Both the consumer and wholesale inflation reports released this week came in hotter than expected. The Consumer Price Index (CPI) showed annual headline inflation accelerating to 3.7% in September, up from 3.4% in August, while consumer prices rose 0.6% on a monthly basis. Removing volatile food and energy, core CPI ticked up to 2.6% annually, from 2.4% in August.
The 3.7% print reflects a re-acceleration, it remains well below the multidecade peak of 9.1% recorded in June 2022 but it extends one of the longest stretches of elevated inflation in the past century. Headline CPI has now stayed above the Federal Reserve’s 2.0% target for more than five years, since March 2021.
The primary catalyst for the recent bump is energy. The conflict in the Middle East has disrupted energy supplies and pushed costs sharply higher. Over the past year, gasoline prices have surged 34.2% and fuel oil has jumped 74.2%, and price pressures are spreading into broader categories, including shelter (now at 3.2% annually), airline fares and other transportation costs, automobile prices, and hardware and software tied to the AI investment boom.
This puts the Federal Reserve in a difficult position, because its main tool works on demand while this inflation is coming from supply. Raising rates does not create more oil. Hikes cool inflation by slowing spending and borrowing, which works well when prices rise because demand is too strong. The war has cut oil supply, a hike cannot bring back a single barrel. It only makes people and businesses spend less on everything else, so hiking rates risks pushing growth lower while inflation stays high, which is the stagflation trade-off.
The Producer Price Index (PPI) delivered an even sharper upside surprise. Final PPI surged 1.3% in September, nearly double the 0.7% economists expected and the largest monthly advance since March 2022. Wholesale prices rose 6.3% year over year (up from 5.6% in August), the largest 12-month advance since December 2022.
More than 80% of the increase in goods prices traced back to a 10.8% jump in wholesale energy costs, including gasoline up 20.3% and diesel up 21% within the month. Wholesale food also rebounded 1.2%.
The FED Dilemma
Hike too much, too soon: the Fed hurts a slowing economy for a problem rates can’t fix.
Wait too long: the shock leaks into wages, core prices and expectations, and then it takes harder hikes to undo.
The Stock Market and Setups
Last week we studied how price action was showing clear signs of a top, with the NDX printing reversal signals and the VIX due for a spike, not to mention the bearish reversal called for NVDA in my daily note on Wednesday 10/7. This week, price action found its bearish trigger.
We have also studied how technical analysis anticipates events, and how institutional algorithms account for roughly 60% to 73% of daily US equity volume according to JP Morgan, Bloomberg, and the Bank of International Settlements (BIS).
Did the whales know what was coming on inflation, and did their moves leave footprints in price action? What we know for sure is that last week’s price action warned of a decline. The high probability setups for NVDA, AMD and QQQ reached their targets: 219 🎯 (-4.2%), 537 🎯 (-11.6%) and 722 🎯 (-4%) respectively, all of them beyond expectations. We also studied bullish setups, and they worked as well: COST 1,000 🎯 (+5.6%), WMT 516 🎯 (+5%) and NFLX 72.8 🎯 (+3.5%).
All of these levels were calculated from modeled support and resistance levels where institutional algorithms react, and the directional views rested on transparent technical analysis presented here, including the charts and momentum maps shared here with subscribers every Saturday.
I publish the complete set of weekly and monthly levels for my watchlist every Friday. This Saturday’s publication adds the technical charts and the Blueprint of setups for next week, including the price targets for this watchlist:
If you trade some of the stocks in this watchlist, this publication is for you:
Indices & Futures: SPX, NDX, DJI, IWM, ES=F, NQ=F
ETFs: SPY, QQQ, SMH, TLT, GLD, SLV, DIA, VXX
Major Stocks: AAPL, MSFT, GOOG, AMZN, NVDA, META, TSLA, SPCX, LLY, WMT, AVGO, COST, JPM, XOM, PLTR, NFLX, V, AMD
Crypto & Related: Bitcoin, Ethereum, ETHA, IBIT
Leveraged ETFs: TQQQ, SQQQ, UDOW, SDOW, UPRO, SPXS, URTY, SRTY
Yesterday I included charts showing why it matters to invest and trade using levels, with clear charts for SPX and QQQ. In case you missed it, the publication is here:
Unlock all the content by upgrading to a paid subscription, which also gives you access to my full Market Intelligence library, with educational content and two downloadable ebooks on essential and advanced indicators, with worked chart examples:
Everything is available at smartreversals.com.
Today’s Agenda
Market Context: Charts+levels for SPX, Indices, ETFs, VIX, Breadth, and Crypto.
Deep Dive: Individual analysis with charts and targets for Mag Seven and setups.
Momentum Map: Analyzing the stage of every security in a single view.
Setups Blueprint: Entry levels for short and long setups with price targets and invalidation levels for all the securities in the watchlist prioritizing stronger setups.
Let’s begin.
SPX: What to Expect Next Week
The chart shows a critical support tested and bearish conviction in price action, considering previous reversals these are the drivers for what is coming: