Soft CPI = Strong S&P 500 (SP500) -LSB

Inflation softer than expected

The big news from last week was that the inflation numbers (CPI) came in softer than expected.

Here is a chart of the 10-year US Treasury yield. Maybe I didn’t need to include the caption state when the CPI report was published.

Here’s the same time frame chart, but instead we look at S&P 500 futures.

It certainly appears that the order of operations was as follows:

Soft CPI Report -> US Treasuries Rally -> S&P 500 Rises

S&P 500

If we zoom in and look at the daily chart of the S&P 500, here’s what we see.

Last week (see full report here), I made the following comment about a possible “bullish path” for the S&P 500 in the short term.

Bullish Street = A continuation up from here where “The S&P 500 not only breaks the trendline, but then retests the trendline, thereby allowing it to become support and then march higher from there to remove the next ‘top gap.'”

As I pointed out above, for this bullish move to have legs, it needs to go down and close the gap it created last week (blue box), bounce off the downtrend line, and then march higher from there.

Look at the RSI

Note that the RSI is heading into “overbought” territory. A move lower to fill the gap and bounce off the trendline could be enough to eliminate some of the overbought conditions and then drive the S&P 500 higher to close the upper gap (green box). .

If that narrative breaks, it will be with the S&P 500 trading below the downtrend line on the chart. If this happens, I think you have a pretty good chance of removing each of the open gaps below (the red boxes).

US Treasury

On October 30, I made the following comment (see full report hereRegarding the potential for a move higher in the US Treasury ETFs we track:

ZROZ, TLT, TLH and IEF all have very similar tables. I realize that the following rhetorical question may be (and likely is) a bit early, but “Are these four ETFs forming the ‘Head’ of a potential Head & Shoulders reversal pattern from a deeply ‘oversold’ position to RSI?”

If so, a rally back to the neckline (ie, not even counting the target levels that would form above the neckline if this turns out to be a Head & Shoulders reversal pattern), would create a move of +51.4%, +29.3%, +22.7% and +11.5% respectively.”

Let’s highlight ZROZ in today’s post.

Here is the weekly chart for ZROZ.

Since I published the October 30 article, ZROZ has returned 11.36%.

If this eventually becomes a Head & Shoulders inversion, ZROZ could reach a target near 136.97 in the medium to long term.

If inflation continues to fall, U.S. Treasuries should continue to rise, and the U.S. Treasury ETFs we track have plenty of room to run.

Briefing

The S&P 500 had a fantastic week last week due to softer inflation numbers and a rise in US Treasuries. However, the rally was so fast and furious that a) it created a new gap below the current price levels that needs to be filled and b) it is already reaching overbought levels on the RSI indicator.

Watch for a possible pullback over the next week and pay attention to how the S&P 500 reacts relative to the downtrend line.

Happy Thanksgiving!

Life can be full of many ups and downs, but my hope is that each of us (myself included) will take a minute or two over the next few days to count our blessings and spend time being thankful for everything that is given to us.

Until next week…