CPI Bounce Feels Vulnerable

There is a disconnect between what the market is pricing in and what central banks are saying.

PRE-OPEN MARKET COMMENTS WEDNESDAY – The volume the last two days has been incredibly low and the intraday range has been a third of the 20-day average. The CPI came in at 4.9% and 5% was expected. The S&P 500 rallied 25 points on the release.

I don’t believe that an inline number is going to be the upside catalyst that everyone has been waiting for. If earnings, the FOMC and the jobs report could not move the needle, I doubt this number will. Here are a few things to consider. Inflation is still running way above the 2% target. Forget about prices even retracing to the levels they were at a few months ago, this is a runaway freight train. Hourly wages grew .5% in last week’s jobs report and that is the largest input cost for employers. The ECB is expected to raise rates 50 basis points Thursday and they have been vocal about raising them again in July. The Fed left the door open for more rate hikes and they said not to expect any rate cuts this year. The market is pricing in a rate cut in Q4 and there is a disconnect.

Buyers and sellers are content at this price level. Both sides have equally compelling arguments and time will determine which side is right. The volume is terrible and neither side is motivated. We need a catalyst (new information) to push us out of this range and traders are constantly looking ahead for the next piece of news that might spark that move.

The SPY is going to open at a minor resistance level at $415. Given the lack of movement the last two days and the tendency for the bid to be tested on gaps up, I believe we could be set for an early reversal. Our best case scenario is a wimpy little rally that hits resistance and that features wicks and tiny bodied candles. 1OP will start in a bullish cycle and it needs to produce. If it does not, the market will fill the gap and a nice short will set up. I am favoring this scenario because the news was not that great. If we see nice stacked candles and good volume through $415 in the first hour, we will drift higher on light volume. That early move up would force us to take early action and we would be chasing. Our risk of having the rug pulled out is higher in this low probability environment and that is another reason I would favor a reversal. Under these conditions, mistakes are very difficult to overcome. Tread cautiously and wait for your trading windows to set up. Focus on a handful of stocks that have big technical breakouts D1 and heavy volume.

Support is at $408.65 and resistance is at $413.70 and $415.