After a normal pullback in a bull market, the S&P 500 is within striking distance of the all-time high. The inflation numbers this week will be important.

PRE-OPEN MARKET COMMENTS MONDAY – The market bounce the last few weeks has been tenuous and we are looking for technical confirmation before we add to swing positions.

In the last month economic conditions have started to soften (GDP, ISM services and employment). The Fed curbed quantitative tightening (QT) and that is a step in the right direction. Before they ease, they are likely to end QT. The market has been able to rally during this “soft patch” because traders are expecting a rate cut. If inflation is “hot”, the Fed might not be in a position to ease.

The PPI will be released Tuesday. It came in at .2% last month and that is expected tomorrow. This would be a rather benign number. The CPI will be released Wednesday and it came in at .4% last month with an annual rate of 3.5%. That is well above the Fed’s target rate of 2% and a reading that high will be tough for the market to shoulder. Anything below that level will be “market friendly”. Retail sales will be released Wednesday and that will help us gauge consumption.

The market bounce has come on mixed overlapping candles and light volume. That is a tenuous move so we need to use caution with our longs. We have a stater long near the 100-day MA and we added when the SPY broke through the 50-day MA. I am not expecting a strong breakout above the all-time high with a long green candle because the quality of this bounce has not been ideal. If we get it, I would add to positions, but I am not expecting it. If the market can’t advance through the all-time high this week we will simply hold what we have. If the market breaches the 50-day MA we will be ready to exit long positions.

We are cautiously long and we have been expecting a bounce after the dip. Shorts are being squeezed and that is fueling some of this move. Conditions have changed and we are aware of that. How quickly will economic growth slow? Will inflation remain stubbornly high? Will the Fed consider a rate cut this summer? We don’t know the answers to these questions.

In November, the backdrop was more predictable. Economic growth was strong, inflation was stubborn and the Fed was hawkish. The market was able to shoulder “higher for longer” because economic activity was strong. We are no longer in that environment.

Is the light volume bearish? No. The market can float higher on light volume for long periods of time. It simply means the level of conviction is lower (buyers are not aggressive). At any time, the volume can increase and the move higher can accelerate. Light volume is not bullish or bearish. It simply means we follow the trend, but with smaller size.

Gaps up are the worst scenario especially as we approach the all-time high. The reversals can be nasty and there is plenty of room to retrace the opening move. Often, the gap reversal will gain traction and the momentum will increase. I would NOT chase this gap higher. Be patient and wait for support. There isn’t any news over the weekend to justify a big move higher this morning and overseas markets were only up marginally. If the dip into the gap is brief and shallow, it is a sign that buyers are interested. If the gap fill is swift with long red candles, it is a sign that of heavy selling pressure and it will take longer for support to be established.

Support is the 50-day MA and resistance is the all-time high.