Category Founder’s Trading Journal

Founder's Trading Journal
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We just issued a Navigator buy signal to the Founders Group at 3835.50. Since we already have 6% allocated to XLF and XLE calls, that leaves a 96% position for the S&P 500 index. As always, do your own homework and make your own decisions.

Given recent volatility, these positions could be very short-term compared to normal, swing-trading holding periods. So if you are keeping track of my decisions, stay attentive to your emails or check this website periodically.

Founder's Trading Journal
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Navigator Algorithms – 97% Cash – 3% XLE

It is time for another deep dive. This weekend, I will be covering the shifting relative strength of small caps and international markets. As you can see from the chart below, we are in the early stages of these relationships turning positive (shaded areas are recessions).

The steepening yield curve, strength in oil and commodity prices, weakening dollar, and an eventual reassertion of the uptrend in gold contribute to these relative strength shifts. 

In addition to the XLE, the financials (e.g., XLF), particularly banks (e.g., KBE),  are poised to benefit from the steepening yield curve. The inflationary pressures also stand to support relative strength in the materials sector ETF (XLB).

The short-term problem is that we are still dealing with an overbought, euphoric market trying to pass through a 40-week cycle correction zone. I will sort through the issues over the weekend, but you can see my thought process and potential investment targets.

For now, the Nasdaq 100 led us off the bottom of the Reddit downdraft, but the breadth is narrow, and the other major indices are not confirming the recovery as yet. Man cannot live by tech alone, as I often say. Of particular concern are the lagging Dow and Transports. Another schism to be resolved over the weekend. 

Morning Plan

As to the core S&P 500 index and Navigator Algorithm, the value area was unchanged yesterday, signaling that the recent higher prices are being accepted – albeit with significant breadth concerns and non-confirmation of all major indices. The gap below us remained unfilled yesterday, another sign of strength.

The market will open within the past three days’ range, with prices very close to the overnight high. Regular session sellers were muted on yesterday’s expected liquidation break, and sellers also failed to take control overnight.

So the path of least (or perhaps lesser) resistance remains higher, with the breadth caveats mentioned above. Remember, a break above the February 2nd high will be a breakout from two days of balance and could trigger a Navigator buy signal. A look above and fail would bring us back to the lows of the past few days around 3800 and potentially into the unfilled gap from there.

With cyclical down forces in place until mid-February, we are still in a caution zone for swing trading, though I will continue to take advantage of the short-term swings in the Founders Group.

Despite the generally overvalued, leveraged, and euphoric market, opportunities are everywhere beneath the surface.

Founder's Trading Journal
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Navigator Market Algorithms – 100% Cash

Pre-Market Outlook

Navigator Core Algorithm Status

While the short-term bias is up, I am expecting a liquidation break sometime in today’s session. There is a FOMO (fear of missing out) piling on effect with very little long liquidation in this run so far. Overnight trade was balanced with a small distribution that is very wide right at the volume point of control from yesterday around S&P 500 3829. 

As traders seem comfortable with these higher prices, we could easily see more backing and filling in the regular session around the POC (point of control) area. If so, set targets and stops smaller and look for responsive trading today. There is no potential for a change in tone unless the potentially unfilled gap comes into play. Outside of that scenario, my bias is long.

Founder's Trading Journal

Some Musings

AF Thornton 0 Comment

Navigator Alogorithms - 100% Cash

I have mentioned several times in these pages the uneasy feeling I have been experiencing since I woke from an induced coma in July. Granted, a freak allergic reaction that required intubation for three days on a respirator left me a bit disoriented. And it was quite an experience to awake in a hospital after I thought I had been crouching in the corner of a dark room in front of what I thought was a movie screen. In short, I thought I was dead, an experience I hope to share one day. 

The uneasy feeling, however, has not left me. It is as if I woke up in an alternate universe. The steroids they give you in the circumstances inhibit sleep. After I emerged from the coma, I was up for four days straight, watching the BLM and Antifa riots unfold all day. When you can’t sleep, read or surf the Internet due to anesthetic amnesia, you end up watching the same shows repeatedly at night. Echoes of Orwell’s “1984.”

On one night, Israel (or someone else) was taking out Iranian nuclear facilities. The next night one of our destroyers apparently was nose to nose with a Chinese destroyer in the South China Sea. No doubt the steroids and other medications enhanced the experience, but the news on television seemed dystopian nonetheless.

Sure, this universe is similar to the one I left, but there are certain quirks, just enough to make me suspicious about where I landed. The feeling is like riding in a falling elevator, but it never stops on a floor. If you have ever seen the show “The Man in the High Castle,” – it somewhat describes this new universe. In the show, Germany and Japan win World War II. The show is set in an alternate America in the early 1960s, dominated by Nazi Germany and Imperial Japan. That is how it feels to me here. No offense intended to those of you born here.

Perhaps the crescendo comes next week. This universe is headed for a dangerous (and I believe) unconstitutional impeachment attempt. In fact, the constitution is being shredded so fast you will be lucky to remember it. Can you really imagine if a precedent is set to impeach and castrate a despised opponent after they leave office? What comes next? 

Then I ask myself, If your Trump was so resoundingly defeated in the popular vote and Electoral College, what is the establishment so scared about? If he runs, can’t they just beat him again? Shouldn’t his next defeat be even more decisive after the left implements their new, utopian, and outstanding programs? Won’t all of you feel better after you sock it to those billionaires and corporations with new regulations and taxes? Think of all the new jobs!

While we are on the subject, what is with all the walls and soldiers around the Capitol and related buildings? We did not have that where I came from. I thought walls didn’t work in this universe – like on your southern border. Maybe all the people cheering these new, popular programs and taxes have too much enthusiasm. With all the rock stars in Congress, security is needed for this concert of bliss. After all, you haven’t seen the population this happy in such a long time!

If I even give some credence to the assertion that the election here was manipulated, it is not a big step to seeing the rest of this story unfold. It would seem that the election was an important part of a much larger and longer-term plot. The victors are not behaving like winners, but maybe that is part of the distortion that makes me uneasy in this new paradigm.

By not stopping the summer riots, the folks here conceded that mayhem was the new normal. By letting the rioters free afterward, without charges, good people all around lost hope. Don’t worry though, 177 Trump protesters at the capital have been jailed and are facing 10-years in prison each. Where I came from, we tried to dispense justice equally. We had this statue of a lady balancing scales. This is what I mean about this universe. It is similar, but with these twists. Here, justice is different depending on your caste, class, party, or who you know. 

I also find it interesting that the names of all the deplorables caught up in the riots are widely published, but I can’t find the names of the anarchists who obviously pre-planned the Capital breach? I cannot find the names of the Antifa or BLM protesters either. All but one have remained anonymous. The true organizers of the Capitol riots have never been charged, including after the January 6th ‘insurgency.’ Even your New York times acknowledge their existence. Where I come from, we would say the “fix” was in. This is what I mean. Everything kind of looks the same here, but there are weird twists like this. 

The other day, I was trying to find the name of the officer who shot Ashli Babbit, one of the Capitol protesters who died. I guess it is a secret. That is unusual because when I first got here after the coma, they were publishing officer names left and right. I learned the police were bad, and you needed to defund them. 

But now I just learned that an officer who died in the protest would be laid out and honored in the Capitol right before the impeachment trial next week. Bless this officer for his service – and this is definitely a step in our direction. But the schism in how these officers are treated here is another anomaly. I am also wondering why they waited for this display until right before your impeachment trial?

Does anyone have any idea who led the charge into the Capitol building? Has anyone from your 2008 Financial Crisis been arrested? Have they been charged? Are they in jail? Have their Lear Jet parking fees at least been raised?

In this alternate universe, free speech – the hallmark of the America I came from – is under vicious assault. Average people supporting traditional values are being labeled as insurrectionists. Reporters on the leftist channels are taking lawmakers through “struggle sessions” to coerce them to adopt the “party” line that there was no election fraud. Nothing to see here…

People I previously respected in my world are advocating (unapologetically) for communism here. The country here is drowning in lies. Where is Walter Cronkite when you need him? Our country seemed so simple – so innocent. Here, I see friends set against friends and family members against one another. Children are turning their parents in for attending the Washington D.C. protests. In my world, we saw this in Mao’s Communist China.

We used to believe that the establishment actors in Congress were just incompetent losers and fools. But here, I watch in horror as they get away with every outrageous ploy. I am confident you will never see indictments for the Russian collusion plotters or the Ukrainian impeachment sham. Corruption is the soup de jour across party lines here. Frankly, I wouldn’t trust anyone in power here. Attorneys General, White House Chiefs of Staff, the FBI, the CIA, and the Justice Department are impotent at best. At worst, your leftists have taken full control.

One other quick gripe – we hid under our desks in my universe for nuclear drills when we were kids.  We hated communism. Yet here, communism is coming in through the front door with no shots fired. It appears you will be surrendering your sovereignty to the globalists’ Great Reset. It would all sound like a conspiracy theory in my old universe, but I am running out of them here because they all come true. We call these bad dreams, but at least in my universe you wake up and it isn’t true.

As to the financial markets, my friends over at Kimble Charting Solutions have a way with words and charts, as you can see above. Some short-covering over the past few days gave us an awesome bounce off the 50-day line. We have only seen the 50-day line three times since March. With some follow-through, we might stick our toe back in the water. The market could be in a blow-off stage bubble, at least short-term. Alternatively, maybe everything is just fine. I am not sure how to interpret it in this alternative universe.

Where I come from, we would be really, really careful here. It is a giddy, strange crowd out there. A bunch of mad people have been buying stocks on Reddit – to punish Wall Street and Hedge Funds. Their loyal broker, Robinhood, apparently worked under cover. You see, they were actually Wall Street themselves after all. The wolf in sheep’s clothing. Where I come from we like to buy stocks to make a profit. We protest in other ways. Anyway, I am learning the nuances here. But I am still going to be careful.

Thanks for allowing me to ramble a bit – I needed to get this off my chest. We will leave it there for tonight. I will dabble in the technicals tomorrow.

What I can say for sure now is that buy and sell signals will come more often in this volatility. Holding periods will be shorter. You will have to be attentive if you participate – this is a fast market. I wouldn’t blame anyone for sitting this one out for a while. 

Then again, perhaps you are all used to this behavior in this universe. In mine, it would be considered a high-risk environment.

A.F. Thornton

Founder's Trading Journal
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Navigator Algorithms – 100% Cash

The market is looking to gap higher this morning, adding to yesterday’s short-covering rally. Technology stocks are leading so far. But with trader inventories heavily skewed long, there is always the potential for early correction this morning, and then we will see.

Typically, the market will turn back lower from this zone to retest the Sunday night lows before we confidently call this correction over. Time-wise, the cycle trough does not pass until mid-February. So the jury is still out.

At least for now, the frosting is off the cake, but we have no clear buy signal. Volatility remains higher than normal. On a positive note, the 50-day line provided support, and we have not often visited that line since the March 2020 low.

If you are trading this, be careful. We await our next buy signal, so stay alert.

A.F. Thornton

Founder's Trading Journal
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Navigator Algorithms - 100% Cash

Looking at January, not to mention last week, what we can say is that the market rejected further gains above December’s high. Of course, this also means that we are coming back into the megaphone channel and dropping below the weekly wedge pattern. 

From a weekly perspective, the market rejected four weeks of gains last week, ending January essentially flat. This leaves the broad market flat for the year.

As the saying goes, “so goes January so goes the year.” It is a nice saying but unsupported by actual statistics. Nevertheless, the market sorely needed to digest recent gains and work off the froth. GameStop risk (with counterparties behind the curtain) triggered the sell-off and reminded investors just how leveraged this market is (with record call options) and how it might behave when you roll the tape backward.

Does that mean this is THE top or a major top? Of course, I don’t know but reverse “V” tops are rare. Topping is a longer process, at least in the absence of an exogenous event. For now, I am viewing this as a first down leg, which may turn out to be part of the topping process for a deeper intermediate correction that ends mid-February. Outperformance by defensive sectors last week underscores that opinion. 

But as I have stated, a major market top would more likely present towards the end of spring based on the predominant, 18-month cycle. Between now and then, the topping process could involve a lot of lateral action, meaning the January high would not be exceeded. We are in cash for now, and we will remain on bottom watch, culling through our lists.

On a positive note, the Navigator core model was up 55% for the month. We were stopped out of my brief foray into the XLE Friday, though oil held its ground firmly. Unfortunately, the XLE got caught up in indiscriminate selling associated with the GameStop hedge fund fiasco. The hedge funds, along with some banks, clearing firms, and other counterparties, were forced to sell other securities to maintain short positions and cover margin calls. With Robinhood further limiting sales of up to 50 securities, market participants got spooked and fled to cash.

My initial target of 3650 on the S&P 500 futures has been tagged tonight, and the market bounced. At this writing, the S&P 500 futures have reclaimed 3700. That is a net positive, as are the fear gauges showing that a short-term bottom should be close at hand. At least some of the froth is off the markets for now. Further gains will depend on what the Europeans do later tonight. At least the Asians are buying.

Notably, the Weekly Expected Move based on Friday options expiration has nearly double from last week, with the low end of the range at 3600 and the high end near 3900. Clearly, market makers are expecting considerable volatility this week, given a 300 point range.

I would expect the market to bounce here, then fail about halfway back before moving down into the next nominal 40-week cycle correction slated to trough around February 15th. We should zig and zag a bit until we finish. As pointed out in the 2021 outlook video, 3500 is looking to be the worst case for now – and we would be lucky to tag it for a nice, bottom entry point. I always keep an open mind about all possibilities and will continue to trade what is in front of us, regardless of forecast and opinions.

Given the systematic risk associated with the GameStop phenomenon and the high correlation right now among all S&P 500 sectors, I don’t expect energy stocks to counter the market forces, even though oil is performing well. So we will use a more generalized market bottom to reenter this important sector and inflation hedge.

Next week is the impeachment trial, and rancor dominates Washington, D.C. The Reddit crowd is now setting their sites on silver. So the road ahead will be rocky for a while, and the markets are likely to reflect the same.

As always, stay tuned.

A.F. Thornton

Founder's Trading Journal
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I grew up in “America as Founded.” Get used to hearing that new phrase, as it defines the “us” versus “them” (communist revisionists) mentality enveloping the cold, civil war in this country. Having grown up as such, and with traditional education, we were required to read books. One of those books was “Animal Farm,” by George Orwell. Upon reflection, Animal Farm seems the more appropriate analogy to our current demise than Orwell’s equally prescient book, “1984.”

Animal Farm was the story of the struggle between the animal kingdom and humans. Anyway, Snowball – an intelligent, though bit detached from reality pig, who shared the power with Napoleon and Squealer right after the Animal Revolution, came up with a short phrase to describe the animal community’s Seven Commandments issued by Old Mayor. The commandments were too long and too hard to understand for most of the Animal Farm (like the political mechanism or stock market is purported to be too complicated for the “little people” in our time). So, comparing the animals to people, Snowball came up with the simple phrase “Four Legs Good, Two Legs Bad.”

Snowball lets the least intelligent animals like sheep learn this phrase by heart and take it as their motto. He is right somehow: the pigs had to build their government and spread the ideas fast. They didn’t have the time to teach everyone to read beforehand. This phrase protects the farm population from the outer enemy – the humans who oppressed them and had two legs. Humans are bad, therefore not allowed to rule over the Animal Farm. But this simplification backfired spectacularly. The animals were perfectly protected from the enemy from outside, but when Snowball’s conflict with Napoleon reached the climactic point, he was proclaimed the “inner enemy” of the Farm.

The very existence of Snowball and his henchmen now allows Napoleon to change the Commandments, pretending that it is needed for the defense of the Farm. Snowball (who is long dead by that time and analogous to Trump exiting as President) becomes an excuse to do anything. Moreover, when Napoleon sees that the Commandments’ minor changes go almost unnoticed and is perfectly capable of shutting up the rare ones who protest, he changes this very phrase. Now it’s “Four legs good, two legs better,” and the change is made when the pigs start walking on their two legs. Orwell uses this image to mock the leaders of the Communist party who nominally were equal to any other citizen. Still, they lived in luxury and had almost unlimited power to use and oppress the rest. Sound familiar?

While not the most perfect introduction to the concept of corrections, most corrections have two legs. They have the first leg down like Tuesday, then a pause for a few days. The correction usually resumes to complete a second leg down equal to the first to finish the decline, and the market resumes its course. This type of correction is normal, healthy, and preferred. If that were to occur now, the chart below illustrates the possibility. The 100% projection of the first leg down is in the 3667 range on the S&P 500 futures chart below:

There is another type of correction. One that is more insidious. It is a correction with three, or, heaven forbid, four legs. That is where the market gets in serious trouble.

I am not expecting a three or four leg correction here. It is not really due cyclically. Believe it or not, the cycles and corrections, in magnitude and scope, are reasonably predictable.

I never cease to be amazed that people like George Orwell or Ayn Rand could have such a vision about how the future might unfold more than 50 years after their writings. Over the past few days, individual Reddit and Robinhood stock traders are now “stock insurrectionists.” Unbelievable! Add this slander to the new Orwellian description for those who question election fraud: “election denialists.” In fact, the elite power brokers are even saying that the “election denialists” are some of the “stock insurrectionists.” This is pathologically outrageous!

So what is the moral of this story? These elite idiots sent us all home for a strong political power grab. Maybe that was not such a great idea. The hedge funds have been raping common people for years. They have no scruples whatsoever. But they financed the election of the new regime in Washington D.C. It is not difficult to predict that the hedge funds will get anything they want.

This latest oppression by the ruling elites will leave the Country further divided. Even more shocking, Janet Yellen, the new treasury secretary, will be in charge of solutions to stop the stock insurrectionists. The very losing hedge funds whining and requesting “protection” have paid Yellen millions in speaking fees. Shades of Hillary Clinton’s Wall Street speaking fees, right? The fix is in. I hope I can still trade and do what I do. Worst case, we start a hedge fund.

If you want to know how Wall Street, the Financial Press, and the Hedge Funds really work, read this award-winning expose by Mark Mitchell from the mid-2000s.

For now, and for the correction at hand, I agree with Napoleon from Animal Farm. Four Legs Bad, Two Legs Better!

A.F. Thornton

Postscript

To understand the Reddit phenomenon, read this open letter from a Reddit trader to Melvin Capital, one of the Hedge Fund whiners losing money:

I was in my early teens during the ’08 crisis. I vividly remember the enormous repercussions that the reckless actions by those on Wall Street had in my personal life, and the lives of those close to me. I was fortunate – my parents were prudent and a little paranoid, and they had some food storage saved up. When that crisis hit our family, we were able to keep our little house, but we lived off of pancake mix, and powdered milk, and beans and rice for a year. Ever since then, my parents have kept a food storage, and they keep it updated and fresh.

Those close to me, my friends and extended family, were not nearly as fortunate. My aunt moved in with us and paid what little rent she could to my family while she tried to find any sort of work. Do you know what tomato soup made out of school cafeteria ketchup packets taste like? My friends got to find out. Almost a year after the crisis’ low, my dad had stabilized our income stream and to help out others, he was hiring my friends’ dads for odd house work. One of them built a new closet in our guest room. Another one did some landscaping in our backyard. I will forever be so proud of my parents, because in a time of need, even when I have no doubt money was still tight, they had the mindfulness and compassion to help out those who absolutely needed it.

To Melvin Capital: you stand for everything that I hated during that time. You’re a firm who makes money off of exploiting a company and manipulating markets and media to your advantage. Your continued existence is a sharp reminder that the ones in charge of so much hardship during the ’08 crisis were not punished. And your blatant disregard for the law, made obvious months ago through your (for the Melvin lawyers out there: alleged) illegal naked short selling and more recently your obscene market manipulation after hours shows that you haven’t learned a single thing since ’08. And why would you? Your ilke were bailed out and rewarded for terrible and illegal financial decisions that negatively changed the lives of millions. I bought shares a few days ago. I dumped my savings into GME, paid my rent for this month with my credit card, and dumped my rent money into more GME (which for the people here at WSB, I would not recommend). And I’m holding. This is personal for me, and millions of others. You can drop the price of GME after hours $120, I’m not going anywhere. You can pay for thousands of reddit bots, I’m holding. You can get every mainstream media outlet to demonize us, I don’t care. I’m making this as painful as I can for you.

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