Heading into this morning, everyone on the planet who follows the stock market was waiting for one thing…

The consumer price index (CPI) report, a key measure of inflation in the U.S. economy. And it once again showed that the prices of goods and services are continuing to rise…

But before we get into today’s reading, let’s look at recent history for some perspective…

Two months ago, the July CPI report came in at 8.5%, representing a 0% month-over-month increase in the prices of goods and services.

The market rallied in response, with the S&P 500 ETF Trust (NYSEARCA: SPY) surging to a high of $429.

The following month, the August CPI numbers came in at 0.1%, representing a 0.6% month-over-month increase…

Unlike July, the market reaction to the August numbers was overwhelmingly negative. The SPY was down a whopping 3% intraday following the print, placing us right back into the overall downtrend.

This brings us to today’s CPI report, which showed 0.6% core inflation — higher than analyst expectations, but exactly the same reading as August.

And this time, the market reaction has been absolutely mind-boggling…

After opening down more than 2%, the SPY soared into a bullish frenzy, erasing all of its morning losses to complete a full red-to-green move. (The index is currently up 1.52% at the time of writing.)

How can we make sense of this madness? What does this CPI report mean for stocks moving forward? And what setups are worth watching now that it’s behind us?

Let me show you what I’m seeing and tell you how I plan to trade accordingly…

The Market is Trying to Bottom

Has the market bottomed? No one knows…

But to me, it’s now undeniable that stocks are trying to find a bottom, something that hasn’t been true for most of this year.

Previous hot inflation readings were met with unstoppable selling.

But now, we’re starting to see contrarian reactions to bad news. Today being a prime example…

A few factors stick out to me, in particular…

• The market is oversold … As share prices get lower and lower, going long gets more attractive. It’s an ever-shifting pendulum, and sentiment was simply leaning a bit too bearish heading into today. We’re seeing a natural bounce back.
• Shorts are getting greedy (and overconfident) … Options traders have spent $30 billion+ on puts in the past month, creating an environment where the entire stock market is turning into a short squeeze. The motivation for market makers to boost the indexes has never been higher.
• The volatility index (VIX) is muted … With high inflation numbers coming in, you’d think that the VIX would’ve been ripping this morning as stocks were opening lower. But you would’ve been wrong. The VIX was actually red this morning, suggesting that the market isn’t seeing panic or capitulation of any sort. 

Considering these indicators (and the market’s reaction so far), I think stocks have the potential to rip next week and I’m positioning myself accordingly…

How I’m Playing It

Whenever major shifts in the economic narrative occur, traders need to re-evaluate their game plans…

Which is exactly why I bought Tesla Inc. (NASDAQ: TSLA) 10/28/2022 $220 calls this morning. 

I’m not gonna try to fight what the market is telling me. 

Sure, I have a negative bias. And quite frankly, I don’t think the final bottom is in yet.

But when it comes to positioning for next week, I’m going full bull. 

I’ve seen the bear market rallies that have already happened this year. They’re incredible call-trading opportunities, and ones I haven’t capitalized on as much as I would’ve liked.

Will this turn into a full-blown bear market rally? Probably not.

But even a few days of bullish price action could cause a variety of beaten-down call options to absolutely skyrocket.

Bottom line: In my opinion, the risk/reward is better going long next week. But with this much volatility, you should still be quick booking profits and even quicker cutting losers. 

Final Thoughts

If you’re confused by today’s price action, you’re not alone. The vast majority of financial news media is trying to make sense of this right now.

But as traders, we don’t need to understand exactly why every move happens. We simply need to position ourselves correctly to capitalize on them.

Let’s see how the post-CPI reaction continues to play out and re-assess next week.