Ultimately, the question now is whether or not we can go lower and break below the 3800 level?

The S&P 500 has initially tried to rally a bit during the trading session on Thursday but get back gain as we are starting to focus on the CPI numbers coming out on Friday. Ultimately, the CPI numbers will give us an idea as to what the Federal Reserve is about to do, and of course, tightening monetary policy is like kryptonite for Wall Street. After all, the last 13 or 14 years have all run on liquidity and nothing else.

We have pulled back from a major area of confluence, as the 50 Day EMA sits there, and it was the same area where we had seen previous support. This is now resistance, based upon “market memory.” Ultimately, this is a market that has been in a downtrend and I just do not see that changing anytime soon. Ultimately, this is a market that probably goes looking towards the bottom again, but we will have to wait and see whether or not we have enough momentum to actually break through. All things being equal, this is a market that has nothing positive about it, so therefore I think it’s only a matter of time before we see sellers push even harder.

On the other hand, if we were to turn around a break above the 50 Day EMA, then we will challenge the 4200 level. Above the 4200 level then opens up the possibility of challenging the 4300 level. That’s an area that has been massive resistance previously, and now the 200 Day EMA sits right there as well. Ultimately, this is a market that I think will be looking for signs of exhaustion to jump all over. Because of this, I am more than willing to fade any short-term rally at this point, especially if the CPI numbers come out hotter than anticipated.

If the CPI never misses horribly to the downside, that might be enough to get a bit of a relief rally going, but I just don’t see that being the case, and even if it does, I think it only offers us shorting opportunities at higher levels. Quite frankly, that would be my favorite trade setup, but I just don’t see it happening. Ultimately, the question now is whether or not we can go lower and break below the 3800 level?

Market participants will continue to see this as a “sell the rallies” type of situation, as the market has far too much to concern itself with right now to suddenly get wildly bullish.

The S&P 500 initially tried to recover on Tuesday, but as you can see we have given back all of the gains to show signs of extreme weakness. Ultimately, this is a market that looks as if it is scared to death of the CPI numbers coming out during the Wednesday session, which will give us an idea as to how bad inflation truly is. Because of this, I think the market will more than likely continue to see a lot of volatility, but it certainly looks as if we are “leaning” to the downside.

The S&P 500 continues to worry about the inflationary headwinds, and perhaps more importantly at this point in time, the Federal Reserve. The Federal Reserve continues to look as if they are going to be very tight going forward, and aggressive when it comes to monetary policy. If the CPI print comes out stronger than anticipated, that could be a very negative turn of events for this market. If we break down below the bottom of the candlestick, it is likely that we will continue to see some follow-through, perhaps opening up the possibility of a move down to the 3900 level.

On the other hand, if we get a reading that is lower than anticipated in the CPI figure, we may make a serious attempt to get to the 4100 level. There is a barrier between 4140 and 4150 that I think is going to be difficult to overcome, so keep that in the back of your mind. Market participants will continue to see this as a “sell the rallies” type of situation, as the market has far too much to concern itself with right now to suddenly get wildly bullish. It is worth noting that every rally has been sold into as of late, and it looks as if the negativity is going to continue to be a major factor in this market.

If we were to turn around and break above the 41 to 50 level, that would be an extraordinarily bullish move, but right now I just do not see the momentum of the market swinging that rapidly. It would take something rather remarkable coming out of the CPI to make that happen, something that I do not think we will get.

Now that we have tested the 50 Day EMA two days in a row and I found buyers there, I suspect that a bounce could be coming.

The S&P 500 has saved itself late during the trading session on Thursday, as the fabled “Plunge Protection Team” enter the market. Whether or not it was actually anybody at the Federal Reserve is a completely open question, because quite frankly there were a lot of technical reasons why this could have happened.

The first thing of course is the 50 Day EMA being tested, which generally attracts a certain amount of attention. Now that we have tested it two days in a row and I found buyers there, I suspect that a bounce could be coming. It did not look that way earlier in the session, and quite frankly I thought we could see a bit of selling. Now that we have turned around, it is obvious to me that the market refuses the fall, perhaps due to the fact that people are willing to challenge the Federal Reserve.

Keep in mind that this is about liquidity and nothing else and will have nothing to do with the overall economy. (The idea of the stock market and the economy being related was killed after the Great Financial Crisis.) Currently, there is a huge debate as to whether or not the Federal Reserve will be as aggressive with monetary policy as advertised. It is an interesting argument, and is going to continue to cause headaches for traders.

If they are not, that is good for stocks because they run on liquidity and nothing else. On the other hand, if they have to be tight because of inflation, that will be like a hammer to the stock market. A lot of it is going to come down to whether or not Wall Street gets its fair share of cheap money, in its eyes. Those days could be over, but it will be interesting to see whether or not that plays out.

The market has been forming a bullish flag, and the action during the trading session on Thursday saved that notion. I anticipate that they may try to push this market higher heading into the weekend, but there is going to be a certain amount of influence from Asia and Europe at the open. If they start to sell off again, we may fall to test the 200 Day EMA. I anticipate that by the time it is only North America trading, there will be buyers.