Time for some profit taking ahead of the US CPI?

Last Friday, the University of Michigan consumer sentiment report surprised to the downside with a big drop from 77.2 to 67.4 while the consensus was expecting just a slight tick lower to 76.0. It’s not yet clear which weighed more on the sentiment between inflation and the labour market, but it comes after notable misses in the NFP and Jobless Claims data. The inflation expectations jumped to a six-month high, although the long term expectations remain anchored around the 3% level. Overall, an ugly report. The S&P 500 fell after the release but eventually erased half of the losses.

In the 1 hour chart above, we can see that we had an incredible run since the FOMC decision with more bullish momentum triggered by the miss in the NFP report as the market viewed that as a good thing for inflation and eventually rate cuts. More recently, we started to see a divergence with the MACD, which is generally a sign of weakening momentum often followed by pullbacks. Given that we have big risks ahead with the US PPI and CPI in the next two days, some profit-taking around these levels into the data shouldn’t be surprising.

From a risk management perspective, it’s better to wait for the data to be out of the way before taking new positions or increasing them. In fact, in case of a hot report, even if the buyers expect the market to eventually make new highs, the spike lower could be notable. That would be an even better opportunity to go long at better prices or go short for new lows, depending on one’s individual bias.