Week of Feb 13

Massive CPI day, retail sales etc

Recap of last weeks action:

Have been nailing every single move since I started this sub stack. I recommend you read last weeks sub stack for detailed analysis on the action.

Now I urge you to rid yourself of biases and cleanse your mind of all the recession and market crash talk. Until PROVEN otherwise this was a regular technical retracement of an intermediate bull trend within a long term downtrend. We sold off to work off some technical overbought conditions, as well as rising terminal rate expectations as Powell and other fed speakers took the stage again and reiterated their commitment to fighting inflation and reminding participants the job was not done. 4200 is also a significant resistance level, and market needed to cool off and gather “energy” before breaking through that. This down move last week may be what it needed. But ultimately is dependent on the CPI data, because that is the data that Powell and the Fed act off of.

Next move for markets?

Up. From Fridays close at 4100 ES, I think we have another thrust to the upside left before a larger retracement. CPI has been a bullish event as of late. Participants are still hedging and going into the event with lots of “fear” and market responds the way it usually does when many are on one side of the boat. Fact is inflation is falling rapidly, and even if it comes slightly higher than expectations the downward trend will remain. It will take more than 1 data point to convince the Fed and markets that the war on inflation is NOT over. Now I always like to reiterate that there is no edge in betting on binary events. And that is a good general rule to follow. But price matters. We have retraced about 4% from the early February high into a very strong support zone. The event is very well hedged. Implied vols are very juiced headed in here. So in the event it is lower than expectation, meets expectation, or even a slight miss, I would expect the market to take another crack at 4200 resistance before making its next move. A huge miss (hot print) would trigger a down move most likely. But trading is a game of probabilities, and I think if we get a chance to buy 4050 (also a hugely important CTA trigger level) that is a good r/r for longs. Betting on “bad data” to drop the market has been foolish as of late. Take a look at recent NFP and CPI prints.

Image A: A retracement to the mid of the keltner channel and 21DMA. In strong bull trends, market will ride the upper bound of the keltner channel and bounce off the midpoint.

Trade ideas:

I like long SPX 4150 calls if we retrace to around 4050 ES again BEFORE the print. I would size smaller than usual. If we gap up and go higher on Monday I would just be flat into the print and look to sell higher. Maybe will be sending an update post CPI. There is not much to write and consider before such a pivotal piece of information.