Morning Notes – 8/11/2022

Good Morning:

• We will be in the Trading Room today.
• Today’s DEM shows less volatility than yesterday, at 30 points plus or minus yesterday’s settlement at 4210. That means the options market set today’s range at 4180 to 4240.
• But the market is slated to Gap higher again today at the Open, just above both the DEM and WEM highs. The WEM remains between 4060 and 4235.
• So Gap Rules apply again today. Remember that due to yesterday’s and today’s Gaps, the market structure is very weak underneath us and subject to large liquidation breaks, even if the price action is otherwise bullish. The market is also short-term overbought.
• Note that yesterday’s 4210 settlement is close to the 4211 target discussed in yesterday’s note and my most oprimistic target from the June low. With two gaps in a row, the moves could be so-called “breakaway gaps,” preceding a melt-up.
• And why not a melt-up? Nothing else makes sense or is normal these days. That is why I have been calling it the “pain” trade.
• But keep an eye on the bond market and VVIX – both of which are challening the stock-market rally.
• Both inflation reports, consumer and wholesale, have now beat expectations. This morning’s wholesale report eased month-to-month, but continued to show high, persistent, year-over-year inflation at 9.8%.
• The job numbers also beat expectations this morning, with initial jobless claims at 262,000 versus a forecast of 264,500.
• With yesterday’s Gap, the market managed to thrust back above our key bull/bear 5-day line and Algo trigger, which we will continue to lean against for longs.
• At this writing, resistance today is at the DEM high at 4240, then 4250 and 4275. Support is at 4210, 4200, and 4180. Major support is 4140 and 4120.
• Always remember that as price breaches a support/resistance level, it reverses polarity.
• Back at the June low, my outside, most optimistic target had been 4211, and that number was achieved yesterday. 
• From current levels this morning, we are in an air pocket and no-man’s land. The next major target would be the 200-day line at 4325. We have already achieved the WEM high this morning at 4235, so the options market does not allow for much higher prices until next week.
• We have been on plan from the June low at 3639, breaking above the 6-month balance range and our June monthly candle high at 4189 yesterday. I need a new plan from here – which I will formulate in the next few days. 
• At the moment, we are in no man’s land. The bear is still intact unless or until the S&P 500 finds acceptance above 4325 – also the 200-day and primary downtrend lines.
• And if this is the “2” wave retracement wave of the bear, it will suck a lot of investors back in only to viciously repel them in the “3” wave.
• A “3” wave is the most vicious of all the bear legs. “2” waves have a way of convincing investors that the worst is behind them – only to rob investors worse than the first leg down. In 1929, it is said that the second wave down into 1934 was the “Rich Man’s Crash” because the rich avoided the first crash leg, bought the dip and then got dumped even more vciously in the next wave down. 
• What you are observing is the most hated kind of rally that money-managers experience. The fundamentals say “no,” but FOMO says “yes.” Money managers in cash, and a lot of them, missed this entire rally and may be poised to throw in the towel and drive it higher.
• As I mentioned yesterday, the easy gains are now behind us. We will continue to use the 5-day line as our bull/bear threshold, favoring longs above and shorts below the line.

 As always, stay tuned.

A.F. Thornton