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A Technical Breakdown Of The S&P 500 Going Into January's CPI Reading

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The S&P 500 has been range-bound between 4450 and 4590 (oscillating around 4500) since it broke out of correction territory at the end of January, as market participants sit on their hands and await the next meaningful macro catalyst. Thursday's (2/10) inflation figure looks to be the next on the docket of market-moving economic reports, which will reveal the magnitude and focus of Omicron's inflationary impact.

Volumes have been gradually declining since February began as nervous investors set their expectations for the flood of quarterly reports that are hitting the wire before and after each trading day. Following a red hot January jobs report, the January CPI report and its monetary implications will be the primary market focus of this week's index level action.

This inflationary indicator should further tighten the credit market's expectations (5 to 6 Fed Fund hikes in 2022) and hopefully provide an information-relief rally across the most inhibited rate-sensitive spaces of the market (assuming CPI data doesn't illustrate anything wildly unexpected). Expectations vs. reality is what to focus on, not fear-mongering headlines, which I can almost guarantee we'll see no matter what the result.

Technical Breakdown

Fear, uncertainty, and doubt (FUD) surrounding inflation, monetary policy, and their combined implication on sustained demand have held the S&P 500 in a technically-bound trading range.

When employing macro technical analysis on the US stock market, it's prudent to do so with S&P 500 futures instead of the spot index due to its 24-hour trading (Sunday evening thru Friday afternoon), making it the preferred US equity trading tool for global professionals. In other words, it's the industry standard for stock market chartists.

Something to remember while reading: Fibonacci extension levels (price targets to the downside) shown above represent entry points, while Fibonacci retracement levels (price targets to the upside) provide technical exit targets.

Below is a breakdown of all the technical levels we have been interacting with over the past week, with Fibonacci extension (green circles) & retracement (red circles) levels holding exceptionally well in this precarious trading environment.

I realized how confusing all these overlapping levels look on the surface, so I will break down what we're looking at. The S&P 500 level interactions are circled in the chart below and color coordinated as follows:

Blue circles: Represents its 200-day moving average (MA) at around 4450, which just so happens to be line up with the 38.2% January Fib-retracement (two supports are always better than one).

Red circles: Fibonacci retracement levels drawn from January's highs to lows. These levels are price targets to the upside and where sellers have shown up. Key levels are the 50% retracement at 4520 and the 61.8% golden ratio slightly north of 4590, which ended up being the high of the week. This fib-extension gives us a longer-term S&P 500 price target of about 5200.

Green circles: Fibonacci extension has denoted buy levels throughout the past week, at 4480 and 4455.

TradingViewImage Source: TradingView

Last Monday (1/31) began with a tech-fueled breakout to conclude January's exceptionally volatile trade on a note of optimism, driving the S&P 500 comfortably away from correction territory (-10% decline threshold) and back above its 200-day moving average (blue circle).

The week saw its peak around Wednesday's (2/2) closing bell (red circle) into Meta's post-earnings meltdown that carried the whole market with it. Amazon's (AMZN) unexpected earnings blowout, along with scorching hot January jobs report, put a Band-Aid on this hemorrhaging Friday morning.

Fickle price action is kicking us off in this second week of February trading. With a slew of earnings across sectors being released throughout the week and January's yield-driving CPI report Thursday morning, we are poised for another crazy week of market action.

The most important S&P 500 (futures) technical levels to watch amid this week's likely volatility will be the 200-day MA to the downside, which sits just above 4450. A break below this could mean the market is headed back into correction territory or, worse yet, towards a bear market (-20% decline from recent highs).

A breach of the 50-day MA at 4620 will be the bullish breakout signal to watch for if this week's data comes in favorably. First, we'll need a catalytic push above last week's fib-bound high around 4590. This catalyst could come in a data relief rally following January's CPI release Thursday morning.

I'm looking to buy growth prior to this reading as this data will likely lift the FUD-pressures surround next generation innovators.

Stocks I'm buying into the print: CrowdStrike (CRWD - Free Report) , Splunk (SPLK - Free Report) , SoFi (SOFI - Free Report) , ACM Research (ACMR - Free Report) , SMART Global (SGH - Free Report) , TSMC (TSM - Free Report) , and Twilio (TWLO - Free Report) .

Happy Trading!