SPDR S&P 500 ETF Trust (SPY) Forecast: After rally what comes next?

• SPY stages a massive turnaround after another hot CPI report.
• CPI came in at a 40-year high and markets tanked.
• SPY and QQQ then turned and staged a 5% or 6% rally from the lows.

Add another incredible day to the long list we have been lining up recently. Your author is long in the tooth in this game and has seen some momentous days in markets, but lately every day seems to be a momentous one. Thursday was yet another with a huge intraday swing.

SPY news

Let's review, and at least we can point to our previous note and weekly preview where we already outlined negative sentiment and positioning and thought the risk-reward was to the upside.  On Thursday we said before the release: "The market has in my view front run a lot of bad news. Positioning is bearish, and sentiment is bearish. A number in line or even lower than expected will lead to a massive risk-on rally in my view....I would feel more comfortable in my contra-bullish view if we had washed out to $352."

So how did I do? Correct on the first part – positions and sentiment were overdone. We got a bad number, so I was wrong about that, but we did get the washout to $352 that I was looking for. However, it extended to $349.

Then we got a crazy rally. Everyone was short or bearish coming in. The number was bad, so people doubled down and went max short. That's when the selling stopped. A brief rally, some covering, then more covering, and before you know it we get a massive squeeze and close up over 2%. Incredible stuff. so what's next? 

For starters, things are not yet rosy. Bond yields looked over at equities and once again shook their heads disapprovingly at the madness. Bond yields remained high for most of yesterday. They are still elevated this morning, but crucially the 10-year yield is back below the psychological 4%. Watch this space. Early indications from earnings are also that Nike and FedEx got us maximum pessimistic, and we got the bad news out of the way. As mentioned previously, analysts have set the bar pretty low. 

I still feel the risk reward is tilted to the upside in the short term. Long term, I remain bearish. Already the major banks out today have all beaten earnings, so up we go again for futures.

SPY forecast

What a beautiful engulfing candle we got on Thursday. Bullish engulfing, many have said, but in my view engulfing candles are more about confusion than reversals. However for now we have held the Fibo retracement and avoided a capitulation to $338. That is still possible but looking less likely in the short term. Today we need to hold $362, and next week we can then target $373. That should then give the rally more legs and move us to target $388. 

SPY daily chart