Cooling Inflation Lifts Stocks as Treasury Yields Test Major Resistance

S&P 500 futures are stabilizing slightly higher after cooler PCE inflation data offset a hotter ADP jobs report. The bigger fight is still between a bullish S&P structure, narrow market breadth, and the United States 10 Year Treasury Yield pressing against resistance last seen in 2007.

In One Minute

The immediate market reaction is constructive. ADP employment came in at 90,000 jobs, above the 73,000 forecast and the prior 38,000, but PCE inflation came in better than expected across the major readings. That helped futures recover and Treasury yields ease slightly. The S&P 500 Index (SPX) remains less than 2% from its all time high and above its neutral zone, but the underlying market is much weaker than the headline index suggests. The biggest level I am watching is the 10 year Treasury yield around its 5.28% to 5.29% resistance area, because a sustained move lower would help stocks, gold, silver, and Bitcoin.

The Setup

The macro picture is giving us mixed signals. The ADP private employment report showed 90,000 jobs created in September, stronger than the 73,000 forecast and much stronger than the previous 38,000. Normally, stronger employment raises the risk that inflation remains sticky and gives the Federal Reserve less reason to ease policy.

Then PCE inflation changed the tone. Year over year inflation came in at 3.4% versus 3.7% expected, while core inflation came in at 3% versus a 3.3% forecast. The other monthly and core readings also came in better than expected. Inflation is still well above the Federal Reserve's 2% target, but the direction was favorable enough to give stocks some relief. The third GDP revision was also slightly better than expected, although I put less weight on that because it covers an older quarter rather than the economy we are trading today.

What Changed

The S&P 500 Index (SPX) was down 0.17% in the previous session, and five of the past six sessions have been lower. Even with that weakness, we are still less than 2% below the all time high and still above the neutral zone. Until that neutral zone breaks, I continue to treat the larger structure as bullish.

There is also a possible inverse head and shoulders pattern developing. It is not confirmed yet. I need to see price curl higher and complete the structure. If that happens, the technical target is 8,000 on the S&P 500.

The bigger concern is breadth. More stocks are trading below their 50 day moving average than above it, while the headline S&P remains close to record highs. The Invesco S&P 500 Equal Weight ETF (RSP) is more than 6% below its high, while the standard S&P 500 remains less than 2% below its high. That tells me Microsoft Corporation (MSFT), NVIDIA Corporation (NVDA), and the other mega caps are doing a lot of the lifting, while companies such as Nike, Inc. (NKE), The Kraft Heinz Company (KHC), and Conagra Brands, Inc. (CAG) have much less influence on the standard index.

I do not automatically read that weakness as bearish. If the beaten down parts of the market start bouncing while the mega caps simply hold or move modestly higher, that gives the S&P another source of upside.

The United States 10 Year Treasury Yield (US10Y) is still one of the most important charts. It pushed as high as 5.29%, briefly breaking the 5.28% high from 2007, then pulled back. It is now down just over one basis point. That rejection keeps resistance intact for now.

In commodities, West Texas Intermediate Crude Oil (WTI) is getting a small bounce after yesterday's decline. Price is sitting around an important rising trend line that has already been tested several times. This is now roughly the fourth test, and that matters because repeated tests weaken support. At this point I treat the next reaction as close to a 50 50 situation. If the line breaks, the next retracement could take oil below $80 per barrel toward the lower parallel trend line.

Gold (XAUUSD) is also bouncing, but its rising trend line is the key. If that line breaks, $3,900 becomes the next downside area, with a deeper possibility around $3,500. There is also potential double bottom support. This is roughly the third meaningful test of that longer trend line, so it should still have some strength. If price keeps hammering it again, the probability of a breakdown increases toward that same 50 50 type of setup. Near term, I am neutral to slightly bullish while support holds. A break turns me bearish near term, while the longer term view remains bullish.

Silver (XAGUSD) has a similar structure. Its rising trend line is the level I am watching. If it holds, I give silver the benefit of the doubt. If it breaks, $55 becomes the first important downside area, with $50 possible after that. The longer term view remains bullish, but the near term view changes quickly if support fails.

New York Mercantile Exchange Natural Gas Futures (NG) continue to look weak after a sharp rally and retracement. Short term support is around 285. If that breaks, the next level is 270.

On individual stocks, CrowdStrike Holdings, Inc. (CRWD) remains one of the names where I am comfortable being selective on the short side because the stock went parabolic. That does not change my broader bullish market bias, but individual stocks can still become too extended.

Jabil Inc. (JBL) closed around $319 and is trading near $307 after earnings, roughly 2% to 3% lower. Earnings were good, but the stock had already run hard with the semiconductor group. The important level is the rising trend line built from several major pivots. If that line breaks, the downside could accelerate significantly.

Conagra Brands, Inc. (CAG) continues to move lower after earnings. Food and energy costs remain a problem because the company still has to absorb higher input and transportation expenses, while there is a limit to how much of that can be passed on to consumers. I am watching a possible double bottom around $12.60. If price reaches that area, it becomes interesting for a possible day trade or swing trade. There is also a larger parallel support structure farther below.

Micron Technology, Inc. (MU) reports earnings after the bell and is indicated slightly higher going into the report. This is one of the biggest earnings events we have had in weeks, especially now that Micron is a trillion dollar company. If the stock rallies, the gap fill around $1,150 is major resistance. On the downside, the rising trend line just below $1,000 is the important support.

I expect the earnings themselves to be strong, but that is not the real issue. Margins going forward matter more. Micron and companies such as SK hynix Inc. (000660) are adding manufacturing capacity, and more supply eventually means pressure on margins. The market usually prices companies six to twelve months ahead. If margin compression stays outside that window, the stock may continue to get the benefit of the doubt. If management signals that pressure is moving inside the next twelve months, the stock could react very differently. Longer term, I still see the possibility of Micron trading below $500 within two years, and potentially below $300.

Digital Assets and Crypto

Bitcoin against the U.S. Dollar (BTCUSD) remains one of the cleanest major asset charts in this market. Bitcoin broke above a long descending trend line, consolidated, then produced another strong move higher. Now it is consolidating again, and the structure is beginning to look like another possible pause before a continuation move.

I am not calling the next breakout before it happens, but Bitcoin remains the strongest major asset here from a chart perspective. As long as price holds above that former descending resistance area, the larger structure remains constructive. Lower Treasury yields would also help because easing rate pressure benefits Bitcoin along with stocks, gold, and silver.

Why It Matters

The market is not trading one story. Strong employment supports the economy but can also keep rate pressure elevated. Softer PCE inflation helps offset that risk. Meanwhile, the S&P remains technically bullish even though much of the market underneath it is weaker.

That makes Treasury yields especially important. If the 10 year continues rejecting 5.28% to 5.29% and moves lower, it takes pressure off equities and gives gold, silver, and Bitcoin more room. If yields resume climbing, that pressure comes back quickly.

Key Levels

The two levels with the widest market impact are the S&P neutral zone and the 10 year yield around 5.28% to 5.29%. Those will tell us whether this remains a normal pullback inside a bullish market or whether broader pressure is starting to build.

Bull Case

For stocks, the S&P needs to stay above its neutral zone, the possible inverse head and shoulders needs to complete, and Treasury yields need to continue backing away from 5.29%. Better breadth would strengthen the setup even further if the equal weight market begins recovering.

Oil needs its rising trend line to hold. Gold and silver need to defend their own trend lines. Bitcoin simply needs to maintain the breakout structure and resolve its current consolidation higher. Jabil needs to preserve its rising support line, while Micron bulls want strong earnings, stable forward margins, and a move toward the $1,150 gap.

Bear Case

The S&P becomes more vulnerable if price drops into the neutral zone, especially if Treasury yields move back through 5.29%. Oil breaking its trend line opens the door to prices below $80. Gold breaking support puts $3,900 in play and leaves $3,500 possible after that. Silver losing its line opens $55 and potentially $50. Natural gas below 285 points toward 270.

Jabil becomes much more vulnerable if its major rising trend line breaks. Conagra can continue lower toward the $12.60 double bottom. For Micron, any sign that margin compression is moving inside the next six to twelve months could change the market's willingness to support the stock, even if the current earnings report is strong.

What to Watch Next

The next major macro catalyst is the nonfarm payrolls report on Friday. Before then, I am watching whether the 10 year yield continues rejecting 5.28% to 5.29%, whether the S&P stays above its neutral zone, and whether breadth begins improving.

Micron earnings after the bell are the main company catalyst. I also want to see whether oil, gold, and silver can defend their trend lines, whether Jabil holds its rising support, whether Conagra reaches $12.60, and whether Bitcoin's consolidation resolves into another continuation move.

Bottom Line

The central market relationship is still stocks versus Treasury yields. The S&P remains technically bullish, Bitcoin remains strong, and gold and silver still have constructive longer term setups, but all of them benefit if the 10 year yield continues backing away from its 5.28% to 5.29% resistance area. I am staying patient here and letting price confirm the next move rather than chasing it.