Category Founder’s Trading Journal


Test 123

Pigs Get Fat – Hogs Get Slaughtered

Good Afternoon:

— The S&P 500, our principal investment vehicle, can easily ride higher on tech earnings this afternoon and the Fed’s decision to hold the Fed Funds rate steady tomorrow.

— Nevertheless, we have chosen to sell the last 25% of our positions acquired a few weeks ago at 4775 for 4951.50 today.

— We already discussed a mixed bag of internal weaknesses and inconsistencies in the last few blogs. The market is approaching the top of its ATR channel at 3 ATR – overbought by most measures. And a loose but bearish rising wedge pattern could cinch a short-term peak and pullback. 

— The risk/reward ratio is simply unfavorable to long positions. But we would not short the market quite yet either.

— We will stay neutral at 100% cash for now.

— The next few days will be interesting, with major tech companies reporting after today’s bell and the Fed decision and press conference tomorrow. As always. the past is prologue and forward guidance is the key.

A.F. Thornton

Reducing Positions

Good Morning:

— We sold another 50% of our recent position, 25% this morning at 4925.50, and another 25% at 4924.50 just a few minutes ago. That leaves us with a remaining 25% of the position we acquired at 4775 a little over a week ago.

— Our indicators continue to show some internal weakness. We tagged the rising 5-Day line pre-market this morning at 4880 and bounced before we put out our forecast. And the market reached down to 4895.50 after that, just above the 4895.25 stop set this morning. We continue to maintain the 4895.25 stop on our remaining 25%.

A.F. Thornton

Mixed Signals / Taking Profits

Good Morning:

— We sold 25% of our current position yesterday at 4930.25 as the market closed in on the Weekly and January Expected Move Highs set by the options market. These levels accurately cap prices most of the time for the referenced period. Accordingly, the January Expected Move High could be an obstacle to any more January gains past 4933.25. If the high is exceeded, January’s price is likely to close at or below the level by the end of the month.

— But we can count on the market to sputter around to help everyone doubt their convictions before it takes another spill like yesterday. There are many divergences and disconnected price relationships to support a dip, not to mention some pressure on interest rates and commodity prices (inflationary)

— And all the Black Swans still circle us as global tensions continue to rise.

— Without some positive light, we will continue to sell intraday rallies. And we have raised stops on our 75% remaining position to 4895.25.

A.F. Thornton

Sell When You Can – Not When You Must!

S&P 500 Continuous Futures - Daily Candles - Potential Trading Channel
S&P 500 Continuous Futures - Daily Candles - Potential Trading Channel

Good Morning:

— Our “armchair” M-Squares™ Economic Forecast operates from a simple model. As long as Junk Bond (JNK), Homebuilder (XHB), and Semi-Conductor (SMH) ETF prices confirm price advances in the S&P 500 Index, we want to be long. As long as the Dow Industrial, Transport, and Utility Index prices all confirm each other with higher prices, we are tickled pink to be long. And when the U.S. Dollar and the S&P 500 Index move in opposite directions – life is normal. Same with 10-year U.S. Treasury rates and technology stock prices opposing each other.

— What happens when these relationships shift, or send mixed signals? Generally nothing good. Since we are currently experiencing some of these mixed signals, and S&P 500 Index prices have reached the top of a potential channel line (even slated to gap open above the Daily Expected Move) we are selling 25% of our latest position at this morning’s NYSE Open, acquired when the S&P 500 Index tagged 4775 about a week ago. We will sell this first portion around 4925 (the price at this writing) for a 150-point profit into an overly enthusiastic crowd – likely to give us a little extra premium.

— The market may continue higher, at least into next week’s Fed meeting. Perhaps “Irrational Exuberance” has returned, and Artificial Intelligence is the new Dot Com. But I never worry about leaving something on the table for the next investor. Otherwise, there would be nobody left to buy, right? We retain 75% of our position though we are on pins and needles with it at this price location. Anyway, we love profits – and perfection likely isn’t possible.

— We are keeping our stops two ticks below the 5-day EMA on the remaining 25% of our position.

— As always do your own homework, but at least you know our thoughts.

Stay tuned,

A.F. Thornton 

Onward. Upward, or Look out Below…

S&P 500 Index Quarter Day Candles - Support, Resistance and Hourly Signals
S&P 500 Index Quarter Day Candles - Support, Resistance and Hourly Signals

Good Morning:

— We are still enjoying our last swing entries at 4775, yet guarded as this market continues to rip to new all-time highs.

— And the price is, once again, well above the daily mean.

— Our investment theory focuses on mean reversion. We know it will snap back like a rubber band, but we have to know at what price and when.

— I laugh to myself sometimes at all the coding and programming we create just to predict those moments.

— There is a simplicity to this if you can get in sync with the price and meld with it.

— There is a possible measured move to 4950 from the reversal pattern we identified a few writings ago.

— Price could consolidate a few more days or even retest the breakout at 4840 before reaching higher again.

— And in the background remains the measured move from the broad, cup and handle pattern previously discussed on these pages at 5600. But that will take time – likely months. 

— But 5600 is an eventual peak target should the market continue to trend higher. Of course, we could see a blow-off top reach out to that level quickly – a low-probability scenario.

— For now, make sure your stop is about two ticks below the five-day line and for sure at break-even.

A.F. Thornton

New All Time Highs and Then?

S&P 500 Index with Trading Archimedes™ M-Square™ Trading Signals for 2024.
S&P 500 Index with Trading Archimedes™ M-Square™ Trading Signals for 2024.

Good Morning:

— 2024 Market Swings are generating profitable buy/sell signals, but I would prefer less trading, especially on our Daily Strategy.

— Aggressive accounts closed the first short trade of the year (carried over from December 29th) on January 8th at 4744.50 for 83.25 points.

— The commensurate January 8th long signal closed on January 12th for 81 points at 4825.50.

— The commensurate January 12th short signal (for aggressive accounts only) closed yesterday for 50.25 points at 4775.25.

— Yesterday’s long entry has an unrealized gain of 60 points at this writing.

— This brings the YTD total points to 274.50 for traders taking both Long and Short signals. Long-only traders are up 141 points. Compare this to 49.5 points for someone simply buying and holding the S&P 500 Index.

— In futures dollars, then, our $13,775 per contract L/S gain and $7050 Long-Only gain compares favorably to $247.50 for the buy-and-hold investor. For options traders, the gains are closer to $10,331 and $5288.

— Of course, past performance doesn’t necessarily portend the future and the year is young. This gives us plenty of time for some disappointing trades before the year is up, right? And what a year 2024 promises to be! There is a 100% guarantee that nothing works 100% of the time. And we all know that if you live by the numbers you can die by them too. Still. enjoy the moment.

— The NASDAQ 100 has already moved to new all-time highs and the S&P 500 is poised to follow and finally test its all-time highs today.

— This test is unusual as today is Monthly Options Expiration. I would have predicted that the market would pin around 4800 where a huge amount of Gamma expires (4830 on the futures). It may still pin that level all day, keeping us on the edge of our chairs until Monday when the market is finally loose of the 4800ish options chain and gamma. 

— Our 4800 pinning forecast earlier this week helped our confidence in going long yesterday. But 80% of breakouts fail – which might be unhelpful to the odds today.

— Big picture, however, we pointed out the Cup and Handle breakout last December 8th, and the measured move eventually takes the market to 5400 plus. And there is a Head and Shoulders reversal pattern if the market breaks to new highs in the next few sessions that points to a 4840 target.

— The time element to achieve these big-picture price milestones is less predictable. Price might need to pound at new highs above 4840 a few times in the coming sessions before advancing. The short-term pattern would then resemble an ascending triangle. And price is over-extended at the top of its over-extended trend channel. So price might need time to climb the upper channel line to achieve the targets.

— It is rare to have everything always come up roses, so let’s set stops (at minimum) around break-even plus a few points or 4780.50 to allow for the pinning behavior expected today.

— And this market is not especially healthy with barely seven stocks (the so-called Magnificent 7) carrying all the returns. Either the soldiers present an opportunity to sift through some 2nd tier names slated to catch up. Or the Magnificent 7 will lead the market down to rip through the weak structure from the October 2023 lows and repair it.

A.F. Thornton

Sputtering Near the Channel Top…

We closed our first long trades for 2024 for a nice profit last week. We are back to cash and/or short (aggressive accounts) with a tight stop after the latest sell signal. Yesterday, the price sold down to the Daily Expected Move low and is opening below today’s Daily Expected Move low (4776) this morning after steady selling all night. The Weekly Expected Move low is around 4765, and might also be tested today.

So far in this shortened trading week, the S&P 500 is stumbling as we head into Friday’s Monthly OPEX, largely due to Fed comments, stronger-than-expected economic reports, and some ensuing pressure on interest rates. We have more Fed speakers and a few more key reports (e.g. Consumer Confidence) later this week, so expect volatility to increase as the week wears on. As we are now into Quarterly Earnings Reports and season, forward guidance could also throw a few monkey wrenches into the mix.

A large amount of options Gamma is set to expire this week at Friday’s Monthly OPEX, which can allow the market to move more freely. The main level to watch is 4800 for pinning until the significant Gamma gathering at that level expires.

Below that, there aren’t many supportive levels until 4700 and then 4600. The Gamma flip line is currently at 4750. If the price decisively drops below that, it opens the door for more volatility and the potential to test 4700 and 4600. There are large air pockets down to those levels so the price can move quickly. That would be the more bearish case.

On the bullish side, the price is above the Year-To-Date (YTD) VWAP and is currently trading above the YTD Low VWAP and below the YTD High VWAP. On a Week-To-Date/Daily basis, the price closed yesterday just below the Weekly VWAP.

For the bullish case, we want to hold the YTD Low VWAP and get back above the WTD VWAP. The bullish case would see the price move up to the 4800 pin and potentially make a run for the all-time high (ATH) after OPEX.

But the price is trading below the 5-day (Machine Line). The line is currently inclining, which is positive. But this is a key short-term level, the violation of which triggers stops on long positions. Another test of the 20-Day (Mean) lies below that.

The weekly EMs are still wide open. If the runoff in Gamma frees the market to move, I’d expect we will make a run for one of the weekly EMs – but whether it will be the WEM high or low is not readily discernable right now.

The CP Lie Inflation Report is Out – Sell the News?

CPI Report Comes In Hot?

Good Morning:

— Assuming anything the current regime says is true, inflation came in a little higher than expected. The U.S. Dollar and Treasuries strengthened on the news and the S&P 500 Futures weakened.

— This could very well be a “Buy the Rumor – Sell the News Event.” And that could potentially strike a double top in the S&P 500.

— Continued jobless claims reported less than expected – yawn.

— Inflation reports are the big news for the day and week. With retail inflation out of the way, wholesale inflation (PPI) reports tomorrow. Don’t forget that the January Monthly Options Expiration is Friday.

— The Expected Move for the day allows for about +- 32 points and there will be an incentive for Dealers to drive the price back below the Weekly Expected Move High at 4795.75 before Friday’s expiration. Dealers want to return prices to the Weekly Expected Move range where they can avoid losses.

— Local 0DTE (options expiring today) support is 4775 and resistance is 4800.

— Friday is monthly options expiration, as well as the normal weekly expiry. 

— We are moving stops up to 4801.50 for the Daily and Hourly strategies which is a few ticks below the Globex morning low (4801.50).

— If we get stopped out, we will reevaluate at the 5-day line.

A.F. Thornton

Raising Stops to Lock in Profits

S&P 500 E-Mini Futures Weekly Chart - Channels
S&P 500 E-Mini Futures Weekly Chart - Channels

Good Morning:

The S&P 500 E-Mini ripped through the WEMH (Weekly Expected Move High) at 4795.75 early this week to peak at 4804 on Monday. It was a rare, three-sigma move on the day, triggering buy signals in our Daily and Hourly strategies as announced belatedly in this Blog yesterday and live to subscribers on Monday. As with most first rally attempts after a pullback, the first run can be attributed to short-covering, and then we look for follow-through.

After the three-sigma run, Dealers and Market Makers brought prices back inside the WEMH by Tuesday, and prices have been moving sideways since. Essentially, prices are marking time for the big event of the week which comes tomorrow (Thursday) when the CPI report is released pre-market. So investors will be fighting Dealers for any ground above the WEMH at 4795.75 for the remainder of this week, and they have been somewhat successful thus far.

The current pattern on the hourly charts could be part of a BULLISH cup and handle or a flag for another leg higher. But it could also be a wedge to go lower for a test of last Friday’s 4702 low before a new rally can support higher prices. It would not surprise us to see prices test December highs at 4841.50 but from a 4702 retest. Perhaps the inflation reports will act as a catalyst to resolve price direction. All-time highs at 5028.25 could even be achieved before prices encounter the top of recent channels. You can find analogous levels to those quoted on the SPY ETF and SPX cash index. 

For now, whether prices can close above the WEMH before next week is an open question. Prices will encounter the usual resistance at a roundie (4800). The CPI and PPI inflation indexes will exert some influence in the next few sessions. It also pays to monitor transcripts of Fed Governor speeches this week for any Fed policy hints. Quarterly earnings announcements and forward guidance will begin to drive prices as reporting season gets underway this week. The 10-year Treasury Auction today will also be scrutinized for demand and the bid-to-cover ratio. 

As a side note, the DEM (Daily Expected Move) remains +- 21 for today’s session, and prices may GAP slightly higher at the open. But it will not be a True Gap above yesterday’s high, just yesterday’s close.

The best short-term strategy is to buy pivots from the 5-day line with a three to five-point stop. Then target the WEMH and/or stop runs above Monday’s 4804 high until the round trips stop working. Buy a true breakout above Monday’s 4804 high or short a true breakdown from the five-day line. 

Notably, prices manifested a double bottom near the 5-day line overnight in Globex, with the successful retest low landing just above the 5-day line at 4787.75 around 9:00 am EST. Work the ranges if you are day trading. We are raising stops to 4787.25 on our recent Daily and Hourly buys at 4760.75 to begin locking in profits.

The WEMH is not written in stone and Monday’s impulse through the DEMH (Daily Expected Move High) might have been a bullish harbinger for the rest of the week. But statistically, there is a 67% chance that prices close below 4795.75 on Friday. It is risky to bet against those odds, though it is successful 33% of the time. And prices can exceed the WEMH early in the week, but still close back inside the level by Friday.

The new Zero Day to Expiration Options (0DTE) crowd may try to push a “Gamma Squeeze” on Dealers, buying at the WEMH to keep it above 4795.75 at Friday’s close, forcing Dealers to buy futures or lose their proverbial butts. Dealers who fear this may take the opportunity to hedge on visits back to the line early in the week. in such cases, the opposing actors cause the WEMH to act as support rather than a cap on prices. A big report like the CPI tomorrow is a perfect opportunity for manipulation by these market participants. 

From personal experience, this 0DTE crowd has wreaked a lot of havoc on day trading generally – obfuscating many day-trading strategies that previously worked for years. A similar thing happened to the broad markets, as options grew to dominate the investing landscape over the past 10 years and become the proverbial tail that wagged the dog. 

A mini version of the option tail wagging the dog is invading day trading and the influence is growing as more and more securities have options that expire daily, instead of just weekly and monthly. Like the broad market, we now segregate and monitor significant gamma levels as well as Call and Put Walls for same-day expiration options. That is a lot to monitor to trade as a manual, retail trader against quantum computers which provide 80%+ of the intraday volume. I don’t recommend day trading for the faint of heart.

We handle the Dealer/Market Maker battles in real-time – but thankfully this is less important to the Daily and Hourly Swing Strategies, which focus on options or spreads with longer expirations than one day, or the same day. But if you insist on Day Trading against quantum computers with programs designed to induce you into bad trades, you need to be aware of these recent developments in the options market and reflect them in your trading. 

Never forget that trading is a zero-sum game. Either you are taking someone else’s money or they are taking yours. Which do you think is easier? Quantum computers taking money from retail traders like you, or other quantum computers?

Note that prices are near the top of their trading channels (see chart above), with limited headroom absent a melt-up. And underlying market/support structure is weak, with so many unfilled gaps since the October 2023 lows. Not to throw too much shade on the party, but bullishness remains near extremes, and the bear still has a slight chance of coming out of hibernation. It would take a Black Swan trigger, but doesn’t everything look like a Black Swan these days?

A.F. Thornton


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