Founder's Trading Journal

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We are spoiled rotten of late. It seems that no matter the dip, the market takes off out of a “V” bottom and never looks back. But now, as the nominal 18-month cycle matures, the market is settling back into more typical behavior. Let me digress.

I talk about cycles incessantly. The reason is, cycles give us context. Just like you can take a quote from someone out of context and render the opposite meaning, so too you can take a peak or trough in the market out of context and get the wrong impression. The quote example leads to inconvenience. But the market example can cost you money.

Last March, the markets bottomed a number of cycles simultaneously, from the nominal 54- month (four-year Presidential cycle) on down to the nominal 18-month, 40-week, 20-week, etc. That is why the dip was so pronounced. When long-term cycles nest with all the shorter-term cycles below them, we experience the most pronounced corrections. The Mental China Pandemic was simply the catalyst – but the dip would have occurred regardless. Fundamentals can exaggerate the amplitude of the cycles, but the nest of lows would have presented anyway. Here is an example of how the 9-month cycle is phased:

While it is true that the nest of cycle lows exacerbates the dip, it is also true that the rally on the other side of it is usually something to behold. The new bull run that comes out on the other side is usually so strong that the shorter cycles are barely discernable at all, especially in the first nominal 54-month cycle that ensues. In other words, the market barely dips, and when it does price only spends a nanosecond at the trough. We have seen this over and over since last March.

The aforementioned behavior is different in more mature cycles. In a typical dip as the market matures, there is a retest after the first run out. That is how financial markets were behaving before last March. You might have heard this described as “Elliott Waves” or “three pushes.” Essentially, these theories reference the fact that the markets tend to move in five waves; three advancing waves and two correcting waves as can be seen in the chart below:

Closely examined over the years, these waves have particular characteristics. There is no need to review that here – as it is a science in and of itself. Notably, for this morning, the first 1-2 sequence involves anywhere from a 50% to 80% retracement of the first run out or blue “1” wave as labeled above. This forms the “2.” And this makes sense because at this point in the “1” wave rally, there are a series of declining peaks and troughs leading into the dip, so until the market has a dip that presents the first higher trough, few people jump on board. When the trough turns at a higher level than the troughs preceding it, you have a classic trend reversal and everyone jumps aboard. And not just buyers come flooding in, but the shorts also panic buy to cover. Hence the longer run in the “2-3” sequence as compared to the “1” wave illustrated above. Makes sense, right?

Then there is the head and shoulders pattern. Recall our discussion back on February 24th. Here is a refresher illustration, using a reverse head and shoulders, the relevant pattern this morning:

Recall that I pointed to this pattern as a typical pattern presented when bottoming a cycle. As you can see, it also marks the transition of a trend reversal, which is what we see at cycle lows.

So where am I headed with all of this? Take a look at the NASDAQ 100 index as it currently presents this morning? How does this all tie together?

Allow me to summarize the possibilities. Emphasis on “probability” as nothing is for certain in the markets, and we must always keep an open mind. Yet for the Founders Group, we put our money where our proverbial “probabilities” lie, especially when our algorithms confirm a buy signal.

So here is the argument: (i) we are retesting the nominal 20-week cycle low, which is now the “head” in the illustration above; (ii) this is the first round of the nominal 20-day (calendar day) cycle out of that trough; (iii) the average length of the 20-day cycle trough to trough has been about 10-12 trading days, and we are on day 11; (iv) we see a potential head and shoulders reversal pattern coming in the right at the mark; (v) since the cyclical indexes are stretched, we expect a reverse rotation back into growth stocks, currently spooked by interest-rate scares; (vi) the Fed said nothing Wednesday to cause concerns about any reversal in the accommodative rate policies; (vii) while the momentum in the markets has waned of late, market internals remain very strong; (ix) the NASDAQ 100 and S&P 500 indexes tagged their 20-day future lines of demarcation yesterday, further confirming that the 20-day cycle has reached its projection.

The Founders Group was stopped out of our 8-point stop yesterday on our S&P 500 position. We are currently reestablishing a 25% position, along with a 25% position in the NASDAQ 100. We are still using futures, but it is fine to buy the cash indexes (SPY or QQQ) or April 16 at the money calls on the same. I will communicate stops later this morning. If you did not honor yesterday’s stop on the S&P 500, hold the position for now and add the NASDAQ 100.

A.F. Thornton

Founder's Trading Journal

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Founder's Trading Journal

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Just a brief note, we were stopped out at the end of the first hour yesterday on both our 50% Nasdaq 100 and 50% S&P 500 positions. We stopped out at 13035 and 3939, respectively.

The market opened below our 5-day EMA stop point. As you will recall, our stop for the day session was an hourly close below the 5-day EMA. Since we opened below it, we took the closing price at the end of the first hour since the market could not punch back through the stop line. This is somewhat of a judgment call and depends on market conditions. In a fast market, we simply would have stopped out at the open – but conditions yesterday allowed us to wait until the end of the first hour. We made substantial profits in both positions.

When I first started trading, the gray hairs told me that to be a successful trader; you have to learn how to take and handle a loss. After these many years, I have concluded that to be a successful trader; you have to learn how to accept a stop and then watch the market take off without you. That is what happened yesterday afternoon.

I am not sure what anyone was expecting from the Fed, but the crowd was apparently short. After the announcement, the short-covering was something to behold, and the market spiked higher. However, the overnight crowd took the market right back to the pre-meeting levels this morning, so I don’t feel too bad. We will see what the day brings.

As before, I am traveling but would not be day trading until next week anyway. Today and tomorrow, many market-makers will be dealing with quadruple witching – a day that occurs each calendar quarter when stock index futures, stock index options, stock options, and single stock futures expire simultaneously. The cross-currents distort the normal market – and I have not found it worth trading.

At some point, I will discuss some techniques, such as pinning trades, that can be fun for derivative expiration days.

We will hold to our cash position, looking for another entry point, long or short, as circumstances dictate. Risks remain very high here, and I believe that financial stocks continue to hold the keys to the castle. Our friends over at Kimble Charting published this salient chart yesterday:

This is a time to be cautious. In a perfect world, what we have here is a recovering economy and likely an early-stage secular bull market. Nevertheless, the market is overdone by any measure and well ahead of itself. This would lead to a 10% to 15% correction in normal conditions – likely to be coincident with the 18-month cycle low. That will present soon.

If the doom and gloom folks are correct, we could start into the 80-year cycle correction, a much harder cycle to call but the one that promises to be most brutal to the current generation. The last one bottomed after the Great Depression. The mid-point of the cycle was the bottom in 1974. The next bottom is due any time – and we have not even started into it.

If you are trading, keep stops tight. Always have a disaster stop set. If you are stuck in positions for tax or other reasons, consider using some options or futures to offset risk, almost like insurance. If you want to play the lottery, consider buying cheap, out of the money puts. At least until the 18-month cycle correction is behind us sometime this summer, risks are extraordinarily high.

A.F. Thornton

Founder's Trading Journal

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I need a couple of days of travel time, and the next few days are as good as it gets. It would be best if you did not day-trade on Wednesday through Friday. Tomorrow (Wednesday), we are on the Fed announcement watch. The board starts meeting today. Nobody anticipates any change from the Fed, but that may be the problem as market participants may be looking for inflation vigilance. In any event, it is not advisable to day trade on a Fed announcement day.

Additionally, Friday is quadruple witching day. No, this is not a day to honor Hillary Clinton. It is a day when stock index futures, stock index options, stock options, and single stock futures expire simultaneously. The cross-currents, having little to do with market direction, are nearly impossible to anticipate or trade.

You could try some day-trading on Thursday, but being sandwiched between the two salient non-trading days – day-trading on Thursday is not advisable either – just less risky than Wednesday or Friday. Traders and market-makers often start hedging on Thursdays as they prepare for expiration Friday.

As a housekeeping item, this will be my last commentary until next week, given this week’s less than desirable day-trading circumstances. Our portfolio remains 50% S&P 500 and 50% Nasdaq 100, and we have been rewarded handsomely for picking up the 20-week cycle trough, especially on the NASDAQ 100. I will send out a commentary if the macro picture changes or we achieve price targets. In the meantime, I have some commentary I have been writing on various subjects that I will publish sporadically through the weekend. Monday morning will be the next focused commentary.

Today’s Plan for Day Trading

The S&P 500 notched a new all-time high in a spike in the last five minutes of yesterday’s regular session. The overnight high is a new all-time high and should be carried forward as insecure until it is confirmed or exceeded in the regular trading session. At this writing, the S&P 500 (and NASDAQ 100) are slated to gap (true gap) open. Yesterday’s settlement ended on a spike, but yesterday’s volume and time points of control failed to migrate higher, a slight negative.

As to where the markets are positioned just before the New York open, both spike and gap rules are in play this morning, with early indications being bullish and trading above the spike. Given any conflict, I will be favoring spike rules. The NASDAQ 100 is just now coming alive, as I had been expecting.

Respecting our core trading vehicle, the S&P 500 index futures, the spike’s base at 3948 is important today as it is also the prior all-time-high. Buyers should be present there as the market retests the breakout level. Keep that market-generated information in mind should that level come into play.

Regardless of price action, where value develops will continue to be important, as will the relative strength on the NASDAQ 100. Good day trading is often like keeping a lot of balls in the air at once. We absorb the price exploration data, watch sensitivity at the key levels, make our decision, and execute. We set our stop just in case we are wrong.

When I am executing perfectly, following every rule I know (whether in micro-day-trading or macro strategy), the market likely will disappoint me in at least four out of every 10 trades. Keep this in mind, as it is in the realm of statistical probabilities and in no way a reflection of your character or skill as a trader. It is how you handle and manage each circumstance that defines your success and drives your ultimate returns.

A.F. Thornton

Founder's Trading Journal

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Well, you may have heard that a big snowstorm hit Colorado over the weekend, and that is where I happen to be. Not that it would have been any better in Wyoming. I got to choose death by knife or fire. But I woke up to no Internet and had to wade through the snow to clear the back-up satellite dish. It works, but dropping down from Gig-Speed to 50 mpps, in a word, sucks.

So I will be very brief this morning. I am sure that will be a relief, given my recent rants. If time permits today, I will put out something more comprehensive when the Internet is back up.

The sum of my conclusions over the weekend is largely unchanged from last week. The 20-week cycle has bottomed. This is the last run in the sequence of four before the 18-month cycle tops and sets in.

My biggest dilemma is whether this last 20-week cycle will peak early or perhaps even late. That really depends on whether we have started a new, secular bull market as with 1982, 1997, 2003, and 2009. My best judgment is that we have this coming correction will set the stage for the next run. In other words, I am not in the crash camp – at least as yet.

However, I am cognizant of the proposition that a correction is when your money is involved, and a crash is when my money is involved.

Our current allocation of 50% S&P 500 and 50% Nasdaq 100 held its ground Friday. The Nasdaq 100 barely held. Nothing seems on fire this morning in either direction. I want to continue to use an hourly close below the daily 5-day EMA as our stop on both indexes.

I expect the NASDAQ 100 to benefit from some temporary reverse rotation, and the S&P 500 is knocking on the door of new all-time highs. Being a bit self-critical, I see the need to broaden my horizons a bit into some cyclical areas – perhaps even the Dow on the next rotation. I am ok with where we are for the moment.

Day Trading Today

The usual blah blah blah – I don’t typically trade on Mondays. Overnight activity is balanced. Traders did not explore price beyond the recent range in either direction. This means we should deploy responsive trading, using the 3949 all-time high from March 11 as the upper end of the range and Friday’s 3904.50 as the low end. Perhaps the overnight low at 3924.25 could provide support in a more bullish scenario. If so, carry that forward.

For those new to the site, a responsive trade is a counter-trend trade taken against a specific level. The theory is that when two-sided or “balanced” trade is taking place, there will not be enough momentum to push past key levels, and buyers or sellers, as the case may be, will respond to those areas, essentially pushing prices away from them.

In other words, neither buyers nor sellers are in control so they respond to both ends of the spectrum until price breaks in a new direction. This is the opposite of breakout or initiative trading which is more directional in nature and is generally taken in the prevailing trend.

The recent ATH at 3949 may be a breakout point for initiative trade. Watch for the pros running the buy stops sitting right above, then monitor for continuation if a true breakout holds or even consider buying the ATH’s retest after the breakout.

Friday’s low showed a lack of material excess (the minimum two ticks needed not to be poor). That structure could require repair on any liquidation break. Also, there is a virgin (untouched) point of control at 3890.00 from March 10th.

Again, if you are new, our typical approach to day trading, besides identifying key support and resistance, is to follow the sequence of testing yesterday’s high and low and the overnight high and low, depending on initial direction, to see where the market finds the path of least resistance. We are always cognizant that even after the initial drive, no matter how impressive, there is a 50% chance of the market reversing.

Sometimes the overnight action helps us pick the initial direction right out of the gate. In cases such as today, the trading overnight has given us no clue, so we are likely to find the best trades later rather than earlier in today’s session.

A.F. Thornton

Founder's Trading Journal

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So the wife is in Greece indefinitely. Her father, 92 years young, is terminal, and we believe it directly relates to his second China virus shot. Imagine, he was healthy as could be and even survived World War II as a captain in the Greek navy. Yet, he is randomly taken out by vaccination against a bioweapon. Oh, and by the way, in recent simulated Pentagon War games, apparently we lose fast with a Chinese biological-weapon attack. Well, if there were any doubt, the anecdotal evidence now is profound. Just listening to the bizarre rant by President* Biden last night should be enough to convince you.

If you are going to get the vaccination, one of our group owns a prominent biotech company and favors the Johnson & Johnson version. It likely won’t surprise you that I am not a vaccine person. But I am a math person. Let’s see, if your income bracket is low enough, you get a $1,400.00 stimulus check. Yet, the U.S. Government is incurring another $17,000 of debt on your behalf. Somehow, that does not add up, especially when you consider that only 10% of the stimulus bill is going to China Virus related stimulus. Maybe the next largest portion is going to bail out the blue states that screwed their economies and drove small businesses into the ground. Then there are the reparations buried in the bill. And, a family of five with two unemployed parents looks to be able to make about $95,000 a year, at least until September. Nice! This gives new meaning to that scary phrase, “we are the government and we are here to help.”

As I analyze all the recent bills and proposals, here is what I am thinking. Since gender is up for grabs these days, and science doesn’t matter unless it is fudged to make you wear a mask, I am seriously considering identifying as a minority, LGBT woman. No offense intended to the real ones determined by the old scientific method.

The point is, this would give me many, many government benefits. If I had a farm, the new stimulus bill pays it off up to 120% of the original loan. Then there are the SBA loans that never have to be paid back. I could guilt all my white friends about their inherent bias – maybe even getting one to mow my lawn for free! I am willing to pledge to nevermore use any of those nasty, prejudicial terms like mom, dad, parents, brother, sister, grandmother, grandfather, etc. And you shouldn’t either, it might offend me. But I don’t plan to give up the term “China Virus” term anytime soon – I am holding onto it just to keep a small part of my former self.

Of course, all of this is beyond ridiculous, and I don’t mean to offend anyone beyond making the point that this is the logical extension of all these policies. And while I am on the subject, I am sick and tired of the term “woke.” Every time I hear it, I literally want to puke! The proper application of the term, given the circumstances, is to wake me up when this is all over!

So what does any of this have to do with the stock market or our current posture? Besides being upset that these government policies and mandates may kill my father-in-law, the lack of market enthusiasm for the stimulus bill explains the volatility we have been experiencing in the debt and equity markets. Market participants, especially as it has related to growth stocks and interest rates, are less than thrilled at the moment.

The good news is, we had a fabulous day yesterday. The bad news is that neither the NASDAQ 100 nor S&P 500 gains qualified as follow-through days, as the volume still has not exceeded the prior days.

The NASDAQ 100 index slammed into its Weekly Expected Move high and had formed a rising wedge pattern by yesterday’s close. The pattern broke overnight. A rising wedge pattern is often the first wave of a new advance. So that is a good thing. The NASDAQ 100 held at a 50% retracement of the recent gains from the bottom overnight, also a good thing. But the overnight action did not tell us a lot for today’s session, as the traders could not take out yesterday’s low or high.

On the other side, and having experienced these one-hit-wonder days over the past few weeks, I want to lock in profits while giving the markets some room to maneuver. I don’t want to ride a full retest of the lows or even the possibility that the NASDAQ 100 decides to tag a new low at its 200-day moving average. So let’s set a stop as an hourly close below the overnight low at 12776. Stay alert, as we are not too far off the low at this writing. I think that is a solid plan for the S&P 500 as well. The stop level there is 3900.75. These stops only apply if the price is below the stated levels for an hourly bar close.

Day Trading Plan

As you know, I don’t usually day trade on Fridays, especially when we are skirting expected moves at weekly options expiration, as is the case with both the S&P 500 and NASDAQ 100 indices.

As to the S&P 500, the all-time high is slightly below its WEM high, likely to cap gains today. In fact, the all-time-high in the S&P 500 index could take time -even several more days to resolve.

As well, the NASDAQ 100 high yesterday, it’s overnight high, and the WEM high all congregate just above 13,000, also likely to cap any gains today.

The potential is strong for some balance today. Watch for internals to be slightly conflicting. The settlement, points of control, and value area lows are very close to each other and could be used as responsive shorts.

Overnight activity filled yesterday’s small gap, but this does not count towards a fill because it did not occur in a regular day session. If context supports it, sellers can target that gap fill on a short from the aforementioned levels.

Have a great weekend!

A.F. Thornton

Founder's Trading Journal

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Founder's Trading Journal

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The Founders Group went to a fully invested position last night with 50% in the NASDAQ 100 and 50% in the S&P 500 Futures. Our entry prices were 3888.50 and 12,750.25. We are using an hourly close below yesterday’s low as our stop. You should wait and watch for my signal this morning on a pullback for those of you who have to operate in the regular session markets.

The S&P 500 broke resistance, and the NASDAQ 100 retraced all of its losses from yesterday in the Globex session. Mostly, however, I am convinced that the panic in the bond market is subsiding, and this will shift preferences back to growth stocks.

Whether we are dealing with the bond market and interest rates or the stock market, volatility peaks in panics. Accordingly, when we see a significant volatility spike, we can assess that a bottom to the correction at hand is near.

Taking a look at the weekly chart of investment-grade corporate bonds below, the SRVIX (Swap Rate Volatility Index) is at one of the highest spikes in its history, almost rivaling the level it reached in the China Virus panic a year ago in March. In the chart, we track the value of investment-grade corporate bonds, which move inversely to interest rates. So when rates are rising, the price of bonds falls and vice versa.

The bonds lost about 25% of their recent value in the inflation panic, a substantial and healthy correction. The spike in volatility, which essentially measures fear, indicates that a bottom in bonds (peak in rates) is close at hand. The spike is evident in the chart below:

The trend in bonds, as it is for interest rates, remains bearish. Bonds have a long way to go to rise back into an uptrend. Perhaps more importantly, interest rates could move into a trading range for a bit. Or, we could see a relief rally. Short-term, however, the panic is subsiding, rates are stabilizing, and this will allow the stock market to move forward into its final, 20-week cycle before the 18-month cycle correction kicks in. That is my best judgment.

I would expect to see profit-taking soon in Financials, Energy, and some of the cyclical/value sectors – with the funds rolled back into growth stocks. The NASDAQ 100 is most favored for this rotation, with the S&P 500 index capturing all sides of the coin.

I will expand this discussion considerably before the end of the day, but I wanted to get the signals out as soon as possible.

Day Trading Outlook

Gap rules are in play this morning, especially #2 and #4. As with any true gap, the early potential for a fade is there. You might short below the first one-minute low or on a retest of the open, should the opening drive be higher. In either scenario, it’s better if the overnight high is not taken out. Target the regular session high first on a short.

Crossing the overnight high on faster tempo and bullish internals would show potential for the market to move higher, confirming the overnight breakouts. As overnight inventory is skewed long but not 100% so, there is potential for this rally. Monitor closely for continuation.

Continue to watch where value develops. Over the last three sessions, it has been higher. A markedly lower value can change the current tone. Note that this will be harder to do once all majors have crossed downtrend lines.

A.F. Thornton

Founder's Trading Journal

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Wednesdays tend to bring trading ranges in the markets much of the time. But today’s slopfest in the S&P 500 and NASDAQ 100 was particularly gruesome. Nor were the two indexes able to conquer their resistance downtrend lines.

The NASDAQ 100 turned in another negative performance, and the S&P 500 ended the day up fractionally. But the Dow turned in a 520 point gain – almost 2% on the scale. The Russell small-cap index followed the Dow’s lead. So clearly, money is still rotating from the tech sectors to cyclical stocks.

But the concern is that the Dow is hitting resistance at the top of its trading channel, the Russell is hitting resistance at a double top, while the S&P 500 and NASDAQ 100 are hitting resistance at their downtrend lines. If the music stops here, there is only one exit, and it points downward. So I am still content to sit in cash.

While I recognize that every dog has its day, and this is the Dow’s day in the sun after underperforming for years, it has not paid to buck the S&P 500 index’s trend in my career, though it may work for a short time. So I am not a current fan of a flash trend built on buying something cheap that does not have exponential growth potential. I will leave that to Warren Buffett.

In fact, this reminds me of one of those old market truisms. Where the generals lead, the soldiers must follow, or the soldiers could lose the war. Failure of every other index to confirm the 30 Dow Stock Index at new highs does not bode well for a healthy market, at least on the surface. On the other hand, the math is definitely complicated here.

Breadth was still positive today, as there were a net 379 stocks that hit new highs versus new lows. Moreover, the percentage of stocks over their 50-day moving average continues to improve. All of this may still reflect the flipside of last summer and fall, where the generals carried the markets alone on their backs. Maybe the soldiers are taking the lead now, and the generals are so worn out they went back to headquarters. Only time will tell.

Given the circumstances, I cannot say with any confidence that this correction is over quite yet. Perhaps we might see the Dow head south with the NASDAQ 100 pointed north – the reverse rotation play. What I will continue to say for sure is that all of this is good for the markets, working off some of the giddy craziness. So far, and while I recognize it can be frustrating, the markets are not crashing, and the world is not coming to an end, as many have been predicting.

Even more interesting today, the markets seemed to yawn at falling 10-year Treasury rates after the auction. Congress has now reconciled and passed the stimulus bill, which *President Biden plans to sign on Friday. The market did not even poke its head up when the bill passed. The market did pop to the upside on the Consumer Price Index report right before the open. Inflation was tame, which triggered some short-covering to the upside, but the rally was short-lived. Anyway, inflation shows up in producer prices first, and it has not been tame there.

For now, I am still content with this roadmap from yesterday.

Steve Hochberg jolted my memory with a little history in the Elliott Wave short-term update this afternoon (www.ElliottWave.com). On this date, 21 years ago, March 10, 2000, the broad NASDAQ Composite registered its intraday and closing highs, ending the dot-com mania era. The NASDAQ 100 index held up for ten more trading days, peaking on March 24, 2000, along with the S&P 500.

The NASDAQ crashed 78% in the ensuing 31 months, and many investors experienced the aftermath of a stock market mania for the first time in their lives. It took the NASDAQ 15 years to match the high of March 2000.

A lesser-known but equally important stock market top also occurred on March 10, this
one in 1937. This was the second wave of the 1929 crash that lasted until 1942 in nominal terms. The Dow lost half of its entire value, declining nearly 50% from March
1937 to March 1938. This was also known as the “Rich Man’s Crash.” it is said that many of the smart people that avoided the first wave down in the 1929 crash, got caught in this second wave because it was unexpected. This was the famed “C” wave we feared after the market rallied of the lows last March. Fortunately, it never arrived in our setting, so here we sit, that is unless…

What are the odds that this could be the third of history’s most important stock market tops – all three occurring on or near the same date? Investor psychology is certainly primed for such a peak – so I always keep an open mind…

Tomorrow is another day.

A.F. Thornton

Category Founder’s Trading Journal

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