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OVERVIEW
Just Another Low Volume Bounce

The market is once again facing a familiar challenge, but with a new layer of complexity: no one really knows where the U.S. economy is headed. Even economists and market analysts are divided on the current situation, adding to the uncertainty.

This ambiguity is causing both consumers and corporations to adopt a cautious stance. They're holding off on big decisions, waiting for more insight into how the Federal Reserve's upcoming interest rate cuts might affect the economy.

In our previous report, we mentioned today's upcoming inflation data, set to be released just before the market opens. Normally, inflation data would take center stage, but right now, there are several other critical factors weighing on the market’s outlook. The softening labor market and the growing concern that the Fed may have delayed rate cuts for too long are adding layers of uncertainty beyond just inflation.

This cautious tone in the market is reflected in the slightly elevated VIX. As we discussed in our weekend report, the VIX, which measures volatility, often spikes around election years, and we’re seeing a similar trend now. The uncertainty surrounding the softening labor market and the upcoming presidential election is fueling this volatility. Historically, election years tend to see a roughly 25% increase in the VIX between July and November, primarily due to the unknowns surrounding the future, rather than who the president will be.

For traders, the VIX is the key focus. Whether it's the upcoming inflation data or the unfolding election cycle, uncertainty is driving market hesitation. The best move right now is to remain vigilant and pay close attention to how these variables evolve.

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

There's also the potential for a rebound, especially given how intense the selling pressure has been over the last trading week. After days of heavy declines, we saw a bit of relief yesterday, with the market taking a breather from the recent freefall.

It's not uncommon for the market to experience short-term bounces after such steep sell-offs, and with so much selling already behind us, a temporary rebound could be on the horizon. However, whether this pause turns into a meaningful recovery remains to be seen, especially with the broader uncertainties still at play.

Specially for today’s session, we'll be closely watching to see if the inflation report will have any real impact on the equities market or if it will be brushed aside. With the market in a clear downtrend, it’s uncertain whether today’s data will be enough to shift the sentiment.

While a rebound is possible given the heavy selling pressure over the past week, we’re still navigating a bearish environment. A single report may not be enough to change that. However, it's worth paying attention to any shifts in momentum that could emerge in response to the inflation data.

Nasdaq

The Nasdaq paused its sell-off on Friday, finding some support around the $450 demand level. This level, highlighted by the Visible Range Volume Profile (VRVP), is a key support area where we anticipated some consolidation. For a potential market rebound, it’s crucial that this level holds and that buyers step in to defend it.

However, there’s a notable concern regarding this more bullish scenario: the volume on Friday was relatively low. We saw a green day with much lower volume compared to the red days. This suggests that buyers are not aggressively stepping in; instead, the buying appears to be more passive, likely driven by profit-taking from short positions as we approach the CPI report.

In contrast, if we look back at the actual bottom on August 5th, the volume profile was significantly different. Volume plays a crucial role in assessing the strength of moves and informing trends. The current low volume green days do not indicate strong buying pressure, which is essential for a sustained rebound.

S&P Midcap 400

The midcaps are rapidly approaching their point of control (POC) at $536. Yesterday’s inverted green hammer candlestick, appearing amidst the bearish downtrend, is not a strong sign of bullish strength, particularly given the low volume associated with it.

During the session, the MDY tried to push higher intraday, moving towards its declining daily EMAs and the low volume pocket between $550 and $538. However, this attempt was met with rejection, forcing the MDY to close near the lows of the day.

The combination of a low volume green day and rejection near key resistance levels suggests ongoing weakness and caution in the midcaps sector although consolidation at or around the POC is something to be encouraged if we can see it.

Russell 2000

The IWM, which represents the small caps, is in a similar predicament but slightly worse due to the higher volatility inherent to small caps.

The Russell 2000, tracked by the IWM, has also struggled, failing to hold its EMAs and closing Monday’s session with an inverted green hammer candle. This pattern does not suggest a trend reversal but rather indicates that the downtrend might continue with further downside potential.

The next likely support level for the IWM will be the rising 200-day EMA. However, this assumes that no sideways consolidation or flag pattern develops here, which seems unlikely unless the market reacts exceptionally well to today’s CPI report.

DAILY FOCUS
Don’t Try To Outsmart The Market

We observed several stocks from our high relative strength watchlist make gains, as highlighted in Swingly Circle. Sectors like healthcare and biotech, known for outperforming the broader market, actually saw breakouts with strong volume during yesterday’s rebound.

While it might be tempting to jump in, especially when everyone wants to be the one who catches the bottom of a sell-off, it's crucial to remember that this is akin to catching a falling knife. One green day amid a broader downtrend isn’t enough to signal a definitive change in direction.

Our stance remains cautious—risk-off—until we see more confirmation of a market shift. For today, we need to see a strong session, with more stocks either breaking out or forming higher lows.

Keep an eye on how the stocks that broke out yesterday perform and ask yourself:

• Are they able to hold their new breakout levels?

• Do they continue to push higher on strong volume?

• Are any additional stocks starting breaking out?

These are the signs of confirmation we’re looking for before adjusting our strategy.

WATCHLIST
The Leaders Of The Pack

COMP: Compass, Inc.

• COMP saw a massive breakout yesterday, which is quite surprising given the recent struggles of big tech stocks. We had COMP on our high RS watchlist and considered entering a small 0.25R position, but decided against it due to the current market conditions and the CPI report scheduled for today.

• Despite this, COMP remains a stock to keep on your radar. Its ability to push higher while the broader market is selling off suggests it has strong upward momentum and might be poised for further gains.

AQST: Aquestive Therapeutics, Inc.

• AQST was another notable mover yesterday, especially given its status as a healthcare-related stock we've been tracking for several months. The stock exhibited strong continuation with a very linear breakout, which aligns with the concept of linearity that we often discuss.

• AQST's recent breakouts have been impressive, showing how well the stock respects its daily 10, 20, and 50 EMAs, and forms tight ranges with each breakout. This makes AQST a very trader-friendly name.

• If AQST can form a secondary Volatility Contraction Pattern (VCP) and we start seeing more stocks either pushing higher or setting up, this would be a significant indicator that the market might be shifting direction.