On the morning of 12.13.22, the long-awaited Consumer Price Index (CPI) was slated for release. You can see the results of the CPI release on the E-mini Dow Futures below.
CPI Release Followed by Dramatic Upside in First Few Minutes
Dow Futures (YM) – 5-Minute Chart – 12.13.2022
What can we learn from this?
- The previous Friday’s Producer Price Index (PPI) came in lower than expected; meaning that manufacturing prices, though still high, hinted at a possible peak in inflation.
- The markets yesterday rallied in anticipation of the next day’s CPI report; Wall Street seemed to lean toward lower consumer inflation results.
- From a traders perspective, the previous day’s strong rally could have indicated resounding bullishness in expectations for the report. A buy stop a few ticks above the highest point of the YM in the pre-release session might have been a fitting trade entry (tight stop loss at the lower end of the pre-report range).
- In the case of an upset, a short entry might have been placed a few ticks below support.
- The fundamental trigger is this: If the CPI actual is slighlty higher than the consensus figure, volatility might ensue as investors try to figure out what the figure might ental for future rate hikes.
- If it came in significantly higher, then the likelihood of higher or faster rate hikes might be more likely, triggering a fall across all stock indices.
- The CPI came in lower than expected, giving the markets enough fuel to rally—the Dow, rising 750 points in a span of 10 minutes (an adequate move for most day traders).
So, Why the Reversal? Uncertainty Abounds
Still, the Dow reversed immediately afterwards. And at the time of writing, 12.25 pm EST, the market session still has a few hours to go.
Remember that the FOMC announcement is tomorrow. There’s a lot of uncertainty with the coming rate hike as Fed Chair Jay Powell indicated the possibility of a smaller rate hike (50-basis points instead of 75-basis points).
Is inflation truly peaking? If you look at the CPI figures throughout the 1970s you’ll see that the CPI hinted at peaking only to reverse and jump significantly higher.
Big banks have been forecasting a global economic slowdown, some speculating on a much deeper recession. Remember that banks have to be slow and careful in publishing such forecasts as major changes in outlook may entail changes in business policy in the near-term. So, pay attention to them.
Also, Note Changes in Margin!
If you’re trading any of the major index futures, you might have noticed your clearing firm or exchange raise margins before the CPI release. It might even sustain this higher level of margin to cover the following day (FOMC announcement). Where there’s the potential for extreme volatility and rapid market velocity, there’s the actuality of real and significant financial risk. So, trade carefully and understand why your margins have been raised.
The Bottom Line
All of the insights above aim to illustrate the type of contextual thinking that might be beneficial to day traders and swing traders. There’s a certain way to approach trading economic reports. And right now, there’s plenty of weight given to these reports, as it rests on the longer term issues of inflation, rate hikes, and the likelihood of a global recession. As a day trader, it helps to understand the economic context surrounding the technical outlook. It outlines the difference between “strategy” and “tactics.”
Please be aware that the content of this blog is based upon the opinions and research of GFF Brokers and its staff and should not be treated as trade recommendations. There is a substantial risk of loss in trading futures, options and forex. Past performance is not necessarily indicative of future results.
Disclaimer Regarding Hypothetical Performance Results: HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN. IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM.
ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR TO ADHERE TO A PARTICULAR TRADING PROGRAM IN SPITE OF TRADING LOSSES ARE MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS IN GENERAL OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS AND ALL OF WHICH CAN ADVERSELY AFFECT ACTUAL TRADING RESULTS.