Sell the Bounce: CPI, FOMC, and Mercury Retrograde!
Updated
As it has 3 other times this year, the S&P 500 has failed near the top of a descending regression channel dating back to the end of 2021. 4050 looks like the top of the current cycle, as 4340 marked the end of the summer bear market rally.
Mercury Retrogrades have been a useful marker of bearish turning points so far this year amidst the continued downtrend. Mercury Retrograde is not a sufficient trading signal on its own, but its appearance during a bear market rally in a long-term downtrend has been an extremely reliable trading signal (15/17) throughout the 2008, 2018, and 2022 bear markets.
In the real world, apart from the superstitious world, two major events are scheduled which have been associated with volatility in 2022: on December 13, the next CPI reading will be released for November. The October CPI showed decline in the increase of year over year inflation, sparking the current rally in the markets. On December 14, the Fed will release its minutes from its final FOMC for 2022.
There are a few reasons why the November CPI reading may not be as optimistic:
1. Energy prices, which fell through October, have recently stabilized. In a historically bearish quarter for energy prices, WTI and NG remain significantly elevated over December 2021 levels.
2. Housing prices: housing prices peaked between 12-8 months ago, and rental rates generally operate in 12-18 month cycles, so the rent component of CPI should stay elevated until Q2 2023.
Further, the Fed is widely expected to slow the rate of fed funds increase from 0.75 to 0.50 on Wednesday. A smaller increase of 0.50 will not necessarily save the markets from selling off into the end of the year, but a surprise to the upside would be devastating to equity prices. It remains to be seen to what extent FOMC plays a factor in equity prices over the next few months. Continued hawkish comments, even with a 0.50 increase, could roil markets as they have done through most of 2022.
6/7 FOMC meetings in 2022 have been followed by S&P 500 declines of >2% by the end of the week.
When so many factors point to a selloff, the risk/reward overwhelmingly favors a pro trend short trade.
Mercury Retrogrades have been a useful marker of bearish turning points so far this year amidst the continued downtrend. Mercury Retrograde is not a sufficient trading signal on its own, but its appearance during a bear market rally in a long-term downtrend has been an extremely reliable trading signal (15/17) throughout the 2008, 2018, and 2022 bear markets.
In the real world, apart from the superstitious world, two major events are scheduled which have been associated with volatility in 2022: on December 13, the next CPI reading will be released for November. The October CPI showed decline in the increase of year over year inflation, sparking the current rally in the markets. On December 14, the Fed will release its minutes from its final FOMC for 2022.
There are a few reasons why the November CPI reading may not be as optimistic:
1. Energy prices, which fell through October, have recently stabilized. In a historically bearish quarter for energy prices, WTI and NG remain significantly elevated over December 2021 levels.
2. Housing prices: housing prices peaked between 12-8 months ago, and rental rates generally operate in 12-18 month cycles, so the rent component of CPI should stay elevated until Q2 2023.
Further, the Fed is widely expected to slow the rate of fed funds increase from 0.75 to 0.50 on Wednesday. A smaller increase of 0.50 will not necessarily save the markets from selling off into the end of the year, but a surprise to the upside would be devastating to equity prices. It remains to be seen to what extent FOMC plays a factor in equity prices over the next few months. Continued hawkish comments, even with a 0.50 increase, could roil markets as they have done through most of 2022.
6/7 FOMC meetings in 2022 have been followed by S&P 500 declines of >2% by the end of the week.
When so many factors point to a selloff, the risk/reward overwhelmingly favors a pro trend short trade.
Trade closed manually
breach above 50 Day EMA - downtrend violated. Trade closed @ 3933 for slightly over 100 points.
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