CPI – 7.5%
Inflation posted a 7.5% headline number. The market has reacted negatively thus far. I will update everyone later this morning after I analyze the data.
The market gapped open yesterday and pinned just above the Weekly Expected Move hIgh to close at 4580. It was an impressive run and confirmed our recent buys. The market cleared a lot of important resistance and closed above both the mean and the downtrend line, leaving an island reversal on the charts. Also, the 5-EMA crossed up and through the mean (21), which can be a powerful confirmation of the uptrend. Of course, one day doesn’t make or break a trend.
By expiration tomorrow (Friday), 4500 may yet be a magnet to pull the market south, but it should also act as support. And a gap-fill to 4521 (now happening) was not unexpected before we progressed further. Finally, the Weekly Expected Move high at 4570 can be its own obstacle and could stunt any further rallying before tomorrow’s weekly options expiration. Also, there will be trapped and poorly positioned longs above current overnight levels. This creates an overhead supply near yesterday’s close at 4580.
It’s all about the inflation report today, which not surprisingly includes a new calculation method. Only this time, it is not easy to determine if it will overstate or understate the number, which came in at 7.5% and above expectations. After release, it will take an hour to digest the report on the new formula. If it is 7.5% on the new formula, what was it under the old formula? The 10-year U.S. Treasury yield has broken up and through 2% on the news.
While many traders watch the CPI closely, it should not have much short-term impact due to the change in options hedging positions. We saw a clear increase in gamma at the 460SPY/4600SPX strike yesterday (also the 50-day line) which we think further “boxes in” the price action in the 4520 to 4600 area.
Also, head and shoulders reversal patterns are all over the markets with the necklines at yesterday’s close. Sometimes they work as expected and sometimes not. But Apple looks to have a classic, almost unbelievable pattern that actually projects a new all-time high. If there is one company that might achieve new highs in this environment, Apple would be it. But somehow, the chart pattern looks too easy to be real:
Apple’s vulnerability to rates and its cap weighting in the indexes is a good proxy to watch today.
We took some money off the table yesterday, rolling the Navigator Swing Cash accounts back to 75% invested. We also took another handsome, short-term profit on the Leveraged Strategy. Again, we may buy the dip this morning so stay alert.
Day Traders
Volatility projections dropped sharply in half from yesterday, with a .67% move today projected and marked on the 15-minute S&P 500 chart above. We are testing the lower point at this writing. Significant support is at 4521 (also the Volatility Trigger, 21 and 5-day lines) with resistance remaining at 4600 and 4620 (SPY 460 equivalent).
As long as the S&P holds the 4521 area, it is more likely than not that markets will continue pushing higher. Our base assumption for today is that as “event volatility” around the CPI number burns off, positive Vanna flows kick in along with the gamma hedging into the 4600 area. This would signal a continued rotation in options positions to higher strikes, dragging the markets up.
Also, based on today’s volatility estimate, it would likely take multiple sessions to initiate a major selloff, likely initiated from a close below the volatility trigger and 4500.
We are opening with a gap down inside yesterday’s gap up. Nevertheless, Gap rules apply. The extremes of the gap can be used as key levels for potential responsive trade.
Any acceptance below 4521 and/or 4500 could put the rally/recovery into question as we would then return to the four-day balance area we just cleared.
A.F. Thornton