Merry Go Round?

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

Merry Go Round?

AF Thornton

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Merry Go Round?

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