It’s unusual for stocks to sell off in the lead up to an FOMC meeting. Its also unusual for a bearish pattern such as a Head and Shoulders pattern to complete during those days. Yet, here we are.
As has been the case since late August, the only thing preventing a severe downturn (aside from the hope that the Fed will suddenly change course and be less hawkish) is VIX – which keeps getting smacked down every time it reaches 27-28.
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Another ugly open for markets as ES, down about 1.25%, completed its H&S Pattern we’ve been watching take shape.
More grist for the bearish mill…as though we needed any more.
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After that vicious selloff, the market is now in wait and see mode – levitated by OPEX this Friday and next week’s FOMC meeting.
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Apparently, investors aren’t quite as sanguine about inflation as it seemed. After slightly overshooting our upside target from February, SPX plunged 4.32% – about $1.5 trillion in market cap. Trillion-and-a-half here, trillion-and-a-half there, pretty soon you’re talking real money. It was the worst day in the markets since March 2020 and one of the worst on record.
Yet, the talking heads and financial press were all rainbows and unicorns leading up to the CPI print. The big question, of course, is “what happens next?”
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August CPI came in hot, rising 0.1% in August instead of the consensus 0.1% decline. Core was even worse: 0.6% versus 0.3% consensus. The annual print also disappointed, coming in at 8.3% versus expectations of 8.0% or less.
Having slightly overshot our 4153 target overnight, ES is now reversing sharply.
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Futures are up modestly on light volume algo action in advance of tomorrow’s CPI data.
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The algos were back at it yesterday, pumping stocks higher via VIX and the USDJPY. Note that VIX dropped back to the TL which it broke below in August.
This brought ES within striking distance of a backtest of its latest H&S Pattern just in time for next week’s CPI data to drop.
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Futures are off moderately in the wake of the ECB’s decision to impose a 75 bps rate hike – its highest ever – on an economy already reeling from spiraling inflation and weakening economic activity.
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Breakouts from well-established falling channels are usually followed by backtests of that channel. This is how bulls put all that nasty bearishness behind them, freeing stocks for another leg up. 
Except, it doesn’t always turn out that way. Sure, ES nailed our backtest target. But will it follow through with a respectable bounce?
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Futures are off about 0.5% this morning as the economic data was somewhat better than expected.
It’s an important juncture for the market, as USDJPY has reached our 139.43 target at the same time that ES is approaching our 3902 backtest target.
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