CPI, PPI, Big Bank Earnings | Brace for insanity

Hope you enjoyed 1 full week where technical analysis was 100% reliable ūüôā Well, that party is now over. Next week brings a slew of binary events. CPI on Thursday morning will move the markets and is capable of changing market direction if we get any positive surprises. As if this is not enough, we have a ton of earnings from the big financial institutions like JPMorgan Chase, Citigroup, Wells Fargo and Bank of America.

On top of that we also have the insurance mammoth UNH reporting earnings as well. As you know, UNH is the biggest component of Dow Jones and upcoming earnings may be the reason why DOW hasn’t shown any cracks yet. Earnings misses from these giants is the trigger that could drop DOW Jones like a rock. But a round of good earnings will lead us to new highs. It is going to be a very tricky week!¬†

SPY 1y daily (Now in an official pullback)

As I am refining my MRI indicator (Market Reversal Indicator), I will keep pointing out to our group when it triggers reversal signals. However, please be aware that no indicator is perfect and all indicators do is help you form an objective view of the markets which is not influenced by your own personal bias. I am very excited about this indicator, but we are also living in an environment where any of the the following reports РCPI, PPI, PCE, GDP, Jobs Data etc can completely reverse the course of a trend in a single day!!! So, please take it with a grain of salt. 

Now that I have that disclaimer out of my way, take a look at the MRI indicator below. From my backtesting of 5 years worth of SPY data, whenever it has triggered a reversal, the minimum amount of time the new trend (i.e the reversed trend) has lasted for is 4 weeks. (There was only 1 time where the trend only lasted 3 weeks but that is good enough for my trades to be successful) 

SPY support/resistance levels

Whenever we go into a pullback, my job as a technical analyst is to then figure out downside targets. This helps figure out the levels where markets could reverse the current trend. With SPY, here are the important levels:

  • ¬†458 is the lowest hanging fruit and the first support level. If markets continue to dump starting Monday, that is an area where we could see the first bounce. The bounce will only happen if CPI on Thursday is positive.¬†
  • The next significant support level is 430. In my opinion, if CPI is bad and bank earnings are meh, that is the most likely scenario.¬†
  • Of course, if things turn really ugly we can always get a full blown correction and 410 is that level where that correction could end.¬†

DIA 1y daily (Just refuses to give up!!!!)

I have been pointing out that the only way we will get a meaningful pullback in these overbought markets is if all indices start dropping. SPY, IWM and QQQ have all triggered a reversal, but DIA stubbornly refuses to give up its rally and has shown no reversal signals yet.

Can Boeing do that job for us?

BA which is the 10th largest component of DOW Jones could be that catalyst which causes DOW Jones to finally pullback. The news this weekend is significant enough in my opinion to put DIA under pressure. Of course, all bets are off when that pesky CPI data comes out on Thursday and bank earnings on Friday. 

The AAPL indicator

AAPL has seen a sizable drop in the new year but the drop has been so rapid that it is now near a very significant support area around 180. The buzz everywhere is “when to buy AAPL again”. Should you do a 180-185 call spread? Of course, you can. My only suggestion would be to wait for QQQ and SPY to stop falling before you go bullish. Because if you simply zoom out to a 3 year weekly chart, you will see that AAPL has a lot of room to fall even though it appears oversold on a shorter timeframe.

VIX (still in greed)

 For any permabulls out there, you may feel that it is time for the markets to turn around as soon as Monday because you are so used to buying the dips by now. Of course, you are free to have your directional bias but just keep in mind that VIX has barely dropped from EXTREME GREED -> GREED and this tiny pullback could just be the start of a horrible January and could go deeper into February. On the flip side, since we are starting earnings season this week, if companies start reporting good earnings and positive guidance, that could save the bull market and we could easily keep forming new all time highs.

TNX showing its teeth again.

Look who is back in action! Our good old friend, the 10 year treasury yield. After a massive drop caused by Powell’s dovish remarks last year, TNX is beginning to show its ugly teeth. I have a feeling we are going to see those all time highs again one more time before things settle down.¬†

Important Events 

I don’t have any trades expiring this week. But Thursday and Friday will set the tone for the markets. If we get a bad CPI report followed by underwhelming bank earnings, my guess is that we will see a bull blown correction to the order of 10% or more. It is going to be a huge binary event that I am not looking forward to.¬†

Earnings 

Get ready for this guys. Earnings season kicks off with the first round of important earnings. If all these financial institutions report good earnings and give a positive forward guidance, this pullback will be short lived and we can expect markets to go back to all time highs.

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