Good morning Surfers!
In this appointment, we will discuss:
Inflation continues to cool
Bullish pattern for the Nasdaq 100
Small caps clear the first hurdle
Bearish model for 10-year yields
Back to inflation
Inflation continues to cool
Traders seem to have appreciated yesterday's CPI data released before the opening, which showed a continued slowdown in inflation,
Not surprisingly, both the S&P and the NASDAQ reached their respective highest levels since April 2022.
Before the opening, we will have wholesale inflation, with the release of the PPI at 8:30 am.
We will return to this aspect at the end of the article.
A bullish pattern for the Nasdaq 100
We know that there is a negative divergence on the daily chart of the NASDAQ 100 ($NDX).
On the hourly chart, however, gap support has held great and consolidated at the key level of 15300.
The bearish argument speaks of negative divergence on a daily timeframe, and mind you I think a pullback would be welcome and healthy considering the bull run and the less-than-brilliant summer seasonality.
The bullish argument, however, emphasizes a cup and handle pattern that is a bullish continuation pattern.
Personally, I don't like betting against a bullish market where all lows are bought so I would avoid shorting, at least for now
A firm move above 15300 would confirm this bullish pattern, with a target up to 16000 points.
Small caps clear the first hurdle
The early week's rotation favors small caps, with a surge in relative strength in the short term after prices grazed support (Small caps testing support, again... ) and with violent tests of the 20-day moving average in recent sessions.
Early-week strength pushed prices to the break of a level monitored several times in the short term, the break now exposes the small-cap sector toward the true target area at $196-$198.
The channel highlighted by the dashed black lines looks very solid, the PPO is bullish, although it is currently drawing a bearish divergence which, at the moment, is not a concern.
We could immediately test the relative highs in the $196-198 area, or we could see some trading range between that area and $189-190, a level that needs to hold to fuel bullish propulsion above $198, i.e., the level that will end the medium-term trading range on small caps and sanction the continuation of the bull market.
Bearish model for 10-year yields
Since May 2023, The TNX (10-year U.S. Treasury bond yields) has moved upward to test an important resistance near 4.10 percent. This level has been a key reference in recent months.
Let's see why:
Gap up and down of the Island reversal of November 2022
Island reversal maximum of late February 2023
Maximum Island reversal July 2023
An Island reversal is a short-term reversal pattern that forms with two overlapping gaps. A bullish island reversal is formed with a down gap, a short consolidation, and an up gap. A bearish island reversal is formed with a gap up, a short consolidation, and a gap down.
In short, in the same area under scrutiny, we had the formation of three bearish patterns that, within a few weeks, sanctioned the reversal of yields.
Lower yields mean higher bond prices.
In light of the inflation data, the market is discounting a possible regime change in FED rates.
Back to inflation
The CPI has reached 3 percent. Yes, 3%!
Let us assume for a moment that it is 3%.
Mind you, the figure is clear. The only downside is that housing prices and rents remain high, as does the cost of energy, and this still impacts consumers' spending power.
What is the next step?
I think this number allows the FED to start cutting rates unless there is another August CPI hike.
Current markets are pricing in FED rate cuts and not hikes, if you look at the S&P500 near, 4525 or the falling 10-year yields (we discussed this in the previous chart).
This means that the FED can now declare a victory on inflation and that the focus will shift to the next reason why the FED will again begin to ease the pressure in terms of Quantitative Easing (QE).
If inflation is down to 3 percent and the economy remains strong with no recession, what are the justifications for a new round of QE by the Fed?
It is one thing for the FED to buy billions every day (QE) and another thing for it to sell billions (QT).
These are some questions/narratives that will be the focus of this market in the coming quarters and months.