OVERVIEW
The Worst May Be Behind Us

There's been a lot of fear and panic in the market since last Thursday. While it’s still unclear if the sell-off is nearing its end, it’s important to understand why this happened. The market had been riding a wave of optimism about the immediate future, but that enthusiasm was quickly dampened by disappointing job and manufacturing reports. These reports served as a reality check, leading to a surge in selling pressure.

Why We Think This Is An Overreaction

Morningstar analysts pointed out on Monday that, despite the recent data, the U.S. economy is still growing, albeit at a slower pace. They also highlighted that the unemployment rate remains below 4.4%, which is considered the "natural level" by the Congressional Budget Office.

To break it down, the "natural level" of unemployment is essentially the sweet spot where the economy is balanced. It’s not so low that it triggers runaway inflation, but not so high that it stifles growth. When unemployment is at or below this level, it means the job market is strong, with enough jobs for those who want them, without pushing wages up too fast or driving inflation. The fact that we’re still below this natural level suggests that the job market—and by extension, the economy—is stronger than the recent sell-off might lead you to believe.

On a global scale, Japan’s Nikkei 225, which has been heavily blamed for this $6 trillion global sell-off, is already showing signs of recovery. The Nikkei has bounced back by +12%, with investors clearly taking advantage of the lower prices. This recovery in Japan raises the question: if the Japanese economy and stock market were truly the main culprits behind the sell-off in the U.S. markets, wouldn’t we expect a similar rebound here?

But even if the U.S. markets don’t immediately follow Japan’s lead, it’s important not to lose sight of the bigger picture. The sell-off seems to be more of a knee-jerk reaction to recalibrated expectations rather than a reflection of underlying economic weakness. The reality is that the markets were overly optimistic about future economic prospects and growth stocks. The reports last week curbed these expectations, and the markets responded with a pullback.

In the end, the sell-off might have been more about adjusting to a more realistic outlook than anything fundamentally wrong with the economy. It’s a reminder that markets can react strongly to new information, but that doesn’t always mean the sky is falling.

Nasdaq

Let’s break down yesterday’s action in the market, because there’s a lot to unpack. First off, the volume was off the charts—the highest we’ve seen since March of last year. When you see that kind of volume, it usually means something big is brewing.

The QQQ (which tracks the Nasdaq-100) had a rough start, gapping down to $423 in pre-market trading. It spent the rest of the day trying to claw its way back up, aiming to close the gap at $445. The fact that it managed to recover its daily 200-EMA by the end of the day tells us there was some real buying interest, especially at key support levels.

Now, if you look at the weekly chart, there’s an interesting setup. The Nasdaq found solid support at the weekly 50-EMA, a level that buyers clearly defended. This is a good sign for anyone hoping for a rebound. But here’s where it gets tricky—check out the visible range volume profile (VRVP) on the right side of the chart. The QQQ is kind of stuck between a rock and a hard place.

The point of control (POC) at $440 is acting like a massive wall of resistance. This is the price level where the most volume has traded, so it’s a big deal. It stopped the index from pushing up to the weekly 10 & 20-EMAs around $455, which means buyers are facing some serious pushback.

So, what’s next? The Nasdaq might just chop around in this range for a bit, bouncing between the 50-EMA and the POC at $440. This zone is important because it’s where the biggest volume has traded recently, so it’s a battleground for support and resistance. If the QQQ breaks out of this range—either up or down—we’re likely to see a big move.

For those of us rooting for a bounce, the ideal scenario would be some sideways action here, allowing the market to catch its breath before making another push higher. But if that support at the 50-EMA doesn’t hold, or if the POC keeps capping gains, we could be in for more downside. The next few days are going to be key in figuring out where we’re headed.

S&P Midcap 400

he midcaps are in a similar situation. We saw a solid bounce yesterday, with the MDY (the ETF tracking midcap stocks) managing to fill its pre-market gap up to $535, right around the daily and weekly POC (Point of Control). However, the move lost steam before it could really take off.

There’s a white line on our charts that marks a prior support level the MDY has respected since mid-April 2024. This same level was the catalyst for last month’s rally. But here’s the concerning part—yesterday, this former support level acted as resistance.

This is a significant change in behavior, and it's not a positive sign. After finding some support at the weekly 50-EMA, the MDY tried to push higher but got rejected at that $533 level. This kind of rejection at a key level suggests the eager bulls trying to catch the bottom might be losing their grip, and it could indicate that the midcaps are struggling to gain the momentum needed for a sustained move upward to recovery.

Russell 2000

Small caps are doing what small caps do best—being more volatile than everything else. The IWM, which tracks the Russell 2000, tried to push past the POC at $205 but got rejected.

It also failed to climb back above a previous multi-month support line, even after bouncing off both its daily 200-EMA and weekly 50-EMA.

In short, things aren’t looking great. Until the IWM can reclaim that key support level at $205, it’s going to be a rough ride, and we’ll likely remain in a cautious, risk-off mode.

DAILY FOCUS
Keep Scanning For Relative Strength

We've been keeping you updated in real-time on our Twitter feed, sharing insights into the top stocks that are holding up well despite the current market conditions.

Our approach involves running these scans and updating our watchlists to pinpoint not just the industry groups, sectors, and themes that are weathering this sell-off, but also the stocks that are setting up bases and are poised to lead the next bull run (which we believe is just around the corner).

While analyzing major indices is crucial for gauging overall market health (we look for prices to be above the daily 10- and 20-EMAs to consider going long), watching the top-performing stocks is often the best way to signal the end of a correction.

Stocks tend to move before the indices do—meaning, when a correction starts to wrap up and indices like the Nasdaq (QQQ) begin to turn up, you’ll often see early signs of recovery in the strongest stocks first. These leaders, which have high relative strength scores (+95), will begin forming bases and breaking out of Stage 1 bases into Stage 2 uptrends.

Getting in on these high-performing stocks is key, as they tend to have the highest breakout success rates and offer the best opportunities for significant gains. As swing traders, our goal is to find and scale up on a few standout stocks to make substantial profits, rather than spreading ourselves thin with numerous small trades.

WATCHLIST
The RS Leaders

ASTS: AST SpaceMobile, Inc

• AST is a broadband networking company that's been on a solid upward trajectory, consistently staying above its daily 10-EMA since May 2024. This impressive performance followed a surprise earnings report that caught everyone off guard.

• Even though AST doesn’t have the most stellar internals, its relative strength (RS) is hard to overlook. The stock seems to be forming a flag pattern as it approaches its next earnings report in the coming weeks.

• Right now, we don't see a clear entry point and we’re holding off until we spot more definitive setups that are showing strong results. When we do decide to enter, whether it’s ASTS or another stock, we’ll likely start with half-sized positions to manage the higher risk of potential breakout failures.

CLOV: Clover Health Investments, Corp

• Clover has been on an impressive run since its May earnings report, and it's generating buzz once more following yesterday’s strong guidance. The stock is currently gapping up in response to the positive news.

• While the internals might not be the strongest, Clover's position in the health insurance sector gives it a significant advantage. This sector is known for its resilience during market downturns and tends to outperform other cyclical sectors when the broader market faces challenges.

• For now, keep an eye on CLOV to see if it forms a solid base or an actionable volatility contraction pattern (VCP). The stock’s recent move off the earnings report isn’t quite a tradable setup yet, as it gapped up rather than providing a clear entry point.

• Watch for the right conditions to enter, ideally when a base or VCP pattern develops.