OVERVIEW
A Strong Finish to a Challenging Day

Yesterday's CPI data threw a bit of a curveball for the markets. U.S. consumer prices rose a little more than expected in September, mainly due to rising food costs. The Consumer Price Index (CPI) increased by 0.2% last month, which matched August's gain but was a bit above the forecast of 0.1%.

This puts a bit of a wrinkle in the narrative around rate cuts. It’s not a huge miss, but it's enough to make people second-guess. The CPI report was a little hotter than hoped for, both at the top-line and core levels, which has some traders and investors disappointed—especially those banking on more rate cuts from the Fed. While rate cuts were almost a sure bet a while ago, this higher-than-expected inflation number has people thinking that the Fed might now be more cautious about inflation levels.

Up until now, most of the focus was on whether the labor market was softening too much, but with inflation still sticking around, the Fed’s priority may shift back to keeping prices in check. That complicates things because everyone was hoping for a series of rate cuts to boost the economy.

The market didn't take the CPI news too well. All the major indices saw some pretty sharp intraday pullbacks as traders reassessed the chances of any major rate cuts at the next Fed meeting. To make things even more uncertain, Atlanta Fed President Raphael Bostic mentioned in a Wall Street Journal interview that he’d be "totally comfortable" with skipping a rate cut in the upcoming meeting. He also pointed out the "choppiness" in the recent data for both inflation and employment, suggesting the Fed might hold off on any action until things stabilize.

Just a week ago, the market was pricing in a decent 32.1% chance for a big 50-basis-point cut. Now, with this latest CPI data, those expectations have faded rather dramatically.

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

oday, we're gearing up for the release of the Producer Price Index (PPI) report, which comes out an hour before the market opens. Much like yesterday's CPI release, it's likely to stir up some volatility. The big question is whether stocks will have enough momentum to hold onto their recent gains or if we’ll see a retracement, especially with the growing uncertainty around the presidential election, potential escalation in the Middle East, and persistent inflation concerns.

The Volatility Index (VIX), often referred to as the "fear gauge," remains elevated at 20.93, well above all its rising daily moving averages. The VIX measures market expectations of near-term volatility based on S&P 500 options. When the VIX is high, it indicates that investors expect more volatility in the market, which can make it a riskier environment for stocks to rally comfortably. This should make you pause before being too aggressive with new long positions.

Now, this doesn't mean we're headed for a major sell-off. However, from a probabilistic standpoint, we're entering a highly selective phase. Only a small number of stocks are showing real strength, while the rate of failed breakouts has noticeably increased. A few weeks ago, everything seemed to be trending higher, but now, with these uncertainties piling up, it’s much more of a mixed bag.

Nasdaq

The Nasdaq held its ground quite well yesterday, thanks primarily to the strong performances of Apple and Nvidia, the two largest players in the capitalization-weighted QQQ. This ETF tracks the major technology stocks, which are currently one of the strongest sectors in the market. The QQQ is firmly positioned above its daily 10-EMA, but it’s now testing a significant resistance level at $493.50, a point where it has faced rejection before. This could lead to some choppy price action in the near term.

We also saw a green doji candle form yesterday in this uptrend. For those who follow candlestick theory, this pattern often indicates indecision in the market or a potential reversal. So, while the overall trend remains bullish, it's essential to be mindful of these signals as we approach the resistance level. It appears to be a time to exercise caution and really assess whether new positions are worth the risk and likely begin to take profits off the table from open positions.

S&P Midcap 400

The midcaps showed a strong performance yesterday with a high-volume bounce off their intraday retracement down to the daily 20-EMA and rising support level. This action indicates significant buying interest and showcases the commitment from buyers to keep the midcaps afloat, preventing a drop down to the rising 50-EMA, which would undermine the recently formed multi-week flag pattern.

Now, the main focus shifts to whether the midcaps can reclaim the point of control (POC) level at $567. Successfully breaking above this level would bring the MDY closer to the upper boundary of its trading range, setting the stage for a potential breakout above $570. If that happens, it could signal a continuation of the bullish momentum we’ve seen in the midcap sector.

Russell 2000

The small caps are currently showing notable relative weakness, with the IWM momentarily breaking below its rising 50-EMA, which was disappointing to see. Fortunately, the IWM managed to claw back above this level and is working hard to reestablish itself within the ascending support level formed by a series of higher lows since October 3rd. Maintaining this upward trend is crucial for keeping the flag pattern intact.

Despite the bounce back, the IWM experienced higher volume, which suggests a strong effort from buyers to reclaim those levels. However, the relative weakness in the small caps remains evident. For now, the spotlight continues to shine on the larger-cap stocks, particularly in the large and mid-cap sectors, which are demonstrating much stronger performance.

DAILY FOCUS
This Isn’t The Same Market Of Last Month

Back in mid-September, we were enjoying a strong growth phase across nearly all capitalization groups. Breakouts were working well, from microcaps to mega caps, and the success rate for new positions was high. However, the market dynamics have shifted since then.

For the past two weeks, we've been stuck in a sideways chop, making it difficult to find new positions, with the risk of stop-outs increasing. If you're receiving the daily sector and market breadth reports within Swingly Circle, you’ve likely noticed that market breadth has taken a significant hit. Many stocks are struggling to maintain their daily 20-EMAs, and a lot are in stages 3 or 4 of their trends.

During these types of market periods, it’s crucial to resist the temptation to spend your hard-earned profits from the previous cycle on forced trades in an uncertain environment. It’s a common struggle for newer swing traders to understand that 99% of swing trading is about waiting and researching rather than just clicking buttons to buy or sell. You don't need to make 1,000 trades in a year to see significant returns; just a few good winners can easily lead to over 100% gains annually.

Right now, we’re taking a defensive stance and have no urgency to open new positions today. Our primary focus is on managing our current positions, which are at zero risk since they are above our break-even points and already profitable. The only new buys we’ll consider will be adding to existing positions through intraday breakouts. We’re not looking to take on naked long exposure until there’s clearer evidence that the market is ready to make another leg higher.

The only thing that can make us consider new long positions is an unprecedentedly large positive move on the PPI data set to come out soon, however, these positions if taken will be a maximum of half-sized risk (0.25-0.5% of net asset value).

If you want to learn more about our position management strategies, feel free to check them out here.

WATCHLIST
Focus On These On A Strong PPI Reaction

CORZ: Core Scientific, Inc.

• CORZ continues to perform well, maintaining its position above the rising 20-EMA, even while Bitcoin struggles to break above its significant multi-month base.

• Currently, CORZ is curling downward as it approaches its ascending level of support, so it’s crucial that the 20-EMA holds up again for the flag to remain intact.

• What stands out is the impressive relative strength of CORZ. Since breaking out on September 13 above its June base, it has entered a secondary volatility contraction pattern (VCP). This stock shows strong potential to move higher, even if Bitcoin remains weak—much like MSTR, another name in the same industry that has been on a strong rally.

COMM: CommScope Holding Company, inc.

• COMM continues to hold above its daily 10-EMA after a massive rally that began in July. While the technology sector is currently leading the market, if we see a significant move today following the PPI release, COMM is one of the names with the highest likelihood of pushing higher.

• The key question remains whether COMM's impressive relative strength can withstand the heightened volatility we're experiencing.

• Generally speaking, whenever a stock shows such strong momentum like COMM has over the past several months, it's essential to keep an eye on these names and prioritize breakouts. We want to focus on the momentum leaders and avoid falling into the trap of thinking a stock has "gone up too much"—that's a fool's game. Focus on the charts; the price action & volume profile are King.