S&P 500 at a Crossroads Ahead of Inflation Data – Capital Street FX
14 Feb 2023
Over the last 5 months since the Oct. 13 low, the market has reacted in a surprising fashion to many of the CPI and PPI reports. For example, while the Oct. 13 CPI published report was expected to cause a 5% decline in the S&P 500, the market actually struck a major bottom and began a 20% rally off that low.
And, this was not the only time over the last 5 months that market participants were surprised by the reaction after a report. Moreover, these surprises came the upside and the downside. I have outlined these instances in this prior article. So, what is the most important takeaway from these reports? Is it that we should look a lot closer at the substance of these reports? Absolutely not.
I have noted many times that, while news and economic reports can act as a catalyst for a market move, the substance of that news or economic report is not always going to be indicative of the direction of the market move. And, the last 5 months have provided us with very stark examples, as outlined above. So, if you have been trying to discern market moves based on these reports, you have likely been terribly whipsawed many times over. But I can assure you that you have not been alone, as most analysts and market participants have been as well.
Yet, since we bottomed where we expected in October of 2022, I have been continually outlining my expectation for us to rally towards the 4300 regions off that low before the market makes a major decision after that rally completes. And, we are just about them despite most market participants and analysts not expecting it based upon their views of the various reports and news announced over these last 5 months.
Regarding current market expectations, the market has been quite erratic over the last week. While we have been attempting to track a structure that will next attack the 4300 SPX region, the market took a very unusual path last week to the downside. While it spiked and reversed around the support region, I outlined last weekend; it certainly did not provide us with a clear or easy path.
Rather, from an Elliott Wave perspective, it seemed to tell us that the market is attempting to take an overlapping and complex path toward the 4300 SPX region within an ending diagonal structure. And, these structures are not anywhere near as easy to trade as standard impulsive structures that we track.
So, I will make this relatively easy for the coming week. Our support is in the 3980-4025 SPX region. As long as the market respects that support, my next ideal upside target is in the 4290-4328 SPX region, and the CPI may act as a catalyst to begin the rally toward that region (again, assuming we maintain the support noted above).
But now I am going to warn you. The market has become much riskier. While my expectation was for us to rally to at least the 4300 SPX region off the 3491 SPX low struck in March, we seem to be completing that rally with a very unreliable and volatile structure. Moreover, this type of structure can point us back down to the 3800 SPX region quite quickly once we complete this upside move off the December low.
You see, if we are indeed completing an ending diagonal structure in the coming weeks (assuming we hold the support noted above), then the reversal seen after completion is usually quite violent. Moreover, a traditional target after completion is the region from which the diagonal originated, which is the 3800 SPX region. And, again, it traditionally moves back to that target in a very rapid fashion.
Furthermore, the structure of that drop will likely tell us if we can expect further highs in 2023, with the potential to even reach our old 5150-5500 SPX region ideal target for the bull market off the 2020 low. You see, if the market drops back to the 3800 SPX region is corrective in nature, then it opens the door again to be able to reach our ideal target zone for the bull market structure off the 2020 low.
However, if the structure of the next drop towards 3800 is clearly impulsive in nature, then it suggests that we are likely heading down to the 2700-2900 SPX region later this year. So, clearly, the action seen over the coming months is likely going to tell us how the rest of 2023 is going to take shape.
I know many of you have biases as to what you “believe” is going to happen. Yet, these same biases are what cause most of you to remain on the wrong side of the market for too long and incur significant losses. Rather, my suggestion to you is to retain an open mind and view the market with objectivity. It will tell us how the rest of the year will likely take shape, and you should listen to the messages it provides to us rather than attempt to impose your fundamental bias upon the market.