Founder's Trading Journal

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This might be a first. Yesterday, the Dow and Russell hit the upper end of their Weekly Expected Moves, whilst the NASDAQ 100 hit the lower end of its Weekly Expected Move. In other words, you could practically have done a pairs option trade playing the NASDAQ 100 index off the others. Since these indexes are nearly always highly correlated, the situation is unusual. Strange to be sure, but true. The question remains, is this healthy, and does it give us any clue as to future direction?

As you can see from the chart above, another unusual feature of this 20-week cycle correction is the broadening formation in the S&P 500 index. I recall a similar corrective pattern unfolding in the NASDAQ 100 back in 2014. The pattern resolved bullishly, but not until after it jumped off a cliff from the upper resistance downtrend line, a position analogous to where we find the S&P 500 index now. But the textbook says it is supposed to resolve bullishly – it simply leaves out a few details about the road to nirvana. The broadening formation above is not to be confused with the megaphone broadening formation in the S&P 500 that has been unfolding since 2017. That macro formation, tilted in the opposite direction of what we see above, normally resolves bearishly.

I mention chart patterns from time to time when they might be relevant. Over the years, these patterns have become less reliable as they tend to be obvious to everyone who has read an investment book, and they lend themselves to algorithmic programming. In a sense, the market efficiency that follows mass recognition of the patterns tends to cancel them. That is unless the pattern appears to coincide with something else that could be unfolding.

As mentioned recently, the head and shoulders pattern is an example of a reliable pattern when it appears near a topping or (when it is inverted) bottoming cycle. As practically a real-time example, the NASDAQ 100 just flashed a clear H&S topping pattern to mark the peak of the 20-week cycle, as you can see from the chart below:

For now, it looks like the market is trying to make a legitimate turn here. The NASDAQ 100 futures would need to maintain the Globex low, as would the S&P 500 futures. So I may be issuing a buy signal today. Stay alert.

Day Trading Plan

Futures moved in a tight range overnight until the positive (non-inflationary) consumer price data this morning opened the door to a strong rally. However, even with a 16 point gap, we are still slated to open within yesterday’s range, so gap rules are not in play. In fact, overnight inventory is very balanced, and we are currently close to the Globex high. As well, we are at critical junctures on daily charts, especially the S&P 500 and NASDAQ 100 futures.

It’s important to note that both indexes’ trendline resistance is within spitting distance and could be tested today. It’s noteworthy that if you look at the S&P 500 cash index (SPX or SPY), the index actually broke the line on yesterday’s rally, although the index could not close above it. Should either of the futures close a daily bar above the trendline, it will put the bear case into serious question and further confirm that the 20-week cycle has bottomed. This would open the door to an attempt to go back up and conquer the all-time highs.

Current prices are trading very close to the volume point of control which is in the middle of yesterday’s value range. That gives little indication of how traders will act around the open, especially with overnight inventory quite balanced. Higher odds are that the good trades will develop later rather than earlier.

The poor high from yesterday is in play and has potential for repair. Target this high on strength and also a position for a breakout higher to repair the structure. Then monitor for continuation.

The Globex low is very close to yesterday’s low. Consider that fact If the S&P 500 should revisit this weak low. Failure to hold these lows would have the potential to change the tone. Since the Weekly Expected Move low should contain any further downdraft on the NASDAQ 100, I would not expect much further damage this week even if the low is breached.

One more item, the market has tended to rise in the first hour and sell-off in the final hour of trading. This indicates institutional distribution. A change in that tone today could further bolster the bullish case.

A.F. Thornton

Founder's Trading Journal

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While we had a fabulous intraday trade into about 2 pm EST on all the indexes, the market then sold off for the last two hours, rejecting prices right at the downtrend line on the daily chart, at least for our core, S&P 500 Index. From a swing trading perspective, that does not yet trigger a new buy.

If you magnify the upper Algo labels in the chart above, you will see that the Algo places the “Wave State” in the “Kill Zone.” Naturally, I program the circumstances that elicit the label – and they are not circumstances to go long for a few days or weeks quite yet. Also, there are still lots of red and yellow on the status labels, as opposed to green. The labels are purposefully color-coded. Again this is less than ideal.

There is a faint tail visible on today’s candle above, handily rejecting a down trendline break. Volume was light and lower than yesterday on this up day – so no follow-through yet either. But you know the saying “if at first you don’t succeed…”

Tomorrow is a new day – let’s see if the market can take another shot at breaking the downtrend. The NASDAQ 100 is in the same boat, essentially. Both the Dow and Russell 2000 rejected new highs as well by the end of the day.

I am sticking to day trading for now – no Navigator swing buys as yet.

A.F. Thornton

Founder's Trading Journal

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So far this morning, we have the Dow hitting a new, all-time high. The Russell 2000 Small Cap Index closely follows and is within hitting distance of a new, all-time high. The S&P 500 is running in third place, with at least 60 points to go. The NASDAQ 100 is miles behind, at least 1000 points off its all-time high.

Interest rates have backed off a little overnight, while oil is hitting 18-year resistance here. This is giving technology a small boost, as well as a few other growth stocks. Financial and energy stocks are taking a breather. One day, of course, is not a trend.

All of this equates to a striking index divergence – and not a typical healthy, syncopated, or correlated equity market. We have to give some allowance for the discrepancies because the cyclical/value sectors and the leading growth stocks are coming off a historic spread favoring growth. Allowing for some spread reversal is not unreasonable. Nevertheless, the behavior is a warning that this correction may continue south after this brief reprieve.

On cycles, keep in mind that the 20-week cycle could bottom (and likely already has), but the next 20-week loop may result in some indexes and sectors achieving new highs and some not. The cycle could roll over below all-time highs in some sectors – perhaps even in the Nasdaq 100 index itself. This sometimes happens in the fourth 20-week sequence that leads to the 18-month low. The chart below outlines the current road map.

[Clicking on the Image Below will Bring Up the Full Model]

I would normally be issuing a buy signal by the end of the day. The algos are telegraphing the buy signal now, but the price would have to stay above or near current levels by the close to confirm the signal.

The problem is that the algos know how to buy and sell but cannot tell us how far the buy signal takes us. We have to do those forecasts with our other work. If the correction were to continue, then the buy signal would be hard-pressed to capture much gain.

Let’s see what the rest of the day brings, and if I think a buy is warranted for swing traders (meaning we can hold it more than a day), I will telegraph a signal about 15 minutes before the close. Otherwise, our swing trading model needs to stay in cash for now.

A.F. Thornton

Founder's Trading Journal

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Founder's Trading Journal

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Founder's Trading Journal

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If you combine cycles with some context, you can get a reasonable idea of where a given cycle might peak and bottom. Having said that, cycles are somewhat secondary to the primary math of the Navigator Algorithm, which favors price action more than any other factor.

Of late, most sell-offs have barely lasted a few days, much less a few weeks. So it is a change in and of itself to have the time to contemplate a projected low. 20-week and 40-week cycles are like that. We have more time to evaluate them. As previously discussed, the window for the low goes all the way out to March 15th.

I don’t see the “reflation” or “reopening” rotation as anything new. Chairman Powell’s testimony yesterday merely confirmed what the markets had already told us. So I ask myself, what did the market really want to hear yesterday? I can only suppose it wanted Chairman Powell to reiterate a vigilant policy to keep the money spigots flowing while maintaining artificially low interest rates. That cannot go on forever, and it would inevitably end badly.

Inflation is, after all, the greatest tax of all. It is the insidious tax increase levied by governments throughout history who could not pay the bills and had no political will to handle the matter honestly. Unfortunately that is where we find ourselves. $30 trillion in debt and rising, with no way to pay the piper.

The market will make its adjustment. I will carefully evaluate the rotation over the weekend for any hints of change. Then the market will move on again. Time wise, the bottom should be close at hand. Price wise, the S&P 500 Index tagged the 20-week future line of demarcation yesterday for the first time since the correction began. Reaching that line usually satisfies the sellers:

The task now is to confirm the intermediate low when it is firmly planted, and then we can take the next cycle from there. The price has met the minimum 20-week objective, so the question now is will that be enough.

I am always suspicious of news-driven sell-offs like yesterday, which are more akin to liquidation breaks than fundamental declines. It is a bit more complicated when a liquidation break happens in the middle of a correction already underway.

Since the NASDAQ 100 led us down, it should be the first index to confirm a low. I will be watching that carefully in the next few sessions.

Today’s Day Trading

I don’t typically day-trade on Fridays due to the complications provided by weekly options expiration. However, respecting the S&P 500 index, the Weekly Expected Move high and low are way out of bounds today, so they are unlikely to influence the market.

The employment numbers for February were better than expected, at 379,000 versus the consensus at 175,000. Remember, there is a sea change at hand. Good economic news is now bad news for the markets because it could mean more inflation, higher interest rates, and a potentially unfriendly Federal Reserve soon.

Yesterday’s regular session represented a breakdown from balance. The low end of the previous balance area had been about 3805. Acceptance above this area puts yesterday’s breakdown into question and has the potential to reverse the current negative tone as more buyers join a rally.

If the open is faded and there is no further advance into the balance area above 3805, then the bears likely retain control for now. Other key levels are the overnight high at 3782.50, settlement at 3772.25, and the overnight low at 3720.25. Look for the reaction at these levels, and monitor for continuation as the market breaks them either higher or lower, as the case may be.

A.F. Thornton

Founder's Trading Journal

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In the land of make-believe, everything must be perfect – or there will be no milk and honey. It is a good day to be in cash, as interest rates and the bond market went on a rampage after Fed Chairman Powell signaled a “tolerance” for “upward pressure on prices” and “patience” for the rise in 10-year rates he “admitted” to having “noticed” recently.

Clearly, Chairman Powell has enough discretionary income to tolerate higher prices for everything. The average person doesn’t. With those statements, the dream world for the stock market we have enjoyed since last March ended. Remember this day, and remember it well.

All bets are off now, though the markets will continue to offer us trading opportunities. Why the bond market revolt? Governments have a poor history of containing inflation once it is out of the box. What the market anticipates is a coming change in Fed policy.

A smart Fed cannot be so accommodative and will need to reverse course, taking away the punch bowl at this party. A dumb Fed will continue current policies and start the road to oblivion, the one that eventually caused the collapse of the German Mark in the 1920s.

Short-rates are already close to zero, so lowering rates further is hardly an option to appease investors. The Fed can “twist” the bond market, selling short-term bills and buying longer-term notes. The Fed can double down on quantitative easing as Australia did over the weekend. But then where does it all end? When does the Fed take the punch bowl away, and at what price?

Think back to 2018. The Fed attempted a return to “normalcy” by easing its balance sheet and raising rates a couple of times. The stock market went into a 20% correction that August, putting President Trump into a tizzy. The market did not bottom until Christmas eve. The equity markets are more overvalued now than they were then. If the Fed now doubles down on the easy-money policies and continues to print money, where will the market go when the music finally stops? From what level?

You see, it is damned if he does and damned if he doesn’t. For the moment, thank heavens we still have enough of a free bond market left to wake Powell up. I sincerely hope he takes the red pill. It will be a rocky road into the next Fed meeting, scheduled for mid-March.

Hat tip to the NASDAQ 100, it saw this moment coming. That is why it has underperformed so significantly these past few weeks, leading the rest of the market down. Hat tip also to oil, up nearly 4% today while everything else is red. You see, oil loves inflation. Gold, not so much. It is down with the rest of the market. Gold raises currency complications – we will need to sort that out in the coming days.

In the meantime, it is nice to be in cash today. I gave it my best shot catching the volatility of the past few weeks, but I was smart enough to throw in the towel yesterday afternoon. Small profits are better than losses. I bailed yesterday on the WWSHD signal. When what should happen doesn’t.

Stay Tuned,

A.F. Thornton

Founder's Trading Journal

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My first thoughts this morning were to let me off this “Merry Go Round.” We stopped out of all our positions yesterday, setting the morning low as our line in the sand. In the interim, I had turned a large profit on Monday into a small profit by yesterday. Therein lies the challenge of trying to swing-trade a choppy and volatile market. Day-trading has been easy, if not almost euphoric.

And it truly has been a veritable Marry Go Round for swing-trading. As you can see from the daily chart of the S&P 500 index below, we have made two wide and volatile swings between 3800 and 3900 in less than a week. That is just under a 5% trading range. While we have well north of a 100% return year-to-date, I don’t see how any of you can keep up with the trades unless you are parked in front of the computer. Swing-trading normally has fewer round trips, and we have already had more round trips than last year, and last year our return was almost 900%.

There is a saying for everything in the market. Here, we call it the “choppy top of the bull.” But is this truly the top, as many have called? I would venture that this could be part of the topping process for an intermediate correction. As for the mother of all tops, I still don’t think so.

I remain convinced that we merely reached the top of the 20-week cycle – and we are experiencing the bottoming process of a normal and healthy correction. The problem is that the cycle has such a wide time window to bottom – all the way to March 15th. That is why cycles only give us a target zone – the bottoms vary too much in time to trade with precision. But knowing this is a 20-week cycle zone, as opposed to an 18-month, is still helpful in not getting too bearish on the possibilities.

What we have encountered here is a simple math problem. The market is not dead – it is rotational. While the FANGMAN stocks – a small handful of tech/growth companies – carried the entire market on their backs for most of last year, we now get to experience the reverse effect. They are disproportionately and negatively impacting the indices as profits are taken and rotated into the more cyclical, recovery-oriented stocks. Energy, financials, basic materials, and industrials have all been positive, while tech and communications have suffered the profit rotation.

But the aforementioned positive sectors don’t have enough capitalization weight to keep the indices positive. The NASDAQ 100 suffers the most. The S&P 500 does a little better than the NASDAQ 100 but still suffers. The Dow Jones Industrials – the old “price-weighted,” stalwart index – tends to do the best. The Russell 2000 small-cap index does well because it is not weighted at all and has a great representation of regional banks. Having said that, in a pinch, the Russell 2000 will suffer liquidity issues when you need to exit, exacerbating losses. So there you have it – the math problem.

For a better understanding of the cycles, take a look at the chart below. I have isolated the cycle algorithms that are built into the main Navigator Algorithm:

Email me at info@bluprinttrading.com if you want a larger, more detailed version of the chart above. It illustrates the dominant cycles’ current position, demonstrating that the 20-week low is due here soon. It could bottom today.

The most notable line on the cycle chart above is the dotted yellow line towards the top. The computer creates a composite of all the dominant cycles and then projects the market’s path. As you can see, the computer is projecting an intermediate top soon.

An intermediate top is not necessarily the end of the bull market, nor does it predict a crash. It simply projects a peak of the 18-month cycle towards April and a bottom towards the end of the summer. This could end up being a normal correction. I suspect that will be the case, as many other indicators show that we are at the beginning of a new, secular bull market, not the end. Only time will tell, but the market certainly needs to correct.

That brings me to my last point. We tend to think of the markets in terms of up or down. Yet, the markets spend the vast majority of their time going sideways. I would not be surprised to see the market get stuck in a trading range for a while. As an extreme example, the Dow index traded between 500 and 1000 from 1966 until 1982. Trust me; it happens in both macro and micro time ranges.

For now, I will attempt to reduce the number of trades as much as possible while still trying to capture some profitable swings. Until the market is clearly trending again, you will have to stay vigilant for alerts to keep up with the strategy. Incidentally, our infrastructure to expand the Founder’s Group (beyond BluPrint’s founders) is beta testing successfully and almost ready to launch. Automatic text alerts are part of that infrastructure.

Today’s Day Trading Plan

Yesterday’s late-day structure and close indicate emotional selling and poor location for many shorts. Early trade has the potential for an opening drive higher.

Should it be lower, I will buy the high of the first one-minute bar or a cross back through the open.

Rejection back out of yesterday’s range would be less bullish but tricky as we are so far off the Globex low. I would let sellers have their way for a bit before trying to short as high as possible.

I will be watching how value develops below the settlement at 3813.50 before looking at potential shorts. I will be trading from the framework that most of the overnight players are wrong and will use any weakness to cover. If they don’t, then we have important information to glean from that.

Note that we still have an unfilled gap. Overnight traders tested the Gap, but that doesn’t count towards repair unless done in a regular session.

A.F. Thornton

Founder's Trading Journal

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Unfortunately, we stopped out of all of our positions earlier today when we hit the aforementioned levels in the prior posts. So we are 100% cash, and I will regroup overnight.

Founder's Trading Journal

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Category Founder’s Trading Journal

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