OVERVIEW
Where Is All This Strength Coming From?

We’re currently seeing one of the broadest rallies to new all-time highs in this uptrend. On Tuesday, over 20% of S&P 500 stocks hit a 52-week high, with not a single stock hitting a 52-week low. This marked the highest net percentage of stocks reaching new highs in a single session since March, and if we exclude that day, it’s the best we’ve seen since May 2021.

However, tuesday’s session saw almost all those gains disappear, largely due to disappointing performances from NVIDIA (NVDA) and ASML, among others. This dragged down the capitalization-weighted Nasdaq (QQQ) and S&P 500 (SPY), briefly dipping below the rising 10-EMA and shaking many traders out of their positions.

It felt like a flash warning that it might be time to shift to a risk-off strategy, especially as we approach the 2024 U.S. Presidential Election, a time historically known for significant volatility. Despite this, the market continues to show resilience and push higher with yesterday actually showing incredible strength in them market with Nvidia reclaiming all of this lost ground and the shooting star patterns seeing in the Russell 2000 (IWM) & S&P 400 Midcaps (MDY) becoming invalidated from a strong showing of buyer strength.

This morning, the biggest news comes from Taiwan Semiconductor Manufacturing Company (TSM), which reported strong earnings. For those unfamiliar, TSM has been a key manufacturer for NVIDIA (NVDA), producing graphics chips that are vital to the AI boom. NVIDIA and TSMC have enjoyed a long and successful partnership, shipping over 200 million graphics and media communications processors in the last five years.

What Does This Mean?

TSMC’s positive outlook is great news! They expect annual growth, with AI chip sales making up a big chunk of their revenue. This optimism has really boosted confidence in the chipmaking sector, especially for companies like TSMC and Nvidia, which are riding high on the demand for AI technology. TSMC's shares surged 7%, getting them closer to that impressive $1 trillion market cap. Nvidia and AMD also saw their shares rise by over 2%, while other companies like Broadcom, Qualcomm, and Micron enjoyed gains between 1.5% and 3%. Even Intel managed a little bounce as it works to ramp up its chip manufacturing to keep pace with TSMC. This news is a refreshing change after ASML's more cautious forecast, which hinted at a slow recovery in semiconductor demand outside the AI space.

Why Should I Care?

The semiconductor sector is really turning heads among institutional investors as Wall Street zooms in on companies providing the essential tools for the booming AI market. And let’s be real—these big players have a huge impact on the market. Their interest signals a solid growth trend in the chip industry. Companies like TSMC, Nvidia, and AMD are showing impressive performance, which not only points to exciting opportunities in AI but also suggests that the market rally might keep going strong.

Here’s the thing: institutional investors, like hedge funds and pension funds, often take a few days or even weeks to build their positions in these stocks. When a company posts strong revenue and has a solid setup, it catches their attention and leads to a rush of buying as they step in to grab shares, pushing those valuations up. This buying frenzy helps drive up the broader market and creates opportunities for smaller traders like us (those without billions in their pocket) to jump in and ride the wave.

Nasdaq

Yesterday, it looked like the Nasdaq was on a downward spiral, threatening to invalidate its recent breakout. However, thanks to a strong performance from Apple and solid earnings from financial giants like Morgan Stanley, the QQQ found support at the rising 20-EMA and managed to stay afloat.

The volume during yesterday's session was relatively low, but the candlestick pattern—a hammer candle—indicated that buyers were stepping in quite aggressively at the 20-EMA to push prices higher. The next key level to watch is the overhead resistance at $494, which is currently gapping above in premarket trading. We need to see this level hold as support, and then there's the crucial $500 resistance. If we break through that, it could mean all-time highs for the Nasdaq.

There’s a strong chance we’ll see this strength continue. With the focus on the booming AI sector, driven by TSMC’s positive forecast, it's easy to overlook recent comments from Joe Biden about blocking semiconductor trade with China. If we see follow-through from these multi-trillion-dollar AI players, it’ll be hard for the Nasdaq not to push higher.

S&P Midcap 400

The midcaps just keep climbing on their path to all-time highs. Yesterday, they had a strong session, closing near the top of Tuesday’s shooting star candle, which had sent potential sell-off signals to traders the day before.

It’s clear that the strength in the MDY is evident. While we are seeing a slight extension from the MD and its 10-EMA, the midcaps still have plenty of room to keep pushing higher. Ideally, we want to see them break through the $585 level, which would firmly eliminate the resistance and overhead supply at that point.

Russell 2000

The small caps are looking even stronger, breaking out decisively above their major supply level at $225.50—an area where we've seen multiple rejections throughout the year. Yesterday's volume was equally impressive, reflecting strong demand as the Russell 2000 finally takes the lead in pushing the indices higher.

DAILY FOCUS
Take The Opportunities That Come

Right now, the volatility index (VIX), which had been elevated earlier this month, has steadily cooled off, dipping below its 10-EMA and preparing to drop below its 20-EMA. This is an important indicator because it’s quite rare to see a high VIX alongside rising equity markets. A declining VIX suggests that traders are becoming more confident, and this often aligns with bullish movements in stocks.

While it’s true that as we approach the upcoming election, the likelihood of market pullbacks increases—reminding us of the macro events that often cause uncertainty—the most crucial thing we can do as swing traders is to focus on price action and volume profile. Price sets the direction, and volume confirms it.

Right now, there’s clear strength in the market, and instead of questioning why or how this is happening, we should embrace the current momentum. Let’s keep our eyes on the charts and let the price action guide our decisions, as this approach allows us to capitalize on the opportunities in front of us.

Our top priority today is to increase our exposure to the AI theme. We recently got shaken out of our position in Nvidia while trading with the rising 10-EMA, but today we’re looking to introduce a long position in TSM following its earnings report. This presents a great opportunity to capitalize on the momentum in the AI sector and position ourselves for potential gains.

WATCHLIST
Some Amazing Opportunities

TSM: Taiwan Semiconductor Manufacturing Company Ltd.

• TSM is currently gapping up on its strong earnings report, and the stock is trending sideways within a significant base formed back in mid-July. The premarket action has TSM breaking above this base and pushing above the $200 mark.

• As always with earnings-related pivots, our entry criteria focus on the 5-minute opening range high (ORH). We look for a breakout above this level on high relative volume within the first 15-30 minutes of trading. This signals that demand is truly present, increasing the probability of a sustained move.

• This is our primary focus today, and we plan to enter a full-sized position, aiming for a 1% max risk relative to our NAV.

GCT: GigaCloud Technology Inc

• GCT has been down for quite some time, but last month saw a significant bounce, bringing some life back into the stock. It has moved up an impressive 85% from its lows and is now forming a textbook volatility contraction pattern (VCP), nicely sandwiched between its rising 10, 20, 50, and 200-EMAs.

• A breakout above the 200-EMA overhead at $24.80 could trigger a major move in GCT since it has been trending below this critical level for months. This would represent a significant shift in momentum for the stock.

• For our entry, we’ll be looking at the 5-minute opening range high (ORH) breakout, aiming for a maximum risk of 0.75% relative to our NAV. We won’t introduce a full 1% of our NAV here, as GCT isn’t in a leading sector, but we see potential for a solid trade if the conditions align.