Markets boost ahead of inflation report.

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Our View

Man, did Monday work in our favor or what? Bret and I were looking for the ES to rotate over Friday’s high and did just after the open. That put 4135 in play, followed by 4050. The high? 4050.75. 

I love when we get a chance to book some nice gains on a Monday — and ahead of a big event no less. That’s with the CPI report on tap. 

Bank of America said, “We forecast headline CPI increased by 0.4% MoM in January, which would be an acceleration from the recent pace. We also expect the YoY rate to fall from 6.5% to 6.1%. Meanwhile, we look for core CPI to increase by 0.3% MoM and for the YoY rate to fall from 5.7% to 5.4%.” 

Is that passing for “good” now?

I’m no economist, I’m just a guy who has traded the S&P for over 40 years, but I think there are two parts to this. 

First, every rally has ultimately failed so far and all of them have been dead-cat bounces. On the other hand, if you look at the low in October to today’s chart, it looks like the ES is in a big back-and-fill pattern. So there’s something for everyone right now. 

It’s pretty easy to see why the public thinks the Fed’s rate hikes are nearing an end. Consumer prices jumped to an annual rate of 9.1% in June — the highest in several decades — but gained “just” 6.6% in December’s CPI report. Again, I don’t know if I’d call that good, but it’s got the assumption down to the Fed being near the end of its rate-hiking spree. 

That’s even as Powell & Co. stressed that the rate hikes were not over (even as he also said in early February that there is good reason to think inflation will keep falling). The problem? Inflation is far above the Fed’s 2% target. Again, I’m no economist, but it seems to me that Powell was not backing down on more rate hikes in the 4th quarter and so far in the first part of 2023 he is still indicating there will be at least 1 if not 2 more rate hikes. 

Our Lean

The kicker to this is after trading down to 4060 last week, the ES rallied back to 4150 yesterday and is trading above that on Globex as I write this. I doubt there was any new buying yesterday — it was all short-covering ahead of the CPI — while volume was the lowest in several weeks. To top it off, there was $1.95 billion for sale on the close. 

While the markets act firm now, that can change in a New York minute. Monday was a nice, slow upside grinder, but I expect whiplash today.

Our Lean: If the ES rallies off the CPI number (at 8:30 a.m. ET) I have 4185 and then 4220 marked on the upside. Should the ES break down, I have initial support at 4135, with a larger line of support at the 4095 level. If this area can’t hold, it could set the stage for 4022-ish. 

Days like this are tough, because the action is intense before the open. That’s where we are now with the algos and the CPI report. 

My concern for the bulls is a big gap-up open that fades. On the flip side, if the ES goes down fast before the 9:30 open, it may bounce. Remember, I am a get-in-and-get-out kinda guy. If I catch a good one I may hold it for a few days, but I like booking profits. 

Like the PitBull always said, it’s not a profit until you book the gains. 

MiM and Daily Recap

The ES traded up to 4115 on Globex and opened Monday’s regular session at 4107. After the open, the ES traded down to 4101.50 and then made a series of higher highs all the way up to 4145.50 a little before 1:00 and pulled back almost 10 points. From there, the ES popped to a new high of 4149.50 just after 2:00, then dipped 19 points. 

From there, the ES hammered out a nice afternoon low at 4130.50, then rallied up to ~4146 as the 3:50 imbalance meter showed over $500 million for sale. Th ES pulled back down to the 4139 level then popped and traded 4148.25 on the 4:00 cash close and settled at 4149.50 on the 5:00 futures close, up 49.50 points or 1.21% on the day.

In the end, this was a very slow trading day. In terms of the ES’s overall tone I said it early in the MrTopStep chat that it looked like they were “selling them to buy’em.” In terms of the ES’s overall trade volume was low at 1.32 million contracts traded.

Technical Edge

  • NYSE Breadth: 75% Upside Volume
  • Advance/Decline: 75% Advance 
  • VIX: ~$20.50

Today is shaping up in a binary way. Either inflation is in-line or lower (and thus the Fed is closer to the brake pedal) or it’s higher (and thus higher rates are in play). 

“In-line” defaults to the bulls’ favor, because that’s who has control of the current trend. That said, a hot report could put last week’s lows in play in a hurry. 

As for the individual stock trades, don’t be afraid to trim NVDA and/or AMD as they are making a nice pre-earnings push. 

S&P 500 — ES 

We traded yesterday’s setup really well, which is nice because today’s approach is much harder. The algos are going to fly and this binary situation makes it tough to approach, so let’s highlight a few levels on each side. 

On the upside, 4175 to 4180 is key, but I doubt that level is an issue given how close we are to that range. Instead, last week’s high of 4188 and the February high near 4210 are more interesting on the upside. 

If we clear those levels and don’t reverse back down, 4300 to 4310 could be in play next. 

On the downside, 4085, then 4060 to 4070 are key support levels. A break of last week’s low is the major risk for bulls at this moment.

SPY

The SPY and SPX actually have more direct approaches. 

On the upside, the SPY needs to clear and hold $416.50 for a weekly-up rotation. That’s the go/don’t-go line in the sand on the upside. 

On the downside, bulls want to see the SPY hold the 21-day moving average and last week’s low near $405. One ideal trade would be a break of $405, a tag of the 21-day moving average and a reclaim of $405. The “reclaim” would get us long and our risk — assuming it’s reasonable — would be a stop just below the session low. 

Open Positions 

  • Bold are the trades with recent updates. 
  • Italics show means the trade is closed.
  • Any positions that get down to ¼ or less (AKA runners) are removed from the list below and left up to you to manage. My only suggestion would be B/E or better stops.)
  1. NVDA — long from $210 & Trimmed ⅓ at $219+ 
    1. Down to ½ if we see $223+ (pre-market trim is fine)
      1. Raise stops to $208 or B/E
  2. AMD — half position and ¼ trim at $83 — trim down to ⅓ at $84.50+ 
    1. Stop can be tight at $79 or $80 or B/E
  3. CAT — long on a weekly up rotation over $252.14. First target would be $258 to $261. Stop at $242.

Go-To Watchlist

*Feel free to build your own trades off these relative strength leaders*

Relative strength leaders →

  1. AQUA
  2. AEHR
  3. GE
  4. NVDA, TSLA, SHOP

  • SBUX
  • MELI 
  • NFLX
  • WYNN, LVS
  • AXP
  • BA & Airlines — AAL, DAL, UAL
  • TJX, ULTA, NKE
  • CAT
  • HCCI
  • XLE — XOM, CVX, COP, BP, EOG, PXD — (Weekly Charts)

Economic Calendar

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Disclaimer: Charts and analysis are for discussion and education purposes only. I am not a financial advisor, do not give financial advice and am not recommending the buying or selling of any security.
Remember: Not all setups will trigger. Not all setups will be profitable. Not all setups should be taken. These are simply the setups that I have put together for years on my own and what I watch as part of my own “game plan” coming into each day. Good luck!

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