This move is like throwing gasoline on the fire. Here’s why.
PRE-OPEN MARKET COMMENTS TUESDAY – Let’s cut to the quick. We have been in “wait and see” mode and the market has been compressing between the 100-day MA and the 200-day MA on light volume. This is triple witching (Friday) and a move in either direction was going to be exaggerated because it would breach major support (D1 up trendline and the 100-day MA) or resistance (D1 down trendline and the 200-day MA). This move was going to prompt major adjustments and it is like throwing gasoline on a fire.
The CPI was better than feared and the S&P 500 is 100+ points higher before the open. It will blow through the 200-day MA and it will break above the downward sloping trendline on a weekly chart. That trendline is a big breakout.
This CPI reading will not materially change the FOMC statement tomorrow. The other inflation readings the last two weeks have been “hot” and disinflation is a far cry from deflation (prices actually moving lower). The Fed is expected to raise rates by 50 basis points and to pave the way for 25 basis point rate hikes in January and February.
Longer term swing traders should still stay sidelined. We have the FOMC statement tomorrow and these gains can easily be reversed by hawkish statements. The volume has been light to this point and the price action since the low of the year has been very choppy and tenuous. I don’t want to chase and there are still plenty of dark clouds on the horizon.
Day traders should not chase. This is a major breakout. If we get a pullback, we need to wait for support. That would set up an excellent entry point for longs. This could be a day where you just let your longs run and I am expecting a bullish trend day on a major breakout of this magnitude. If we get a “gap and go”, be patient. At some stage today the market will pullback. The initial surge will be short covering and it could exaggerate the move. Asset Managers are not going to chase this move ahead of the FOMC. A gap reversal is unlikely. Any dip will preserve the half-way point of the gap and it would be a gift. Look for opportunities to trade from the long side.
Support is at the 200-day MA and $410. Resistance is at $414.