price) call options.

I will have more discussion out later but I wanted to get this update out before the market closed.

A.F. Thornton

Founder's Trading Journal

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Founder's Trading Journal

Reverse, Reverse Rotation and Cross, Cross Currents

Mar 25, 2021 AF Thornton 0 Comment

Somebody once sent me a Christmas card, and it told the story of a contrarian. At first, our subject was a normal investor. Then, she realized that the real money was in being a contrarian. Soon, being a contrarian became so popular, it stopped working. Ahh said our subject, now I need to be a contrarian, contrarian. The card went on and on in the most humorous way until they finally put our subject in the looney bin.

In Charles MacKay’s classic book “Extraordinary Popular Delusions and the Madness of Crowds, he wrote, “Men, it has been well said, think in herds; We will see that they go mad in herds, while they only recover their senses slowly, one by one.” Certainly, yesterday smacked a bit of crowd madness.

Of late, when bonds rallied (interest rates fell), so did growth stocks and the NASDAQ 100. When bonds sold off (interest rates rise), energy and financials rallied, and growth stocks and the NASDAQ 100 sold off. Those relationships were all broken yesterday. Rates fell, and bonds rallied, but this time the NASDAQ 100 sold off, and both financials and energy rallied. Go figure.

Likely, yesterday’s break in the routine has to do with money manager window dressing as we approach the end of the first calendar quarter. Unfortunately, and despite the overnight rally, we did not even get a chance to raise our NASDAQ 100 stops yesterday before they triggered. Price went on to break key levels in the NASDAQ 100 index, so the index is off the table for now.

Rather than rush through more detail this morning, and given that our swing strategy is back to cash, I will take some time and put out something more extensive this afternoon. But for now, our thesis remains intact. We started the final and fourth nominal 20-week cycle in the nominal 18-month cycle at the March lows. We are open to the cycle peaking earlier than normal, and there are certainly arguments to support that. But since that would be the outlier case, I would need more proof.

Today’s Day Trading Plan

As to the S&P 500 index, we will be coming into the morning session trading near the bottom of the overnight range with a true gap down, so gap rules and potential for an early upward fade of the gap are in play. Settlement yesterday was 3882, so in overnight trading, we could not hold the 3900 roundie or the 21-day EMA at 3894. We will currently test the 50-day EMA at 3864 to see if it can hold, then on to 3850 and other key levels as set forth below.

Overnight inventory is net long, so any selling at the opening could be old business (overnight traders taking profits on their long positions). Keep that in mind if we approach the overnight low at 3859, in addition to gap rules #2 and #4. Another negative, the market seems to be rejecting the old balance area between 3875 and 3940, and the 4000ish Fibonacci target set from the crash bottom a year ago continues to remain elusive. Again, we have to consider quarter-end rebalancing as having some influence over the next week or so.

Key levels currently below us to watch today will be the 50-day EMA at 3864, overnight low at 3859, the half-roundie at 3850, and the next point of control at 3830. Remember that we are oversold from the standpoint that we are trading well below the 10-day point of control at 3930 and the 10-day value area low at 3920. If the overnight low holds, then target the levels above sequentially and monitor for continuation.

Key levels to watch above us also include the overnight halfback at 3877.50 (also yesterday’s low) and the overnight high and 21-day EMA around the 3895 area (also the bottom of yesterday’s single prints). Likely, traders will test the overnight low first.

Yesterday’s action carried our two key indexes, the S&P 500 and the NASDAQ 100, below their 21-day EMAs, and I carry that forward as bearish. The NASDAQ 100 has also breached its 50-day EMA, and the S&P 500 sits right on its 50-day EMA at 3864.

A.F. Thornton

Founder's Trading Journal

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Founder's Trading Journal

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At the moment, where the NASDAQ 100 leads, we will follow. The Founders Group stepped up to a fully invested position yesterday, with half in the S&P 500 and a half in the NASDAQ 100. The market will open well above yesterday’s entry prices, thanks to Europe jumping into the indexes with both feet last night. Let’s see if we get a follow-through in the regular session today.

The potential head and shoulders reversal patterns, marking the 20-week and 20-day cycle pivots, remain in play but require a move to the 20-week neckline today or tomorrow to maintain symmetry:

If the pattern progresses and succeeds, that tells us we are on the right track. If it fails, that also tells us something. In the latter case, failure could foretell a rare, left translation peak in the last nominal 20-week cycle of four in the nominal 18-month sequence. So I am keeping an open mind to all possibilities, but the probable outcome is moving to the neckline and eventually break higher.

In the meantime, energy stocks are moving down to their trendline, so I keep an eye on that. Interest rates are in a short-term down cycle – and that is helping lift the NASDAQ 100 for now.

Other than the issues above, I am looking to get the 5 or 8-day exponential moving averages under us to use as a rising stop. I will publish levels later this morning.

Day Trading Plan

A new day confirms the slow rotation back into tech, with returns in the Nasdaq 100 doubling the S&P 500 overnight and making me look smart. Naturally, I relish these days and bank them for the days I don’t look so smart. Breadth’s weakness tells me that the rotation isn’t solid yet, and the whole thing still seems to carry an air of falling apart at any moment, but the rotation is happening.

The gap higher this morning is in the middle of yesterday’s range for both the NASDAQ 100 and S&P 500 futures, and hence gap rules are not in play. Overnight inventory is balanced to slightly net short. Current prices are ticking in the upper third of the overnight ranges. This indicates some strength going into the morning session.

For all the late-day selling yesterday, note that value (where 70% of volume occurred) was unchanged. This keeps the status quo intact more than any other data point. The Globex highs in the NASDAQ 100 and S&P 500 futures at 13150 and 3919, respectively, should be seen as potential breakout levels. There is nothing else pointing to the open’s potential direction, so let the market sort itself out for 30 to 60 minutes and follow the usual quartet pattern.

Founder's Trading Journal

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The Founder’s Group just added 25% Nasdaq 100 (at 13050) and 25% S&P (at 3912) 500 to go to a fully invested position. Risks remain elevated here, so evaluate your decisions carefully.

Founder's Trading Journal

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Somehow this intro got deleted in the first publication. I wished everyone a happy anniversary, as a year ago today, the China Virus crash bottomed and the Founders Group went to a fully invested position. What a day that was, as I communicated on these pages. It was one of the braver moves I have made over the years, and I fear I am becoming more conservative in my old age.

So far, the market has followed through on our reverse rotation thesis as tech led the rally yesterday and seemingly is confirming the same overnight. There was selling in both Asia and Europe last night, but the market traded in a rather tight range that landed in the middle of yesterday’s regular session range. This tells us little about what to expect from today. But I am pleased with our progress so far, as we begin this last 20-week cycle before the 18-month cycle inflicts a reality check on the markets.

By the way, the volume could have been better yesterday. Perhaps a better way to look at volume is to break down each daily candle and put the volume out to the right – looking at volume at price. For even better context, we can look at the amount of time the market spent at each price. The volume concept is called “Volume Profile,” and the time concept is called “Market Profile.”

Essentially, you are looking at something that starts as a bell curve and forms various shapes and patterns that can tell us a lot about the market and where traders are positioned. This works on any financial instrument that involves volume, whether it be an index, ETF, or stock.

We focus on the bulges to the right in the profiles above, indicating what price had the most volume and caused the market to spend the most time. I think you can see that the price that attracts the most volume and where the instrument spends the most time is a key piece of information, whether you are looking at a single day, the Globex overnight session, or the regular day session. In my case, I also look at an aggregate of the last 10-days. The “10-day POC” marked by the yellow line above is the price (about 12950) that has attracted the most volume over the past 10 trading sessions (about two calendar weeks).

On the NASDAQ 100 profile above, the settlement at yesterday’s regular session close was 13071. Since most of last night’s trading occurred below that level, we can say that traders are coming into today’s session net short. As the session opens today, those traders may help drive a rally as they go to cover their shorts this morning. Overall, however, the overnight profile is in the middle of yesterday’s regular day session, giving us little direction about today’s regular session trading. Every profile gives different information about the day that might be ahead.

The Navigator swing strategy is 25% S&P 500 and 25% NASDAQ 100, and I am looking to add to those positions on pullbacks.

Today’s Day Trading Plan

Now that you have a better sense of the profiles as set forth above realize that a lot of the key levels and concepts I talk about here come from the profiles above.

Yesterday, I noted that the Friday low should be considered secure. Accordingly, and for now, pullbacks to the 15 or 30-minute 21 EMAs are buyable unless we take out Friday’s low. The NASDAQ 100 continues to lead, which gives lower odds of any short setups working in the S&P 500.

Overnight inventory is net short but not 100%. The entire overnight range is within the RTH range, which indicates balance.

Use yesterday’s settlement at 3812.62 (S&P Futures) and 13071 (NASDAQ 100 Futures) as bias lines. Otherwise, follow the quartet and monitor for continuation. There is a lot to digest, especially in the NASDAQ 100, from yesterday’s gains.

A.F. Thornton

Founder's Trading Journal

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We are having an awesome morning thus far, but I take nothing for granted. The Founders Group moved our stops up as follows:

SPY – 389.75

S&P 500 Futures – 3897.50

QQQ – 314.75

NASDAQ 100 Futures – 12967.50

I will update these pages if our stops change for any reason.

This information is provided for educational purposes. Always do your own homework.

A.F. Thornton

Founder's Trading Journal

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At the end of the day, trading is nothing more than a hypothesis overlayed on randomness that may or may not play out. Even more fun, when a trade fails to play out, your lizard brain blocks all access to your cerebral cortex and higher thinking, almost guaranteeing a loss. If that wasn’t challenging enough, it seems we always have a “soup de jour” of sorts that traders hang on every month. Call it the “issue du jour” – or classic groupthink.

Right now, the issue is interest rates. But it changes. I remember when we hung on every monthly trade deficit. Then there was the budget deficit. If those issues were so important in the 90s, what the hell does anyone think now?

And so it goes with interest rates. They have not yet even reached pre-China Virus levels. Anyway, to be successful at this, you have to have perspective and see the game for what it is – a game. You have to play the game better than most other traders.

Of course, there is pressure on rates. But will it be the end of the world if they go to 2%? Really? Ensure the person you are listening to is not a Hedge Fund manager on CNBC who is short and trying to talk the market down.

History does not bear out that higher rates kill the market, but here we are in the game – so let’s play it. Right now, it is a contest between financials and tech stocks. To make it interesting, we have the cyclicals moving around the periphery. Rates go up, financials – particularly banks – perform well. Rates go down; tech stocks perform well.

Looking at it another way, the NASDAQ 100 rises when rate scares abate; the Dow rises on cyclical prospects, and the Russell 2000 / S&P 500 benefit from the financials. Actually, the S&P 500 gets yanked in every direction.

So we are 50/50 Nasdaq 100 and S&P 500 to work all ends toward the middle, giving an edge to reverse rotation back into tech, at least for the short-term. Then, as the 18-month cycle peaks, we will go back into full correlation again – and we will head for the hills.

Based in Italy and one of the foremost experts on Hurst Cycles, David Hickson put out a great video on Saturday reviewing the current position of the cycles and the coming 18-month peak. It is a bit technical but worth reviewing for the bigger picture.

Meanwhile, back at the ranch, our latest mix and signals appear to be working well this morning, now that quadruple witching is over. By the way, here is some European humor for you:

Scary, right? So far, I am gleaning that the Europeans think we are a bunch of idiots in the US. But they have always had a superior attitude.

Day Trading Plan

One would think that being six hours ahead of New York trading. I would be in the future and have some advantage over the U.S. traders. I had a lot of fun this morning (here) trading the Globex markets (there), so I was not left with crumbs as usual in the US. I could get used to this. But anyway, I don’t typically trade on Mondays – but if you do – here goes it…

I would assume Friday’s low to be secure in the S&P 500 until it’s not. Today will be all about whether or not the overnight NASDAQ 100 strength continues into today’s session and overcomes the S&P 500 index relative weakness.

While the NASDAQ 100 futures moved out of Friday’s range overnight, the S&P 500 futures were unable to duplicate the success, and as such, the extremes of Friday’s S&P 500 range are the main key levels. Even with NASDAQ strength, there is potential for the S&P 500 to remain within range. There will be a small gap higher at the open, but it is not a true gap, so gap rules are not in play. Overnight inventory is balanced in the S&P 500, so let the market sort itself out before jumping in with both feet.

I will communicate new stops on our current positions later this morning.

A.F. Thornton

Category Founder’s Trading Journal

Reverse, Reverse Rotation and Cross, Cross Currents

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