Bad PPI and a failed breakout

What a relief! DOW seems to have given up its mind boggling rally. I couldn’t find any logical reason for that rally except that we do get relief rallies in bear markets. Bad PPI seems to have triggered the pullback. A bad CPI next week is enough to sound the death knell for these markets. 

DIA 6m daily – Failed breakout?

DOW broke out of the resistance zone at 340 for a week but we have a failed breakout on our hands. PPI was mildly bad and I didn’t get the reaction I was hoping for on Friday but it was good enough. The dump at close on Friday was particularly interesting.

From a purely technical analysis point of view, the chart below is indicating that DOW could very well revisit its swing low of $295. However, if the CPI comes out bad (which should be a logical result because the PPI was bad), then I do expect DIA to dump to 315-320 area before we get any bounces. 

SPY 6M daily – Not looking too rosy

DOW was leading the charge so far and SPY and QQQ were just languishing around trying to play catchup. I never saw any conviction in QQQ and SPY and if markets dump next week on a bad CPI, I expect QQQ to lead the charge on the downside, followed by SPY and then DIA and drag everything down with it. 

QQQ 6m daily – Entering a squeeze.

The weakest of them all, QQQ never demonstrated any strength at all, lacks momentum and seems to be entering a squeeze now. If CPI is tame, it seems like indices might just enter a sideways consolidation phase. A bad CPI will result in an explosive downside move though and I won’t be surprised if QQQ breaks through the long term support at $270. 

Market moving events next week

A mildly bad PPI is behind us but we have that pesky CPI print on Tuesday before market open. That is followed by the Fed rate increase on Wednesday and Powell’s speech. I expect the CPI number to have a bigger effect on the markets.

1. Bad CPI tanks the market. If Fed does a 50 basis point hike (which is widely expected), I don’t expect it to help with anything. On top of a bad CPI if the Fed does a 75 basis point hike, expect all hell to break lose and get ready to go put heavy on these markets.

2. A good CPI (I will be surprised if that happens) could get us back on track for a Santa Rally, and the 50 basis point hike will just add more fuel to the fire.   

Earnings 

There are 3 stocks reporting earnings towards the end of the week, and this is a good thing because we will know where the markets are heading by then. If we resume our Santa Rally, ADBE, ACN and DRY could offer trading opportunities for adding call spreads.

Macro Analysis (VIX)

I had pointed out last week that although the VIX had dropped to 18, it doesn’t mean much. The last we saw this happen was in August and look how quickly it spiked back up. VIX needs to go below 22ish and remain there for a few weeks for a reliable bull market to resume. 

Spread Tracker 

This week shows why it is so important to stay balanced between bear puts and bull calls. At the beginning of the week all calls were showing as PROJECTED WINNERS and all put spreads were OTM. As the week unfolded, some of the calls ended up becoming losers, but the put spreads offered a helping hand. If you manage losers at 50%, you can come out profitable even when trading delta neutral like this. 

I am bear heavy next week and things are looking pretty nice so far. If we get a bad CPI, I will be adding bear put spreads for 12/16, 12/23 and 12/30 expirations.

Key Takeaways

  • We have a failed breakout on our hands with DOW. 
  • Bad PPI should ideally lead to a bad CPI, but who knows what will happen.
  • Bad CPI = I will be purely trading bear put spreads and boy there is no shortage of those trades!
  • I will not open any trades on Monday. Instead I will be working on a list of bear puts and bull call spreads for our group, like I usually do with these binary events. I will publish this list on discord on Monday at close of market.
Free no-obligation 7-day trial

Can a $5 move in a stock double your investment? Discover the power of Vertical Spreads. Come join us where we do this with 1000+ traders every day of the week.