CPI May Derail Any S&P 500 Upside Move


Simpler Trading Team

Nov 09th 2022  .  5 min read

The red wave didn’t materialize across election night, but the stock market crashed into the red zone during trading today.

Red may be a no-go in political waves, but it could set off a green light for bullish momentum ahead.

Uncertainty in the market on various fronts leaves much to unpack for retail traders wanting to take advantage of the next move.

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S&P 500 may be key to shifting market

After three straight days of gains in the S&P 500, the index and the market overall hit the brakes into a downward slide Wednesday.

In the market today, the Nasdaq topped the losses chart by falling 2.48% to 10,353.17. The S&P 500 followed by losing 2.08% and dropping to 3,748.61 points. The Dow closed at 32,513.94 points to tumble 1.95% (dropping 646.89 points on the day).

The day continued an uncertain pattern in the market.

“The last couple of weeks the S&Ps have had a tough time getting out of the paper bag,” said Taylor Horton, Vice President of Directional Options Strategies at Simpler Trading.

Taylor continues to focus on day trading, highlighting the difficulties in swing trading within a market environment that can change on a dime.

Despite the downturn midweek, Taylor is looking for (with several trades on the books) at a possible upturn if all market conditions play out.

He is particularly watching a daily squeeze on DXY with it possibly firing to the downside. If the DXY takes out the $109 low, Taylor estimates, this could be a window of opportunity.

“There could be some juice here as far as moving to the downside,” Taylor said. “Maybe even a flush down to that daily 200-day simple moving average (SMA). I think the market would match that move with a rally back toward its own daily 200 SMA.”

Taylor noted how the dollar has been stuck in a range for about a month. The idea of shorting the market could play out if the dollar spikes in price. A dollar rising generally sends equities to downside, whereas a dollar falling generally provides a boost for equities.

“If that daily squeeze in the dollar can take out support and fire short, I think that does the market a world of good,” Taylor said. “I think we could really get aggressively long. We have to see if it breaks first.”

Dollar, tech are signals to watch next few weeks

The next few weeks in the stock market will reveal if any significant setup emerges.

Taylor is also watching the technology sector where individual stocks – once stalwarts of strength – have struggled. He has eyes on Apple, Inc. (AAPL) and Amazon.com, Inc. (AMZN) where he sees any rising price action in these two as support for the overall market.

Taylor doesn’t expect these two key stocks to take off in a big way.

“We just need them not falling apart every day,” Taylor said.

Taylor sees two key signals to watch: a dollar squeeze firing short and technology stocks getting up off the floor. He noted that these may not happen right away, and he is looking ahead six to eight weeks for a significant move.

“It’s not to say that all this has to work in our favor right away,” Taylor said. “We could have a pretty solid directional trade in the market. Time shall tell.”

If all works out, Taylor anticipates that the S&P 500 could benefit from other sectors showing strength, including energy, financial, and industrial.

“We could have a pretty solid directional trade in the market,” Taylor said. “Time shall tell.”

CPI data may derail stock market momentum

A big pitfall to any stock market expectations may open up with the October U.S. Consumer Price Index (CPI) report Thursday.

“More important than the election… we have CPI coming up on Thursday,” said Raghee Horner, Managing Director of Futures Trading at Simpler Trading. “CPI is the next leg of the market, not who is in what (political) seat.”

CPI data results so far this year have influenced how the Federal Reserve (Fed) positions its ongoing efforts to raise benchmark interest rates.

CPI core inflation hit 6.6% year-over-year in the September report, and the Fed is holding to its plan to lower core inflation to a 2% target.

Core inflation – closely watched by the Fed – measures rising costs, less food, energy, and trade services. Overall inflation remains solidly in place above 8% – a level not seen since the early 1980s.

Raghee pointed out that if CPI inflation numbers inch up, the Fed is expected to raise rates more. If the CPI numbers are down, equities are likely to rally and the Fed could hold at its current rate increase plan.

A silver lining for traders as the stock market tussles with the election results and inflation data might be past history. Following midterm elections since 1950, history has shown the S&P 500 turning to the upside no matter the victorious political party.