Markets Look Ahead to CPI and FOMC

Markets gapped down very modestly on Friday.  They then spent most of the day in waves and “dead flat” periods grinding sideways that lasted until 3:15 pm.  At that point, all three major indices sold off hard in the last 45 minutes of the day, closing very near the lows.  This left all of them as some form of a black-bodied inverted hammer candle.  All three also failed a retest of their T-line (8ema).  The QQQ also closed right at its major support level.  So, overall, it was a blah day, punctuated by profit-taking or a bearish selling spree during the last hour.

On the day, all ten sectors ended in the red with Energy (-1.76%) leading us lower and the Financial Services (-0.22%) and Utilities (-0.23%) sectors holding up the best.  In the meantime, the SPY was down 0.75%, the DIA was down 0.91%, and the QQQ was down 0.64%.  All of this action took place on less than average volume.  However, it was close to average than the last few days.  The VXX climbed by 2.14% to 15.30 and T2122 fell back just inside of the oversold territory at 19.67.  10-year bond yields were up sharply to 3.586% and Oil (WTI) was flat at $71.59 per barrel.  

In economic news, the market was disappointed by November PPI (Wholesale-level inflation) which came in at +0.3% (versus the forecasted +0.2% and the October value of +0.3%).  So, traders had expected more evidence that inflation was starting to come down (in order to give the Fed cover to do a smaller rate hike this week) and were then disappointed.  As a result, premarket action went from implying a modest gap higher to actually delivering a modest gap lower at the open.  Later in the morning, Michigan Consumer Sentiment came in higher than expected at 59.1 (compared to the forecast of 56.9 and the previous value of 56.8).

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In stock news, Reuters (which obtained an internal memo) reported Friday that TSLA is suspending production of its “Model Y” in China from at least Dec. 25 through year-end. It’s unclear if “Model 3” production will also be halted.  The unplanned shutdown is a response to upticks in covid labor losses (related to the recent relaxation of zero-covid policies in Shanghai as well as parts supply (reduced for the same reason).  In other auto news, STLA announced Friday that in February it will indefinitely shut down a Jeep Cherokee production plant in IL (1,350 employees).  The UAW told Reuters that internal company documents show the company is moving Cherokee production to its Mexican plant.  Elsewhere, ERIC and AAPL have reached a global patent license deal which ended a legal fight over royalty payments for 5G technology used in iPhones. Meanwhile, on Monday, MSFT announced a 10-year cloud services deal with the London Stock Exchange, part of which was MSFT acquiring a 4% stake in the exchange. Finally, it was announced today that AMGN has agreed to buy HZNP for $26.4 billion (or $116.50/share cash, a 20% premium on Friday’s closing price).

In index news, the QQQ (Nasdaq 100) will rebalance as of the opening bell on Dec. 19.  Changes include the addition of RIVN, WBD, CSGP, GFS, BKR, and FANG.  The tickers being removed are VRSN, SWKS, SPLK, BIDU, MTCH, DOCU, and NTES.  So, the index will remain tech-heavy, even as it diversifies, and will be reduced from 102 to 101 tickers.  Many exchange-traded funds and actively managed mutual and hedge funds are bound by rules stating they must own all of the “current members” of that index.

In miscellaneous news, on Friday the WTO ruled that steel and aluminum import tariffs levied by the US (former President Trump) violate global trade rules. However, in a nod to US steelmakers and unions, President Biden has appealed the ruling to the WTO Appeals Court. This makes the ruling null because the Appeals Court is shut down since the US has been blocking the appointment of WTO “judges”. (US Aluminum and Steel firms: ARNC, SCTM, KALU, AA, CLF, CRS, CMC, NUE, STLD, X) Elsewhere, over the weekend, the Keystone oil pipeline leak in Kansas is the largest spill in the US for more than a decade.  As of Sunday, TRP (the pipeline operator) said they have not found the cause of the 14,000+ barrel spill and have no plans on restarting operations with various investigations ongoing.  Finally, on Sunday, the NASA Orion capsule splashed down after completing its 25-day mission to and week of orbiting the moon.  Hours before it did so, a SpaceX rocket took off carrying a lunar lander made by the Japanese company iSpace.  If they land successfully, it would be the first company (non-governmental entity) to reach the moon.  (To date, only the US, Russia, and China have been able to successfully land missions on the moon.)

Overnight, Asian markets were almost exclusively red on generally modest moves.  Thailand (+0.16%) was the only green while Hong Kong (-2.20%) was the only move greater than 0.90% in the region.  In Europe, a similar story is taking shape at midday.  The FTSE (-0.19%), DAX (-0.29%), and CAC (-0.38%) lead the region and are typical with only the FTSE MIB (+0.05%) in the green in early afternoon trade.  As of 7:30 am, US Futures are pointing toward a modest gap higher to start the day.  The DIA implies a +0.19% open, the SPY is implying a +0.28% open, and the QQQ implies a +0.32% open at this hour.  Meanwhile, 10-year bond yields are falling to 3.536% and Oil (WTI) is off 0.69% to $70.53/barrel in early trading.

The major economic news events scheduled for Monday are limited to the November Federal Budget Balance (2 pm).  There are no major earnings reports scheduled for before the open.  Then after the close, JOAN, report.

In economic news later this week, on Tuesday we get November CPI and API Weekly Crude Oil Stocks.  Then Wednesday, November Import/Export Price Index, EIA Crude Oil Inventories, Fed Q4 Interest Rate Projections, Fed Economic Projections, FOMC Statement, Fed Interest Rate Decision, and FOMC Press Conference are reported.  On Thursday, we get November Retail Sales, Weekly Initial Jobless Claims, NY Fed Empire State Mfg. Index, Philly fed Mfg. Index, Nov. Industrial Production, Oct. Business Inventories, and Oct. Retail Inventories are reported.  Finally, on Friday, Mfg. PMI and Services PMI are reported.

In earnings later this week, on Tuesday, we hear from CNM and ABM.  Then Wed. we get reports from REVG, LEN, NDSN, and TCOM.  On Thursday we get reports from JBL and ADBE.  Finally, on Friday, we hear from CAN, DRI, and WGO.

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All eyes (globally as well as in the US) seem to be looking toward the Fed. As of this moment, Fed Futures are showing that a 75% probability of a 0.50% rate hike and less than a 25% probability of a 0.75% rate hike has been priced into the market. The CPI data on Tuesday may give us a clue, but suffice it to say the market is expecting a slowing of the increases and no matter what the Fed does, it will have plenty of critics.

With that background, the short-term trend remains bearish. However, it looks like all three major indices are holding ground in premarket trading. In fact, the SPY and QQQ look as if they could be trying to form a short-term bottom for their pullbacks. Either way, over-extension is not a problem in terms of the T-line (8ema) or the T2122 indicator (where we are just barely inside oversold territory). So, they have room to run if traders want to move the market.

As always, be deliberate and disciplined…but don’t be stubborn. If you have a loss, admit you were wrong and take that loss before it gets out of hand. And when the price does move in your direction, always move your stops in your favor and take a little profit off the table. You have to keep the “Legend of the man in the green bathrobe” in mind. In a winning situation, it is NOT HOUSE MONEY you’re betting, it’s YOUR MONEY! There is absolutely no reason to keep raising your bet (risk) size just because you’ve had a win. Finally, remember that trading is not a hobby. It’s a job. The money is real and so is the risk. So, treat it that way. Do the work and follow the process. Stick to your trading rules, trade with the trend, and take those profits when you have them. Do the work!

See you in the trading room.


Swing Trade Ideas for your consideration and watchlist: COUP, CLX, BDX, NVDA, OGN, KHC, GSK, MOMO, and PUMP. You can find Rick’s review of tickers on his YouTube Channel here. Trade your plan, take profits along the way, and smart. Also, remember to check for impending earnings reports. Finally, remember that any tickers we mention and talk about in the trading room are not recommendations to buy or sell.

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