Navigator™ Signals for Swing Traders View from the Top – Interim Update by AF Thornton Jun 4, 2021 0 Comment Every once in a while, the market likes to humble me. Yesterday, the S&P 500 bounced at the 21-day line as expected and returned to the 4195 area, where I was looking to get short. However, the market ran out of time – but still – so far, so good. Then the price recovered enough to negate the Algo sell signal mentioned yesterday morning – standing the probability on its proverbial head. The sell signal may yet return today.Nevertheless, the Founders Group honored our 5-day line stop at 4190, and the market failed to close above the 5-day line by the close. So I remain comfortable in cash at the moment. I am still looking to short rallies – but I am not getting aggressively short as yet. Yesterday, the S&P 500 managed to close inside its wider range (between 4215 and 4180). But the NASDAQ 100 failed to get back inside its analogous range.Former market leaders like Apple and Tesla continue to break down, which negatively affects the indexes. Bitcoin perked up a bit yesterday, but it is still throwing a pattern that typically points lower.On the surface, then, it would not seem that the picture is any more transparent today than it was yesterday. The S&P 500 continues to move sideways – and that can chew up premium if you are investing with options.Beneath the surface, the action continues to be about rotation. Rotation is healthy – correlation is not, especially on a down day. In thinking about how to illustrate this, I thought I would show you the positive extreme first: In the chart above, you can see that the XLRE Real Estate ETF continues to move above its May peak to new highs. That makes sense in light of recent inflation trends. On the opposing side, you can see from the chart above that the XLK Technology ETF has a lower peak than May. Given the lofty valuations, that makes sense too. The money rotating into the other sectors has to come from somewhere. Then you can see from the last chart above that the SPY S&P 500 index ETF is almost matching its May peak, somewhere in the middle of the two previous price charts. Stepping out then, we still have Communications (XLC), Energy (XLE), Financials (XLF), and Real Estate (XLRE) moving higher at the expense of our former leaders in Technology (XLK), Utilities (XLU), Health Care (XLV), and Consumer Discretionary (XLY). We find industrials (XLI), Materials (XLB), and Consumer Staples (XLP) are moving sideways with the S&P 500. With the pie chart below, you can begin to see how each sector influences the S&P 500 index. For now, the math is such that the aggregate of current sector performance moves the S&P 500 sideways. When I cannot achieve my goals in the S&P 500 index futures, I will look up the top 10 holdings of each sector fund that is moving. Because the ETFs are cap-weighted, I can often buy options on one or two top holdings to meet my goals. A good resource for this is ETFdb.com. It is vital to carry the current leadership forward, as trends tend to persist. Institutions have barely scratched the surface investing in many of these existing, leading “value” sectors and will likely reposition themselves further if the correction I am expecting materializes.I sketched a head and shoulders topping possibility in the NASDAQ 100 chart above. The pattern projects a low down to 12,200. I am not a huge pattern trader, as our brains look for them – even when they don’t exist. I will point them out when I see them, however.The NASDAQ 100 index has likely seen its lows for the week, bouncing off its Weekly Expected Move low yesterday. I see the same H&S pattern present in Apple (AAPL). If the design materializes, the S&P 500 might fall to the May lows in sympathy with the NASDAQ 100 – a target around 4050. I would speculate that these levels will establish the bottom of a new trading range. But again, I am guessing. Guessing is what we do while we wait for the market to do its work.I see the trading range possibility because, as yet, the market appears to be digesting current valuations – not rejecting them. The sentiment is neither frothy nor particularly supportive – almost dead neutral. We do have the cycle correction ahead, but there is no way to predict the depth or the exact start date. The dip could visit the 200-day moving average, an unpleasant journey to 3750 on the S&P 500. However, with the average in a nice upward slope, why not simply move sideways into the line over a few months of the summer?The linchpin in all of this is Federal Reserve policy. If the Fed eases up slowly, something they clarified yesterday, maybe they can engineer a soft landing such as I am describing. They made clear yesterday that they might slow up corporate bond purchases – but not treasuries. The market will find that palatable. Part of the market’s recovery yesterday was due to the Biden administration easing up talk of higher corporate taxes, offering a minimum 15% corporate tax instead. The market liked that too.Stay tuned, as the road ahead promises to be interesting.A.F. Thornton
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AF Thornton Website: https://tradingarchimedes.com A.F. "Arthur" Thornton is an expert in logic, risk/reward quantification, market fractals, pattern recognition and asset class behavioral analysis with 34 years devoted to developing algorithmic and quantitative trading systems. In addition to trading his own capital, Mr. Thornton designs custom algorithmic and quantitative trading systems for a small and exclusive group of exceptionally qualified traders.