Bears won a battle yesterday afternoon but are still on their heels, notes Jon Markman, editor of Strategic Advantage.

Observations: The S&P 500 (SPX) sprinted out of the gate Monday following a New York Federal Reserve survey that showed consumers expect inflation to slow down dramatically in the months ahead.

The benchmark index briefly traded through overhead resistance at 4,175 before profit-taking ensued. In the end, the S&P 500 actually closed down 0.1% at 4,140, a rare win for bears.

The victory may be short-lived. The July Consumer Price Index report is due Wednesday morning. A weaker CPI number will advance the idea that inflation has peaked, and that the Fed can afford to be less hawkish in the second half of the year.

That calculus changes expectations for consumer spending and corporate profits. It’s also likely to send bears into full retreat. And if they lose their hold on resistance at 4,175, bulls will have a clear shot all the way up to 4,335, the 200-day moving average.

Wednesday is shaping up to be an inflection point. In the interim, the benchmark has key support 4,030.

SA TradeView: No current positions. We still want to buy weakness in the early part of this week if possible. Getting the next trade right will be worth the wait.

The Backstory: The Dow (DJI) added 0.1% to 32,832.54, while the Nasdaq Composite (IXIC) fell 0.1% to 12,644.46.

Technology (XLK) was the steepest decliner while real estate (XLRE) was the top performing sector. Breadth favored advancers 2-1, and there were 119 new highs vs. 35 new lows. The leaders were T-Mobile (TMUS), Automatic Data Processing (ADP), Vertex Pharmaceuticals (VRTX), Waste Management (WM), and Synopsys (SNPS). That’s much better leadership, finally.

Nvidia (NVDA) reported preliminary fiscal second-quarter sales of $6.7 billion, up 3% from a year earlier but below its initial outlook of $8.1 billion, plus or minus 2%. Analysts polled by Capital IQ expected about $8.1 billion. Shares of the company slumped 6.3% at market close, the worst performer on the Nasdaq 100 and the second-worst on the S&P 500.

The graphics processing unit manufacturer attributed the revenue shortfall for the quarter ended July 31 mainly to weaker-than-expected gaming revenue, which it said declined 44% sequentially and 33% compared with a year earlier.

The US 10-year Treasury yield dropped 9.2 basis points to 2.75%. West Texas Intermediate rose 1.7% to $90.49 a barrel.

The chances of the Federal Reserve increasing interest rates by 75 basis points at its Sept. 21 policy meeting have shot up, with markets pricing in a nearly 64% probability, according to the CME FedWatch Tool. A week ago, that probability was at 29%. The Fed's decision will depend on the consumer price index print, which will likely show the headline rate dropping to 8.6% year over year due to the recent decline in energy prices, Morgan Stanley said in a research note. Core CPI will probably continue to run hot at 6.1% annually. The data is due out on Wednesday.

"If Fed chatter points to headline CPI receding and doesn't focus as much on core, then 50 [basis points] should still be seen as the baseline, and I would expect market pricing for 75 [basis points] to recede," Morgan Stanley Chief US Economist Ellen Zentner said in the note.

Meanwhile, the Senate passed the Inflation Reduction Act, the climate and economic package that includes $430 billion to combat climate change and healthcare coverage. The legislation will now head to the House, which will return from a summer recess Friday.

In company news, Penn National Gaming (PENN) was the top gainer on the S&P 500, rising 5.6%. The company on Thursday reported revenue for the quarter ended June 30 was $1.63 billion, up from $1.55 billion a year earlier. Analysts surveyed by Capital IQ projected $1.6 billion.

Learn more about Jon Markman here...