Inflation at the consumer level remained hot Thursday, and traders bought stocks anyway. It didn’t start that way, though, states Jon Markman, editor of Strategic Advantage.

The S&P 500 (SPX) sank 2% almost immediately after a thicker than expected Consumer Price Index. Then the rally began. The benchmark index finished the session at 3,670, up a resounding 2.6%.

To be sure, short covering played a big role into the early decline. At the session low of 3,492 the decline marked a perfect 50% retracement of the rally from the 2020 lows. And the frantic early selling by bulls had all of the earmarks of capitulation. There was a clear “get me out at any cost” vibe.

By contrast, the afternoon was devoid of sellers. The S&P 500 sliced easily through resistance at 3,640. Like butter.

It will be important on Friday for buyers to keep up their energy and determination. The next overhead resistance point is 3,724, the 20-day moving average.

Bears are likely to concede that advance. If bulls can push through, short covering into the weekend is going to get extreme. Another 500 points for the Dow? Not likely but not impossible. The market will always do what it can to mess up the most people at the worst time. For the moment, that would probably mean a sizzling rebound to undercut the overconfidence of bearish pros.

Key support is now 3,492.

THE CHAOS TRADE: The past several sessions have been extremely volatile. Amid the chaos, I am expecting a rally to the 3,724 level of the S&P 500 as soon as Friday’s close. That would be +1.5%. 

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