Stocks are unlikely to test June lows as the market gets a boost from cooling inflation, JPMorgan says

• The stock market is unlikely to retest its mid-June low as inflation shows signs of cooling down, according to JPMorgan.
• "Continued evidence of peaking inflation data in the Aug CPI report can feed into improving sentiment for risky markets," JPMorgan said.
• The S&P 500 has traded range bound in recent months, but found big support at the 3,900 level.

Traders hoping for another leg lower in the stock market to put money to work may not get the chance, according to a Wednesday note from JPMorgan.

In a technical-focused note, JPMorgan strategist Jason Hunter said it is appearing increasingly unlikely that the S&P 500 will retest its mid-June low of 3,636, especially as inflation shows signs of easing.

"We still see the prospect that continued evidence of peaking inflation data in the August CPI report can feed into improving sentiment for risky markets, which in turn can keep the market from fully retesting the 3,636 June low," Hunter said.

Hunter isn't the only one who expects a reversal in high inflation readings to continue. Ark Invest's Cathie Wood cited the precipitous decline in commodity prices like oil, lumber, and copper as reason to believe that inflation is turning into deflation.

What's encouraging to Hunter on a technical basis is that the S&P 500 is holding support near a key technical level, 3,900. The popular index bounced off that level four days in a row beginning last Thursday, signaling that buyers are stepping in even as a 4% Federal funds rate is likely on the horizon.

On Thursday, the S&P 500 hit a high of about 4,010, marking a significant bounce off of support. Hunter thinks there is still more upside left in the index.

If the S&P 500 decisively holds above support around 3,900 and reclaims its 50-day and 100-day moving averages around 4,030, Hunter expects the index to retest 4,120 and 4,300 as medium-term resistance levels. A move to those levels would represent potential upside of as much as 8% from current levels.

"A move above 4018-4043 tactical resistance is required to confirm a short-term trend reversal, in our view," Hunter said.

But a move to those levels will likely require some sideways consolidation as the stock market enters its most bearish time of the year, based on seasonal data.

"Given the bearish seasonals into early-October and lack of signs that the market has seen renewed capitulation, either an upside breakout or further base building near support is required to build conviction in a short-term positive outlook," Hunter said.

And if the S&P 500 does weaken during this bearish time of the year, expect it to find support at 3,790 and 3,721, representing potential downside of as much as 7% from current levels.