US capital markets are preparing for a major paradigm shift. As the release of the new Consumer Price Index (CPI) data approaches, the headline consumer price index (CPI) for May was 2.5%, an uptick from last month’s print of 2.3%. Index investors especially are focused on what this development would mean for the Nasdaq 100 and S&P 500 indices. They are most intently watching certain targets and levels of resistance.
This CPI data is particularly highly anticipated given the current turbulent market conditions. Analysts believe the next release of data, due out on July 30, may be the one that establishes a new pattern for both indices. The Nasdaq 100 is on guard for a breakout above 21,950 or a retreat into lower FVGs. The S&P 500 has hit a range high of 3,036. Traders are either looking for 6,120 targets now or looking for a retest down to 5,900 first.
Current CPI Trends and Implications
The most recent CPI data still indicates a year-over-year decrease of a whopping 2.5%. At the same time, the core CPI has jumped up to 2.9%, up from last month’s 2.8%. These figures represent the talk of the town where inflationary pressures are concerned and will surely factor into monetary policy decisions in the short term. For specific adjustments, I expect the month-over-month CPI rate to fall between 0.2% and 0.3%. This new change will make the market dynamics even more confusing and complicated.
Investors are obviously hyper attuned to inflation rates given the Fed’s ability to raise interest rates (or not) and other impacts on the economy. And as such, market participants are looking at these developments with eagle eyes for any signs of a shift in Federal Reserve policy. If inflation repeatedly surprises to the upside, it could lead to much more aggressive moves by regulators, sending shockwaves through equity markets.
The Nasdaq 100 is often on the front line of these rotations. A breakout above the critical resistance level of 21,950 to 22,000 could signal bullish momentum, while a drop into lower FVGs could indicate weakness. Current momentum targets on the index are located 22,200-22,350, leaving this as a key inflection point for traders.
Target Levels and Market Reactions
Given last week’s 1.82% decline, the S&P 500 is similarly at a crossroads with a range high of 6,035. Traders are looking at multiple target levels as they all focus to react to possible market-moving news after the CPI hits. Immediate FVG support is found between 5,970 and 5,980. Investors may use this range as their cushion if the numbers do not meet their lofty projections.
Further along the spectrum, much deeper downside levels are seen at 5,940 to 5,900. Should these measurable levels be breached, we may see wider sell-offs follow suit across the index. This would be a signal of growing investor alarm over the deteriorating economic outlook.
Market analysts emphasize the importance of maintaining awareness of these target levels as they offer insight into investor sentiment and potential market direction. With both indices at technical crossroads, traders will need to be on their toes as they await the CPI data.
Navigating Market Volatility
As we get closer to the CPI release, participants are forced to work in a growingly volatile environment. The relationship between inflation data and stock market reaction can produce counterintuitive results, resulting in sudden turns in market sentiment.
Should that August CPI data be even slightly above expectations, interest rate jitters are likely to spike. This might force investors to recalculate their bets. If the data surprises to the downside, it should still provide a fleeting sense of relief to investors. Consequently, equities may continue to rally in the near term.
Even more importantly, a basic understanding of fair value gaps is crucial in this context. Our first FVG layer for the Nasdaq is between 21,650 and 21,690. For the second layer, it goes from 21,570 to 21,600. Understanding these layers will allow investors to plan where to make their moves, just ahead of expected price action.