Market Outlook | CPI and PPI are back again!

SPY – Will higher highs, higher lows last?

We are seeing higher highs, higher lows for the last 5 days. However, when markets have a huge gap down like this, watch out for dead cat bounces. A dead cat bounce will usually take you back to the gap fill area, before markets continue to slide in the original direction. The nice thing about last week’s relief rally is that we are almost at that gap fill area. So, markets are literally ready to bounce or die!

• The critical level here is SPY at 538. If CPI, PPI are positive, SPY will take out that resistance without any problems and that would be the time to go into full bull mode grabbing call spreads hand over fist.
• If CPI, PPI disappoint, SPY will get rejected at 538 and the markets and it is officially “GAME OVER!“

SPY – Another look at key levels

• Let me bring out my trusty Fibonacci retracement tool. The tool can also be helpful to gauge whether a recovery rally is “real” or is it a “dead cat bounce“.
  • After a sell off, if the recovery rally starts to fade around 38.2% retracement level, it is most likely to fail is can be classified as a “dead cat bounce”.
  • 50% is considered neutral zone (i.e anything can happen)
  • A breach of 61.8% is serious confirmation that the rally is real (but by then you have already missed most of the move)
• There are two very interesting things happening with this recovery.
  • Note that 10 day EMA (blue dashed line) flattening out and compare that to what happened on 4/23. This indicates that the pullback is most likely over.
  • On top of that the recovery rally is around 38.2% retracement level. All we are watching for is the recovery rally to build on the upward momentum and take out that 50% level for you to primarily go bullish on the markets.
• Also note 10% correction and 15% correction levels I have drawn on the chart. A bad CPI/PPI swiftly takes us below 10% correction. Since markets fall faster than they go up, this could happen as soon as Friday.
• SPY 477 (i.e a 15% correction) looks like a lofty target right now, and I am not going to indulge with that unless I know what the CPI/PPI numbers look like.

RRG charts – Being challenged?

RRG charts have been showing money leaving the markets for over a month now. Is there any truth to this? It is going to be an interesting experiment to watch as things unfold next week right in front of us. If you are a believe in sector rotation graphs, these charts have been showing that money is leaving the entire market not just specific sectors. And the sector rotation narrative that was being sold to you by CNBC and other financial news outlets (remember the pink sheet like POP in IWM where everyone was claiming that IWM will go beyond $230 level) was obviously false.