January 11th, 2024

Rates and Rates. This morning, the highly anticipated CPI beat both the headline and the core expectations. The headline was 3.4% versus the expected 3.2% and the previous 3.1%. The core was 3.9% versus the expected 3.8% and the previous 4.0%. The first aspect I analyze is the rates’ response. Why, you might ask? The anticipation of 3-6 rate cuts is a significant factor in the end-of-year rally. If the 10-year rate was to fall following a CPI higher than anticipated, this could drive stocks lower. Conversely, if the 10-year rate were to rally on a higher number, stocks could also rise. What I mean to say is, the reaction is of utmost importance to me, not the CPI number. Hence, the direction the 10-year rate takes from here could significantly influence the trajectory of the indices.

So, what insights does the CPI reaction give us about today’s market?

The reaction in ZN is bearish, leading me to believe that it’s not advisable to buy into this rally in the indices, especially RTY. RTY and ZN have shown a tight correlation this week, and I anticipate this continuing. My advice for today is straightforward. Be wary of any longs in NQ and ES if we witness a weak ZN. Look for opportunities to sell in RTY if ZN continues to be weak. However, if ZN begins to rally, this might boost the indices. Based on my daily charts, ZN continues to be bearish, and I’m looking for 111-10’25 to be tested. Following the CPI, I began shorting ZN as it has remained below all of this week’s VWAPs and the YTD VWAP. I’ll continue to favor the short side in ZN and search for short signals in RTY using my 3-minute opening range along with standard deviations today.

As for ES and NQ, they remain in a holding pattern for the time being. If ES were to drop below 4772, that would signal to me to start shorting ES. Similarly, if NQ were to dip below 16,685, I would interpret this as a bearish signal to start shorting NQ. Unless this happens, I anticipate sideways or possibly higher trends, albeit a rocky journey due to the weakness in ZN and RTY.

Cheers, DELI

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