A Big Move Is Coming

Exposure Status: Risk Off

OVERVIEW
The Calm Before The Storm

The market is patiently awaiting tomorrow’s major inflation data and the Federal Reserve's interest rate decision, which will be announced intraday. Yesterday’s session was strong, with all major indices climbing higher throughout the day and closing firmly in the green. Optimism surrounding this week’s inflation reports is improving as investors have prepared themselves to now see a lower chance of rate cuts in September, while expectations for a November rate cut have increased. This optimism has spread, with consumers more bullish on the stock market than they've been since May 2021.

The latest consumer expectations survey from the Federal Reserve Bank of New York revealed that the average perceived probability of stock prices rising in the next 12 months increased to 40.5% in May, up from 38.7% in April.

The survey also indicated that consumer expectations for inflation over the next year declined to 3.2% in May, down from 3.3% in April. Overall, the New York Fed found that households are feeling more positive about their financial situations, with more respondents reporting being "better off than a year ago" and fewer saying they were "worse off." This optimism coincides with stocks nearing record highs.

What does this mean?

This is promising and definitely encouraging to see, given the massive deterioration in breadth that we've witnessed over the past month or so.

The market has adjusted its interest rate expectations. Although the likelihood of imminent rate cuts has dwindled, this has opened the door for Jerome Powell and the Federal Reserve to potentially boost market confidence, which could easily trigger a significant bull run in the equities market.

Remember, the market cares less about the absolute interest rate or inflation figures and more about how these factors are "priced in." Any surprise that hasn't been accounted for can cause significant volatility swings.

The rise in optimistic expectations surrounding the stock market and inflation data is a very welcome development.

Nasdaq

QQQ VRVP Daily Chart

The Nasdaq had another sideways day as it consolidates after its big breakout last Wednesday, which pushed the QQQ to trade at its all-time highs.

Volume was low in yesterday’s session, which was expected as most traders are likely sitting on the sidelines until the turmoil of inflation reports subsides in the next couple of days.

The QQQ is by far the strongest index, and there is little more to analyze as the Nasdaq has been a powerhouse compared to almost every other index.

We anticipate another rangebound session today, with the QQQ potentially dipping to $460, where there is a significant lapse in volume according to the visible range volume profile (VRVP). However, this zone was a massive demand area, which will likely cause the QQQ to bounce right back up.

S&P Midcap 400

MDY VRVP Daily Chart

MDY Weekly Chart

The midcaps thankfully made the most of a bad situation in yesterday’s session as they finally filled their downside gap and found a massive wall of buyers to step in and defend the $529 level. Had this support been broken, it would have invalidated the MDY’s multi-month flag pattern it has been building.

Ideally, we will see the MDY push above its point of control (POC) at the current share price. Assuming a positive reaction to the inflation data tomorrow, this could break the midcaps out of their recent pullback and set the stage for a run back up to $555.

Russell 2000

IWM VRVP Daily Chart

The small caps also managed to finish the day strong as they filled their downside gap, prompting a significant influx of buying pressure. This move is now setting the stage for a possible retest of its declining daily 50-EMA at $203.

Given the uncertainty surrounding the upcoming inflation data, it's unlikely we'll see any significant moves today. If the market responds poorly to the data, the IWM (like everything else) could come crashing down, potentially testing its daily 200-EMA as a worst-case scenario.

Today's session is likely to be slow, so ideally, we'd like to see the IWM stay rangebound and hold its current zone above its unfilled gap, consolidating heading into tomorrow’s session.

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DAILY FOCUS
Never Trade Before Big Inflation Data

The market appears promising, with growing optimism surrounding the equities market and the potential easing of interest rates in November, setting the stage for a potential bull run if Jerome Powell and the FED can boost confidence tomorrow.

However, it's important to recognize that this optimism is largely speculative and emotional, two factors that can be detrimental in the game of swing trading. Nobody can predict how the market will respond tomorrow, even if the Fed's comments are positive. The right approach today is to do nothing.

It's wise to wait until tomorrow’s data is released and the Fed makes its decision on interest rates later in the day. Observing how the market reacts without rushing in to join any potential frenzy is crucial. Otherwise, there's a high risk of getting caught off guard.

Remember, there's no need to be the first to buy stocks if the market responds well. The trend and momentum are likely to persist for a while, allowing for more informed and calculated decisions.

WATCHLIST
The Set-Ups We Like

SMCI: Super Micro Computer, Inc

SMCI Daily Chart

  • SMCI is currently consolidating below its daily 10, 20, and 50-EMA levels after breaking down from a failed range break on May 15th.

  • Volume in the stock is declining, and the contraction in volatility is yet to reach its climax.

  • With economic data set to be released this week, there's anticipation for a sharp move in either direction, likely fueled by this data.

  • In the event of a positive reaction, SMCI stands out as a stock to consider for long exposure, given its exceptional fundamentals and strong ties to Nvidia.

MSTR: MicroStrategy Incorporated

MSTR Daily Chart

  • MSTR remains one of the top cryptocurrency-related stocks in the market, consolidating above its daily 10 and 20 EMA following its significant breakout a few weeks ago.

  • The VCP (Volatility Contraction Pattern) it's forming continues to exhibit strength, and as long as this consolidation persists, we anticipate MSTR to push higher, potentially retesting $2,000.

  • The cryptocurrency theme has shown remarkable resilience during the recent several-week pullback, and MSTR's current stability is primarily influenced by the overall sentiment in the equities market.

This newsletter does not provide financial advice. It is intended solely for educational purposes and does not constitute investment advice or a recommendation to trade assets or make financial decisions. Please exercise caution and conduct your own research.

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