Traders are looking for a leg up after a somber week of losses last week in the stock market.

Stock market participants are holding their collective breath ahead of the U.S. Consumer Price Index data release tomorrow before the opening bell.

Whether inflation surprises the market and is getting hotter (rising) or cooling (declining) as is expected among stock market participants will set the tone for the stock market this week.

Will economic data push stock market higher?

After a strong start to the week, bullish traders are looking to keep rolling to the upside.

In the market today, the Dow rallied higher to 34,245.93 points to gain 1.11% (adding 376.66 points on the day). The Nasdaq jumped to 11,891.79 points for a 1.48% boost while the S&P 500 notched higher by 1.14% to 4,137.29 points.

But as the market proved last week, tomorrow may not be a brighter day.

CPI data on Tuesday morning is expected to show inflation cooling overall. But that is the consensus expectation. Anything to the contrary may be bad news for bullish traders.

Regardless of the good or bad qualities of this rally, the point is to make money, so understand the risks this week and understand who stands to get squeezed based on the CPI data plus the levels triggering in the indexes,” said Sam Shames, Vice President of Options at Simpler Trading. “Know what you will do at levels above and below on SPX before it happens so regardless of what happens you have a plan for the upside and the downside.”

A lot of weight has been placed on this next CPI data report.

“My bias is CPI will be cold, again, due to the backward looking function of how it is calculated and that will create another mechanical squeeze higher,” Sam said. “However, we must see this happen and not expect it to happen.”

The market could twist and turn in various ways depending on the CPI report.

“A cold CPI print would facilitate tech (technology sector) to rejoin the party and that will drive everything higher,” Sam said. “A hot CPI print would flush tech and likely the indexes.”

Traders don’t want to be stretched too thin as the market takes in the latest economic data.

“It makes sense to trade shorter time frames until the CPI is out and then going back to a bit longer term trading after the market processes the data,” Sam said.

More inflation data follows later this week

After CPI, the market faces another inflation measure in the U.S. Producer Price Index (PPI) on Thursday. While not as hyped as CPI, the PPI report contains core inflation numbers which are watched closely by the Federal Reserve (Fed). The Fed has focused on core economic numbers in its efforts to raise the federal funds rate and curb inflation.

Sam is watching key market internal signals that can affect stock market action.

“The big risks this week are interest rates, U.S. dollar, and Volatility Index (VIX),” Sam said. “The good thing for bulls is none of these risks have triggered above major levels, so while they have bounced strongly off support so far, they haven’t actually done anything meaningful, yet.”

To follow Sam more as the stock market unfolds, follow him with This Week In The Markets.

Uptrend or downtrend hinges on economic data

Mary Ellen McGonagle, Senior Managing Director of Equities at Simpler Trading, highlighted how this market can move quickly in either direction this week.

“Overall, the broader markets remain in an uptrend,” Mary Ellen said. “However, we are in a position where a move lower could change this to a downtrend if key support is broken. On the other hand, a move higher would provide more confidence in the current uptrend if we move above resistance.”

Like everyone else in the trading world, Mary Ellen is watching and waiting for the economic numbers this week.

“The Consumer Price Index report may well prove to be a catalyst that helps provide clarity regarding the near-term direction for the markets,” Mary Ellen said. “The Producer Price Index data for January due later in the week will provide further insight into whether inflation is in fact cooling.”

Caution with new money in the market

Until these reports are released and digested, Mary Ellen cautions putting new money to work in the stock market.

“Both reports have historically moved the markets due to their importance in determining whether inflation is in fact waning,” said Mary Ellen. “Last year trading action around the release of CPI data was turbulent with the S&P 500 falling on seven of the 12 reporting days.”
To follow more of how Mary Ellen tracks stock market movement, follow her with The MEM Edge Weekly Report.