11 Minute Read

Tackle Today: Peak Inflation or Overreaction?

August 11, 2022

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«Is Inflation Really Over?»


Yesterday we had the CPI number released for the month of July and it came in at a whopping 8.5%. Since the target of the Fed is 2% one could have surmised that this would not necessarily be a good thing, however, don’t tell the markets! The expected number for inflation was 9.1%. This was seen as a win by the Bulls who have wrestled control away from the Bears over the last few weeks and were sitting at a very important resistance level and, as soon as that number came out, the markets jumped above that resistance and have yet to look back. Does this mean that the worst is over from an inflationary standpoint and are we able to quell a looming recession? The next GDP number comes out later this month and will dictate whether we are in a recession or not from a technical standpoint.

Whether or not we find ourselves in a recession or this is truly peak inflation having an inflation number that is over four times bigger than the stated target is troublesome and will cause the FED to continue raising rates that could potentially put pressure on the overall economy. Fortunately, the job market has been solid and this has helped out this situation, although consumer spending has seen a decline since last month and this is a major driver of the US economy. There is a mixed bag of data at this point and we are still waiting on some important data points to get a clear picture of what is really happening economically.

Regardless of what is happening in the economy at this point, we need to look at the charts and what is actually happening in the markets and act accordingly. As we saw yesterday all the major indexes broke resistance levels and there appears to be some follow-through today and this bodes well for the Bulls. I would temper our enthusiasm only because we find ourselves in an overbought situation on a lot of the charts and therefore caution is not necessarily a bad thing. We could see one of two scenarios play out and the first one is that we get a shallow pullback into a known support level and then a confirmation run up in price which would put in higher low pivots which is very good for the Bulls or we breakdown below the support we just created with this breakout and then we have a more neutral type condition. Regardless of what happens we need to keep inflationary and economic factors in mind when we are trading and investing but more importantly, we can’t fight the tape and if the markets want to flow in one direction despite the outlying factors then we need to go with the flow!

Video Of The Day: How to open an Option Chart on Thinkorswim

Coach Tim explains how to open and analyze an option chart on Thinkorswim.

Chart of the Day: S&P 500 Futures (/ES)

Chart of the Day: S&P 500 Futures (/ES)

This chart of the S&P 500 futures shows the breakout formed yesterday after the inflation number came in softer than expected at 8.5% instead of the 9.1% expected. This breakout is a bullish sign and could potentially provide a backdrop for future bullish price action.

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