Last week’s better-than-expected CPI and PPI releases have been sufficient to lift the indices we follow and move some out of their consolidation pattern. Both data sets consider inflation, with the CPI measuring the pace at which inflation is rising, and the July print came in at 8.5% against 9.1% for June. It is this ‘slowing’ that has convinced the market that inflation may have peaked, the Fed will not be required to raise rates quite so aggressively and so avoid a recession. We shall see!

Looking at the charts for the major indices, the tech sector and growth stocks in the shape of the Russell 2000 and associated ETFs continue to build on the mid-June reversal. However, note my comments on the volume on the screenshot for the IWM – the ETF for the Russell 2000.

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If we begin with NQ – the E-Mini futures for the Nasdaq- we can see the index has consolidated and traded between the S3 & R3 pivots. last Wednesday’s up candle was on CPI day, but it failed to break and hold above the resistance at the R3. Thursday’s PPI release pushed the NQ through this resistance, but the candle closed with a deep upper wick and back below the R3. This often happens on a breakout with the price action returning to test the breakout level.

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But if we consider the weekly chart, we can see why the breakout has stalled as the NQ is at the volume point of control at the 13270 area in this time frame and is where we would expect the price action to pause. Plus, if we look over to the left of the chart, the significance of this level becomes evident as it provided the platform for the move to the ATH in November 2021.

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If we consider the chart of the XLK – the ETF for the tech sector, we can see similarities in structure to the NQ on the daily chart.

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However, on the weekly, the XLK has yet to achieve the volume point of control which sits at the 155 region.

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Moving to the ES – the E-mini future for the S&P500, we have a similar candle configuration to the NQ on the daily chart.

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But the price action on the weekly is more positive as the ES has already broken away from the volume point of control at 4150 with the candle only pulling back briefly from the R3 weekly pivot at 4250.

From the above charts, the market’s optimism and positive price action fly in the face of the Fed’s determination to remain hawkish on inflation and stick to its aggressive agenda of rate hikes. However, the market appears to disagree, and whilst volumes and liquidity do fall in August and can result in price spikes, we are seeing the June reversal in equities continue to play out. But whether this reversal is simply a bear market rally, a very sharp short squeeze (as I’ve read), or the start of a genuine bull rally to attack last year’s ATHs remains to be seen. All we can do is watch the price action and volume and trade accordingly.

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My final two charts are a version of the Russell 2000 index from my MT4 platform and the IWM (Ninjatrader) – the iShares Russell 2000 ETF, revealing inflows suggesting investors feel confident enough to move into what are considered more speculative riskier stocks.

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Stocks in the Russell 2000 have an average market cap of $1.15 billion, and many are newer, growth companies and, despite being more volatile, have the potential to deliver double-digit returns, as it has been shown that small caps can outperform the large caps over long periods. The index is also more diversified because of its focus on smaller companies. It is less top-heavy and is not reliant on the performance of a few large companies.

What is also interesting is that since the June low, the Russell2000 is up 16% while the S&P500 has gained 13%, which we can see from the chart structure for both indices. Moreover, from a historical perspective, small-cap stocks outperform large-cap stocks in the initial stages of a new cyclical uptrend, and here, note the word ‘cyclical’ as the market is assuming this period of inflation is indeed cyclical and not structural. There is a crucial difference resulting in very different outcomes, and this is something I will cover in a future post.

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