Folks,
Market Observations for the Week: The SPX and NDX held up today despite a CPI report that came in at 7% y/y and more importantly the 10-yr US rate continued to back off to 1.71% as the bond market rallied. The PPI early Thursday will give us another inflation data point and the consensus expectation is .4%. We continue to see a bullish EW pattern evolving from the Monday low and we are expecting another short-covering rally in the SPX on Thursday because we got another “island-reversal pattern” in the Option Premium Ratio (.88, 1.21, .90) on today’s close. However, it should also be noted that many high-profile analysts are skeptical of the SPX rebound from Monday and even our TRIN-5 indicator has been giving us a sell signal. If rates have peaked in the short term, that could allow another rally back to test the highs for the SPY and QQQ – how the PPI report gets dissected by the market is key for early Thursday. Bitcoin rallied to test its R2 resistance at 44310 today as the rally looks more impulsive to us and bullish for the stock market. Crude oil extended its impressive rally today and touched $83.1 and the XLE made higher highs to 63.75. We remain in 50% cash because of the macro factors facing the global economy (Chinese credit contraction, rising global inflation, and rising global rates, new Covid variant, etc.) and now a more hawkish FOMC that wants to rein in inflation and unwind the Fed balance sheet more aggressively than the market anticipated. Gold extended its rally from Tuesday and tested $1828 as the GDX followed along – gold needs to close above $1835 to resume its uptrend. The 10-yr US rate rallied to test a 52-wk high of 1.808% early Monday and then pulled back to 1.71% on Wednesday. The USD plunged to 94.91 today and that gave the PM sector a boost.
1/12/22 (Commentary for Wednesday) The SPX and NDX held up today despite the hottest year-over-year CPI report since 1981. The rally patterns in Bitcoin and the E-mini are evolving into bullish EW patterns from Monday. Did the NDX finish an EW a-b-c correction from 11/22 into Monday? Maybe. The “bull-hammer candlesticks” on the SPY that we got 1/10 and on 12/20 argue for a retest of the highs in early January. Also, to add to the bullish case, the VIX is declining in an EW 5-wave decline on the hourly chart that looks bullish for the SPX. Another bullish factor, the rally in Bitcoin from Monday is starting to look EW impulsive to us which is positive for the stock market. Crude oil rallied to a higher high at $83.1 into Tuesday night and that continues to be bullish for the XLE. We still hold 50% cash as we feel that the macro risks of being 100% long are just too great with the global credit contraction led by China still progressing and a now more hawkish FOMC targeting inflation and Fed balance sheet runoff. The US economy is highly-levered to widespread speculation in stocks, stock options and digital currencies and Bitcoin trading profits may be hard to come by in 2022. Gold responded to lower rates and a weakening USD and rallied up to $1828 – the PM metals and stocks rallied into the close and look extended prior to the PPI inflation report at 8:30 AM EDT tomorrow. In the US, the background monetary conditions have been deteriorating for months and the Fed quickened the reduction of financial liquidity from the US stock market at the December Fed meeting despite slowing global growth concerns. The 10-yr US rate made a 52-week high at 1.808% early Monday and pulled back to 1.71% on Wednesday. The USD plunged to 94.91 on Wednesday which gave a boost to the PM sector.
Big Picture on Stocks (UPDATED) – Our short-term bias changed Monday night. The QQQ may have finished an EW a-b-c correction from the 11/22 high and the “bull-hammer candlesticks” on the SPY on 12/20 and 1/10 look bullish for a rally back to test the highs. The Russell 2000 may be forming an inverse head and shoulder pattern on the daily chart.
Big Picture on PMs (UPDATED) – Gold extended its rally to $1828 into Wednesday’s close and the PM stocks followed along. Gold needs a close above $1835 to continue its uptrend.
- Stocks – The SPY and QQQ both held up after the hot CPI report and the rally patterns from Monday are looking EW bullish. The PPI inflation report early Thursday will be the next catalyst.
- Gold – Gold continued its rally to $1828 on Wednesday after the CPI report. Gold needs to close above $1835 to resume its uptrend. The market’s reaction to the CPI report is key for gold.
- Silver – Silver tested $22.84 on Tuesday and needs to take out $23.48 to confirm an uptrend.
- Bonds – Bonds rallied in 5-waves from Monday and continued to look strong after the CPI report as the 10-yr US rate moved back to 1.71%.
- Crude Oil – Crude oil rallied to $83.1 Wednesday and that carried the XLE to 63.78 late Wednesday.
- Dollar Index – As the 10-yr US rate declined to 1.71% on Tuesday, the USD dropped hard to 94.90 and that supported the PM sector.
TURNING POINT DAY
The turn window for this week is 1/10-1/12.
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