Will the inflation report send stocks to new lows? (Maybe not)

The monthly CPI report has become more closely watched than the monthly employment report.

Although this is not always the case, inflation does pass through the market. It is being felt at home and abroad, as well as in stocks, bonds, interest rates and the housing market.

On Thursday afternoon, the stock market tipped lower, breaking below last week’s low and moving lower in anticipation of a poor inflation report on Friday morning.

On June 10, that’s what we got, as gas prices helped push up inflation. The CPI reading beat expectations, sending stocks tumbling.

The fear is that inflation is going nowhere.

Fighting inflation has become the Federal Reserve’s primary focus, regardless of what its actions do to the S&P 500 or the economy.

The Fed has been too slow to react to inflation, having only raised rates in March. Even then, it was an increase of just 0.25 percentage points. Now the Fed is on a rate hike frenzy and is beginning to unwind its massive balance sheet.

In combination with today’s inflation report, investors are all asking the same question: have we seen the bottom or are more losses to come?

Trade the S&P 500

S&P 500 daily chart.

After an impressive bullish push that could have marked the bottom, the market made a decisive break down from its consolidation phase.

Until June 8, the SPDR S&P 500 ETF (TO SPY) – Get the SPDR S&P 500 ETF Trust Report was doing a great job holding the previous week’s low near $407 and the 10-day moving average. With Thursday’s action, however, both levels failed as the S&P 500 turned lower.

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Today’s gap brought the 61.8% and 78.6% retracements into play. Additionally, the $387-$390 area was earlier support last month.

Things don’t look great as the market still has multiple headwinds trying to drag it down and the action in stocks and bonds is not encouraging.

That said, if the 78.6% retracement and the $387-$390 area can hold, we could see one hell of a bounce.

A break of $387 and failure to rebound almost surely puts the 2022 low in play near $380.50. Below that and, who knows, maybe a move up to $350 could be in the cards.

On the upside, a rally towards the 10- and 21-day moving averages is suspect, while $407 could very well be resistance.

Trading the Nasdaq

QQQ stock daily chart.

QQQ stock daily chart.

Inside the Invesco QQQ ETF (QQQ) – Get the Invesco QQQ Trust Report we have a similar action. After a nice rally, the Nasdaq consolidated above $303 and the 10-day moving average.

On Thursday, it went below all of these levels, as well as the 21-day moving average. But today’s gap to the 61.8% and 78.6% retracements holds…for now.

This is likely because some of today’s risk was reduced with yesterday’s decline. Now Friday’s action is key.

If the QQQ can hold in this area, it would bode well for the bulls. If not, we could see another drop to the lows near $280. A break of $280 and failure to rebound could usher in a test of the low to mid $260s.

On the upside, keep a close eye on the $300-$303 area. For now, it is expected to be resistance.

Garland K. Long