OVERVIEW
Uncertainty Always Breeds Volatility

We’ve got an important couple of days ahead! U.S. stock futures are dipping as everyone looks forward to the release of September's Consumer Price Index (CPI) report. This report is significant because it will heavily influence the Federal Reserve's decisions at their November meeting. Fed funds futures suggest there's about a 70% chance we could see a quarter-point rate cut, with core CPI expected to rise by 0.3%.

The good news is that we’re not expecting any dramatic changes in core CPI. Year-over-year inflation has been looking positive and trending lower, which is exactly what we want to see. However, it’s wise to brace for some potential volatility if there are any surprises in the report. It’s usually not a good idea to initiate new positions in the market ahead of major economic events like this.

Looking at yesterday’s market action, we saw tech and semiconductor stocks push ahead, mainly led by Apple, which had its own multi-month breakout from a base. However, we’re still experiencing some choppy action in the markets, with fake-out breakouts occurring, which is never a good sign. This choppiness is likely due to the upcoming inflation reports, which often create some volatility beforehand.

Despite the uncertainty, these moves seem to reflect growing optimism that the Fed can navigate a soft landing, especially after last week’s jobs report showed continued strength in the labor market. This is a key point—if the labor market had shown weakness, the ongoing crisis in the Middle East could have triggered a much bigger sell-off. Instead, we’re seeing the market digest these challenges relatively well.

So, what does all of this mean for today’s session?

If we zoom out and look at the bigger picture, we see the market grappling not just with the first rate cuts in four years but also with a major presidential election between Trump and Harris—one of the most divided elections in history. Even though there’s an underlying uptrend, the market could experience more choppiness during what is historically the most volatile month of the year, especially with the U.S. presidential election looming.

Surprisingly, the market has managed to cope with this uncertainty quite well so far, which is a bit of an anomaly. We've experienced a strong month with several sectors breaking out and pushing higher. Given the level of doubt in the air, we should be pleased with how resilient the market has held up.

As we look at today’s session, everything hinges on how the CPI report is digested. If we see a negative reaction, we may go risk-off. However, even if things seem stable, initiating new positions today might not be the best idea with the PPI report coming out tomorrow. This isn’t because we expect PPI to be bearish; rather, it’s about what the market dislikes the most—uncertainty. And right now, there’s still a lot of it that the market can’t quite price in yet.

In times like this, it’s important to stay cautious and focus on managing risk while waiting for clearer signals before making any significant moves. We’ll discuss this in more detail in a few moments.

Nasdaq

The Nasdaq has enjoyed a nice burst of momentum this week, successfully breaking through several months of resistance with high volume on Tuesday and following it up with solid performance yesterday.

However, there’s some overhead resistance to keep an eye on, as highlighted by the red horizontal box on the chart. This is a critical area that the QQQ needs to push through, especially since it faced rejection here during a false breakout on September 26.

Despite this, the overall trend is clearly bullish. The QQQ is trading above its daily 10, 20, and 50 EMAs, with its point of control (POC) level sitting at $481. We don’t anticipate a significant breakdown in this uptrend, especially with the major players in the Nasdaq—like Nvidia and Apple—showing renewed strength.

That said, it wouldn’t be surprising to see some consolidation or sideways action below the $493 resistance level as we head into next week. This could provide a good opportunity for buyers to gather strength and digest the inflation data before hopefully making another push higher.

The biggest opportunities right now are definitely in the large and mega-cap technology stocks, which are the main drivers of the Nasdaq. We’re feeling particularly bullish in this area, especially given the recent breakouts in QQQ-tracked stocks.

While the upcoming presidential election adds some uncertainty, it’s important not to overlook the potential these tech giants have to continue pushing higher. Their momentum can lead to strong gains in other stocks that are lagging, and with many of them already showing positive signs, don’t just brush them aside- follow what the charts tell you.

S&P Midcap 400

The midcaps are currently in a sideways consolidation phase, with volume steadily drying up. The MDY is clearly setting up for a significant move, as evidenced by another inside day yesterday within its narrowing trading range around the point of control (POC) at $569. This level has been a point of contention for the MDY, which has been trading sideways for weeks.

Importantly, the MDY is forming a series of higher lows and is respecting its daily 10 and 20-EMA, which is a bullish sign. This behavior adds to the argument that midcaps could break out to the upside soon.

That said, they do appear less bullish compared to the Nasdaq and large caps, mainly because they have yet to experience their breakout. However, if large caps continue to show strength, the midcaps typically follow suit.

Russell 2000

The small caps are also experiencing a volatility contraction pattern (VCP), as they continue to form higher lows but face challenges breaking through a descending level of resistance. There's significant overhead supply in a range from $218 to $224, which will be tricky for the IWM to push through.

It's not surprising that small caps are struggling more than their larger counterparts, given their naturally higher volatility. However, it's important for us to exercise patience and wait for the IWM to reveal its next move. Keeping an eye on this situation will be crucial, as any breakout or breakdown could provide trading opportunities down the line or, at the very least, give you the warning sign to flip defensive and increase your cash holdings (if you don’t like to short sell).

DAILY FOCUS
Don’t Forget We Have PPI Data Tomorrow Too

The CPI data will be released just an hour before the market opens, and we might see a positive response to it. If that happens, stocks could push higher, creating several attractive buying opportunities. However, whether you decide to take advantage of these opportunities is entirely up to you. Just keep in mind that we have the PPI report coming out tomorrow. While it's not expected to be negative, the potential for volatility is still significant. Given the recent high number of failed breakouts, it’s essential to be incredibly selective and mindful of the amount of new risk you take on.

As for us, we won’t be looking for new exposure for several reasons. One is the higher failure rate combined with the uncertainty surrounding tomorrow’s PPI report. Additionally, we already hold some strong positions and don’t feel pressured to chase new long opportunities.

You should never feel pressured to chase anything in the markets. While there are good opportunities presenting themselves, keep a close eye on the relative volume on any breakout candles, and consider downsizing your risk to a maximum of 0.5% of your net asset value (NAV) in preparation for the heightened volatility we’re experiencing.

Remember, it’s always better to be out of a stock and wanting in than to be in a stock and wanting out. Always protect your principal capital. Now might also be a good time to consider trimming some profits if you’ve bought high-quality stocks that have seen solid follow-through recently. We take a systematic approach to this, selling into strength at predetermined average true range extension levels from our entry price.

If you're interested, you can learn more about this topic here as well as how we manage our stop-losses too, where we recently held a seminar discussing these topics in detail.

WATCHLIST
Focus On These On A Strong Reaction

AOSL: Alpha and Omega Semiconductor Limited

• AOSL is a semiconductor name that continues to hold its rising support level while contracting in both volume and price range, gearing up for a breakout any day now. Ideally, we’re looking for a breakout rather than a breakdown.

• The stock is likely to follow the lead of AI giants like Nvidia, and since Nvidia has shown the follow-through it needed, AOSL should definitely be on your watchlist. This is not only due to the current market theme but also because of its multi-month-long base. When this base finally breaks, we can expect the stock to enter an uptrend that typically lasts for months.

CORZ: Core Scientific, Inc.

• CORZ is a cryptocurrency-related stock that's doing well by maintaining its rising 10 and 20 EMA while contracting in volatility.

• Recently, it broke out of a multi-month base on September 13th and now looks like it's forming a secondary volatility contraction pattern (VCP), gearing up for another potential leg higher.

• This is definitely a name we're keeping a close eye on. However, we plan to trade with half-sized positions since we already have exposure to the crypto theme through MSTR. Plus, we know that these stocks can be pretty choppy and are closely tied to Bitcoin's movements, which usually drive them higher.

• So, while we’re optimistic about CORZ, we'll be cautious with our position sizing to manage risk effectively.