GAME PLAN REVEALED: Inflation Shocks Market, S&P 500 Fake-Out Risk

The market received a jolt this morning as the Producer Price Index (PPI) came in dramatically hotter than expected, sending shockwaves through equity futures and reigniting fears of persistent inflation. In this morning’s GAME PLAN, Gareth Soloway, Chief Market Strategist at Verified Investing, broke down the numbers, the market’s visceral reaction, and the critical technical levels that now define the battlefield for bulls and bears. This isn't just about a single data point; it's about a potential paradigm shift in market dynamics, where the specter of stagflation looms larger and the Federal Reserve's path forward becomes increasingly complex.

The Inflation Shockwave: Why PPI Matters

The headline numbers were impossible to ignore. The month-over-month PPI surged by 0.9% against a 0.2% expectation, while the year-over-year figure hit 3.3%, far exceeding the 2.5% forecast. The core numbers, which strip out volatile food and energy, were equally alarming, also posting a 0.9% monthly increase. These figures tell a clear story: inflationary pressures are building aggressively on the producer side.

As Gareth explained, this is a critical leading indicator that investors must not overlook.

"Remember where does inflation start? Inflation starts on the producer side and then over time the producer says, oh man, these costs are going up. Let me pass it along to the consumer."

This lag effect is crucial. While recent Consumer Price Index (CPI) data may have seemed benign, the PPI is the canary in the coal mine. It signals that companies are facing higher input costs, driven by factors like tariffs and a sustained wealth effect from a strong stock market. Eventually, these costs are passed on to consumers, which could keep inflation stubbornly high. This dynamic creates a challenging scenario, especially if the broader economy is slowing down. As Gareth noted, "You will hear more and more the term stagflation, a slowing economy and an inching up inflation data number."

The market's reaction was swift and decisive. S&P 500 futures, which were trading around $6,491, plunged approximately 30 points to $6,461 immediately following the release. This price action underscores the market's sensitivity to any data that could derail the Federal Reserve's anticipated path of interest rate cuts.

S&P 500: Anatomy of a Potential Fake-Out

The timing of this inflationary data could not be more fascinating from a technical standpoint. Just yesterday, the S&P 500 appeared to have broken out of a key parallel channel, a move that many retail traders likely interpreted as a bullish signal to pile in. However, today's price action threatens to turn that breakout into a classic "fake-out."

Gareth detailed a proprietary technique he developed over a decade ago to distinguish real breakouts from these deceptive traps: the Confirmation Signal.

"The way I've mitigated this and been able to tell if it's a true breakout or breakdown is by using what I call the confirmation signal... you look at the chart and you say, okay, well, we closed above, but now we need to see a secondary close above the high of that first candle that broke above."

The logic behind this is rooted in the behavior of institutional money. Big players may have the capital to defend a level and even allow a minor close above it to lure in unsuspecting buyers. However, their resources are not infinite. A second, stronger close confirms that the buying pressure is genuine and has overwhelmed the institutional sellers. As Gareth puts it, the signal provides a "75-80% chance that it is a real breakout versus a fake out." As of now, the S&P 500 has not confirmed its breakout.

Adding another layer of technical confluence, a longer-term trendline connecting the major lows from the past year was tagged perfectly at yesterday's high. This means the market didn't just break above a short-term channel; it ran directly into a much more significant, long-term resistance level. A close back below the channel line today would strongly suggest a fake-out, potentially setting the stage for a significant corrective move.

Intermarket Signals: Yields, the Dollar, and the Fed

The PPI data sent ripples across all asset classes, providing a clearer picture of the market's underlying expectations. Following the report, the probability of future Fed rate cuts immediately shifted. Where three cuts were priced in for the remainder of the year, the market is now anticipating only two. This recalibration is crucial ahead of next week's Jackson Hole Economic Symposium, where Fed Chair Jerome Powell is expected to speak.

This shift was reflected in other markets:

The U.S. Dollar: The dollar caught a bid, strengthening on the prospect of a less dovish Fed. Fewer rate cuts make the currency more attractive relative to others.
10-Year Treasury Yields: Yields popped higher on the inflation news, which is the expected reaction. However, the bigger technical picture remains dominant. The 10-year yield is still contained within a bear flag pattern, a formation that typically resolves to the downside. This creates a fascinating conflict between the short-term news and the long-term technical structure. Gareth emphasized his guiding principle: "The chart is the truth... That is what is happening. And in this case, the probability, even though inflation looks like it's going up... the bear flag is still telling us... that rates eventually will go lower here."

The Nasdaq 100 tells a similar story to the S&P 500. By drawing a parallel channel from its recent lows, we can see that yesterday's rally also brought the tech-heavy index directly into overhead resistance, making it vulnerable to a pullback.

Navigating Earnings Season Volatility

This earnings season has been particularly tricky. A recurring theme has been stocks falling even after reporting strong results. This happens when valuations become stretched and expectations are sky-high, making it nearly impossible for companies to deliver a report that justifies further upside. Gareth highlighted several stocks reacting to earnings, providing key support levels for potential trades:

Cisco (CSCO): Down slightly after its report, Cisco is not yet at an actionable level for a swing trade. However, a day trade opportunity could present itself if the stock drops to the $66.45 area, which aligns with a previous pivot structure.
Coherent (COHR): Getting "absolutely walloped" down 20% on a guidance miss, Coherent provides a fantastic educational example of a core technical principle. The stock previously struggled for a long time to break through resistance around $83.45. Now, on this sharp decline, that former resistance becomes a massive potential support level.
Deere (DE): The tractor maker was hammered, dropping about 6-7%. Gareth identified a strong support zone between $467 and $470, a level that gains significance by aligning with multiple prior pivots and sitting just below a gap fill at $471.
Tapestry (TPR): Also dropping hard on earnings, Tapestry offers a lesson in identifying major versus minor pivots. The first significant support level comes in at a major pivot high around the $90.70-$90.75 level. A "major" pivot is defined by a very large up-move followed by a very large down-move, making it a more reliable level than smaller, minor pivots.

Bitcoin at a 50/50 Crossroads: A Masterclass in Probabilities

The Bitcoin chart has undergone a fascinating evolution. A threatening topping tail pattern that had been weighing on the price was officially negated by a daily close above it. However, this does not automatically signal a new bull run. Instead, it shifts the probabilities.

"As long as that topping tail was intact, the probabilities favored a pullback... Now, it's been negated... But the reason why it's a 50/50 now is because now you have a double top."

A double top is a less powerful bearish signal than a topping tail, thus neutralizing the odds to 50/50. In these situations, traders must wait for the next "piece of the puzzle." Gareth uses a brilliant analogy from the World Series of Poker: a player's odds of winning change dramatically as each new card—the flop, the turn, the river—is revealed. Technical analysis works the same way.

"Every day is a new reveal where probability could change."

For Bitcoin, the next reveal will come from its directional consolidation. If it forms a tight, sideways-to-downward channel (a bull flag), the odds will shift back in favor of the bulls. If, however, today's red candle turns into a major bearish reversal, the odds will swing back to the negative side. This dynamic, fluid approach to probabilities is the essence of professional trading.

Conclusion: A Trader's Mindset for an Uncertain Market

Today's session was a powerful reminder that markets are driven by data, psychology, and probabilities. The surprise PPI numbers have put inflation squarely back in focus, challenging the prevailing narrative of imminent and multiple Fed rate cuts. This has placed major indices like the S&P 500 and Nasdaq 100 at critical technical inflection points, where apparent breakouts are now at risk of becoming punishing fake-outs.

The key takeaway is the necessity of a disciplined, probability-based mindset. It means respecting the chart's truth over emotional biases, understanding that every day reveals a new piece of the puzzle, and having the patience to wait for high-probability setups where multiple factors align. As Gareth learned early in his career, you cannot force your will on the market. With the pivotal Jackson Hole symposium on the horizon, traders who remain logical, adaptable, and focused on risk management will be best positioned to navigate the volatility and opportunity that lies ahead.