The market fell below horizontal support at SPY $444 and it closed below the 50-day MA ahead of the CPI this morning. The reading was “hot”, but the market rallied on the news. Nothing has changed overnight and on a swing basis the market is all over the board.
The reaction tells me that shorting the SPY into the CPI number was a crowded trade. Inflation is hitting its highest level since 2008 and this news was bearish. Most of the trading in the last few weeks has been program driven and this morning’s reaction will squeeze shorts.
Earnings season kicks off tomorrow and banks will dominate the scene this week. The mega cap tech announcements are still 2 weeks away. Typically, the bid is fairly strong in the early part of the earnings cycle.
Swing traders should stay in cash. The market has been very choppy and I don’t see any reason to buy when there is no direction. The selling pressure will increase as we get closer to the May FOMC and there is a good chance that corporate guidance for Q2 will be soft.
Day traders should watch for consecutive long red candles stacked. This would be a sign that the short squeeze will end quickly and that sellers are still in control (20%). This would be a good move to short initially and much of the gap could fill. The next most likely scenario would be a gradual drift lower with mixed overlapping candles and support well above the 50-day MA. That could present a nice buying opportunity (30%). The chance for a gap and go is low (10%) and I would be looking for an opportunity to short any added gains from the open. The CPI was not good. If the number came in at .5% inflation it would justify follow through buying, but that is not the case.Support is at the 50-day MA and resistance is at $444 and the 200-day MA.