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Why Is the Market Up On CPI?
www.oneoption.com
Inflation was better than feared, but the rally has more to do with triple witching than anything else.
PRE-OPEN MARKET COMMENTS THURSDAY – During triple witching is is common to see a trend day. We don’t know which way it will go, but once the momentum starts, institutions “roll” positions and the move feeds on itself. That’s what we saw yesterday. After the initial drop, the market continued to drift lower all day. The price action was very stubborn and that is a sign that there are some buyers. If there weren’t, the market would have continued lower on nice red candles. We saw mixed overlapping candles and that is a weak trend. The news this morning wasn’t that great and this is buyers flushing out overnight shorts.
We’ve seen four days where the market has closed lower so don’t construe my comments as being bullish. The momentum is starting to wane and the 50-day and 100-day moving averages are converging. They are always within striking distance and we will visit them with greater frequency. The QQQ has made a significant lower high. I don’t believe the market will be able to move higher without mega cap tech stocks.
Initial jobless claims were decent at 224K, Philly Fed was light (-10.2) and the CPI was the only other news to come out at the time. It was 2.7% and 3.1% was expected. That tells me the CPI caused the spike and the news was not that compelling. The ECB kept rates the same and there was no reaction to their statement.
Japan is expected to raise rates by 25 basis points tonight. That will impact the yen-carry trade, but it is widely expected. They will also start selling some of their stock holdings, but at the proposed $5B/year rate it will take a century to unwind. Japan is also selling US Treasuries and that is putting upward pressure on the long end of our yield curve.
The preliminary GDP number will be released Tuesday. This is the first look at Q3. We will also get the PCE and this will be a fairly important release. That will be the last chance for any activity next week. European banks will be closed next Wednesday and the NYSE will have a half session. The market is closed Thursday for Christmas and Friday is likely to be very slow. When a holiday bisects the week, it kills trading. I’m expecting us to stay around this level the rest of the year.
What do consecutive overlapping red candles indicate? The market opens inside of the prior day’s range and it closes below the opening price. Look for that to repeat. We jumped off of AVWAPQ and we cleared the 50-day MA this morning. We should expect that the 50-day MA will be challenged early today. The CPI did not justify a reaction of this magnitude. I would be looking for early shorts. If we blow through the 50-day MA, use that as a stop and protect gains. This is your best scenario today. If the market grinds and pokes at the 50-day with mixed overlapping candles, it could hold and this will be a dead day.
Keep it light. If you can find one or two good trades, that is about all you can ask for.
The price action yesterday suggests that most of the triple witching “rolls” have taken place. We can still expect some volatility, but most of the fireworks are over.
Support is the 50-day MA and AVWAPQ. Resistance is the high from Wednesday.
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