Pre-Market Outlook – 5/7/2021

Pre-Market Outlook – 5/7/2021

Friday Morning, May 7, 2021

There are afternoon drives, and then there are afternoon drives. Yesterday afternoon looked like a Range Rover conquering Mount Everest at 100 m.p.h. All the bears remember is looking up at the tire treads as they got run over. And thus begins the 3rd (and perhaps final) run from the March lows, before the summer doldrums and fall correction sets in on the larger, 18-month cycle. This run is the 3rd push higher and the fifth wave in Elliott parlance, confirming our suspicion that the consolidation from April 19th through yesterday was part of a 4th-wave correction/consolidation.

Confirming that the shorter, 80-day cycle low is firmly planted, the NASDAQ 100 is pivoting (with relative weakness) from its 50-day line. Normally, the S&P 500 tags its 50-day line as well on the nominal 80-day cycle low. Instead, the index pivoted from the 21-day line. The S&P 500 did not tag its 50-day line, another bullish WWSHD (When What Should Happen Doesn’t). Added to a historic (never happened before) 13-day winning streak in the S&P 500 a few weeks ago, the price action can only be interpreted as extremely bullish, at least on the surface.

The S&P 500 also cleared its 5-day line yesterday afternoon – which is a “heads up” to a buy signal on the Navigator Intermediate-term swing strategy. My guess is that we will move through the trigger line today or Monday, solidifying the buy signal. I would have preferred more curl in the trigger line to bring us in lower than the old highs, but it is what it is. Also, I do not expect much progress today above the Weekly Expected Move (WEM) high at 4215 – as that is where weekly options expire at the close.

I was an aggressive buyer on the afternoon lows yesterday, but I was sweating bullets all the way. I practically wanted to pull a blanket over me and hide under the covers until the close. Maybe I was too aggressive. I often say, though, if it feels good, it is likely not a good trade. But it is definitely strange to be benefitting from breakouts in Dow stocks like Deere (DE) and Caterpillar (CAT). And the breakouts make sense in light of potential infrastructure spending ahead.

As a side note, when you have a three-week consolidation, you will find many stocks in volatility squeezes. If you need a scan for such stocks, shoot me an email at info@BluprintTrading.com. You will get the best bang for your buck choosing these stocks and riding these volatility squeezes as they fire long in a new rally.

Let me also identify two additional notables from this week and the last few sessions. First, the put/call ratio has spiked several times since last Friday, indicating too much short-term fear and that shorts could be easily spooked. That had a lot of influence on my aggressive actions yesterday afternoon – as the level spiked to .68, which has been the high end of the range since the March 2020 lows. If the market does not dip to accommodate the shorts by the close, they will cover, and that is what gives us the explosive rallies such as we saw yesterday afternoon.

Second, I cannot emphasize enough the influence of the Weekly Expected Moves (WEM) in the major indices. That is why I am constantly harping on the subject. This week, the WEM lows caught and saved both the NASDAQ 100 and the S&P 500. Market makers have to defend those levels or lose their proverbial shirts. Defend them they did this week. The NASDAQ 100 moved below its WEM low temporarily, but the market makers brought it right back so that their losses are minimized – if they have any at all – at expiration today.

Noting that these moves are influential, we need to look at the other side of that coin this morning. The WEM high in the S&P 500 is about 4215. That level may cap our gains today through the close, just as the WEM low cushioned the market earlier this week. 

One possibility is that 4215 caps us until the New York close, and then the futures will shoot higher in the short, post-closing session. Then, if all goes according to plan, it could make sense to hold longs over this weekend as there is a possibility that the futures will gap open Sunday night and Tuesday morning, no longer constrained by this week’s options expiration.

All of that sounds bullish. But lets at least look at the other side of this briefly. The more bearish case is that we stay stuck in the balance range and make another run lower. It is possible but less likely. All the reference points appear below.

Whatever you decide to do today, or on an intermediate-term basis, be cognizant that the risk in this market is as high as I have seen in my 34-years as a professional. Use stops, spreads, and whatever else it takes to protect your capital. For day-traders, your disaster stop is critical.

Morning Plan

We will open with a solid gap higher after a late day spike,  putting both spike rules and gap rules into play. Click on both terms and get familiar with them as a framework for how early trade may play out. The overnight high is a new all time high (ATH) at 4914. 

As with any true gap, look for the counter trend move first (fade) and note how much of the gap fills if any. Spike rules will tell us bias in the slightly longer-term as they will define whether or not prices from the late day rally yesterday are being accepted or not. Note the outcome after today’s session.

Given the Weekly Expected Move high at 4215, and today is weekly options expiration at the close, do not be surprised to see a brick wall at 4215, which could take us sideways for most of today’s session.

Keep in mind the bullish implications of new all-time highs. There is no overhead resistance – as nobody is stuck above us in a bad location. In fact, it is the opposite. Shorts will be forced to cover – though it appears that they had their opportunity last night in the Asian session. 

Upside references today will be the WEM high and all-time high at 4214/4215 (13,529 on the Nasdaq 100). Downside references will be the Navigator trigger line at 4208; the roundie at 4200 (roundies and half-roundies are always key psychological levels); yesterday’s high at 4197.25; and the top of the single prints and 10-day point of control at 4180. I am bullish above 4180 , though I do not expect much additional progress today with the WEM high as an obstacle. We can (and likely will) move above the level, but I will be betting that the move will be temporary as market-makers defend 4215 until the New York close.

Since options expire at the close, one remote possibility is that short-covering and exuberance push the S&P 500 far enough past the WEM high that the market-makers are forced to buy futures to hedge their portfolio deltas. I have not seen this happen in a long time – but it is a possibility. It is a guess as to the level required to trigger this mechanism, but I would guess at least 50 points above 4215 could trigger the market-maker buys.

Have a great day.

A.F. Thornton

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.

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