Bearish News – Bullish Reaction

On 12/10/21 the US  Consumer Price Index (CPI) was released and recorded a 39 – year high. If high inflation continues it’s  bearish for the average  US consumer, increasing  inflation tends to be greater than increasing  earnings.

Inflation by itself may  not be bearish for stocks, its what happens to yields/rates that have an effect on stocks.  This was discussed in the 11/17/21 blog “Rising Short-Term Interest Rates”.  Rising rates/yields for short- term US government notes/bonds in the one-to-five-year range can lure money out of stocks and into much safer notes/bonds.

The daily chart of US Five – Year  Treasury Note Yields (FVX) courtesy of Trading View illustrates  the price action since July 2021.

On the bearish CPI report  FVX stayed below its 11/24/21 high and had a small decline going from a close  on 12/09/21 of 1.257%  to 1.252%.

Daily Stochastics had a crossover that implies  yields  could continue to decline.   

If yields  continue lower it could aid  the current rally in US stocks.

The 60 – minute S&P 500 (SPX) chart illustrates  a bullish pattern.

After the recent rapid  SPX  rally a  bullish “Cup with handle” pattern  formed. When prices exceed the high point of this pattern it strongly implies  a continuation of the rally.  It’s  also interesting  as  to  when  the upside breakout occurred.  It  happened in the last trading hour of the week, apparently traders  were not concern with “event risk” over the weekend.   

Additional bullish evidence comes from the RSI + MA.  So far RSI has not reached the overbought zone above 70%.  Also, on 12/10/21 RSI – the black line  moved above its moving average – the red line.  This  bullish crossover implies  continuation of the rally.

At the SPX high on 12/10/21 it had retraced 87.8% of the 11/22/21 to 12/03/21 decline.  The bullish evidence strongly implies  the SPX could make  a new all-time high as  soon as  12/13/21.  On 12/15/21 the US Federal Reserve  will  make its  FOMC  announcement at 2:00 PM – ET.  Their decision could help continue the US stock rally or trigger  at  least  an intermediate multi month decline.