Inflation data is not likely to move stock prices much. What's next?

This morning, the markets received the important Consumer Price Index (CPI) release, which came in slightly higher than expected at +0.3% month-over-month. As a result, sentiment worsened slightly ahead of the S&P 500 index open. Futures contracts are trading 0.3% lower; prior to the release, they were down 0.2%. Stock prices are set to fluctuate following Monday and Tuesday’s rebound, which seems like a correction of the recent declines. Uncertainty remains regarding the Yen carry trade, the upcoming FOMC Rate Decision, and the Bank of Japan’s (BOJ) announcement next week.

On August 21, I wrote “Recently, the market has continued to climb following the brief Yen crisis at the start of August, surprising many traders. The question is whether the market will continue to new highs or reverse course and retrace the recent rally. I think there is a chance the market will reverse its course and correct some of the advances, retracing a large part of the rally.”

Despite recent declines, investor sentiment remained elevated, as shown by the AAII Investor Sentiment Survey last Wednesday, which reported that 45.3% of individual investors are bullish, while 24.9% of them are bearish, down from 27.0% last week.

The S&P 500 index approached the 5,500 level yesterday, as we can see on the daily chart.

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Nasdaq 100: Closer to 19,000 Again

The technology-focused Nasdaq 100 gained 0.9% on Tuesday, following its Monday’s advance of 1.3%. It breached the important short-term resistance at 18,800, marked by the local lows from Wednesday and Thursday. However, this morning, the Nasdaq 100 is expected to open 0.2% lower after the consumer inflation release.

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VIX: Still Near 20 Level

On Friday, the VIX index, a measure of market fear, reached a local high of 23.76, slightly surpassing its Wednesday’s local high. It still indicates elevated fear among investors, although, the index continues to close below the 20 level.

Historically, a dropping VIX indicates less fear in the market, and rising VIX accompanies stock market downturns. However, the lower the VIX, the higher the probability of the market’s downward reversal. Conversely, the higher the VIX, the higher the probability of the market’s upward reversal.

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Futures Contract Consolidating Below 5,500

Let’s take a look at the hourly chart of the S&P 500 futures contract. On Friday, it briefly dropped below the 5,400 level, continuing its decline. However, it rebounded on Monday and approached 5,500. This morning, the contract is consolidating, with resistance at 5,500 and the next level of resistance at 5,550, marked by recent local highs.

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Conclusion

Stock prices are likely to open slightly lower this morning, and the market continues to face uncertainty. The short-term resistance level remains at 5,500. For now, it appears to be a consolidation following the recent rebound, which could either be a flat correction before another move higher or a topping pattern before a retreat, potentially re-testing the 5,400 level.

I closed my profitable short position on Monday, at 5,462. This position, opened on August 20 at 5,626, generated a 164-point gain.

Last Wednesday, in my Stock Price Forecast for September 2024, I noted that, “the market experienced significant volatility in August, with a roller-coaster ride that included a sell-off to the August 5 local low and a subsequent advance, leading to a consolidation near the record high. (…) sharp reversal suggests more volatility in September. Last month, I wrote that ‘August is beginning on a very bearish note, but the market may find a local bottom at some point.’ The same could be said today, and September will likely not be entirely bearish for stocks.”

For now, my short-term outlook remains neutral.

Here’s the breakdown:

• The S&P 500 index is set to open slightly lower following the CPI release.
• Investors are awaiting the FOMC Rate Decision next week.
• In my opinion, the short-term outlook is neutral.

The full version of today’s analysis - today’s Stock Trading Alert - is bigger than what you read above, and it includes the additional analysis of the Apple (AAPL) stock and the current S&P 500 futures contract position. I encourage you to subscribe and read the details today. Stocks Trading Alerts are also a part of our Diamond Package that includes Gold Trading Alerts and Oil Trading Alerts.

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