OVERVIEW
The Market Rotation Continues

Lately, Big Tech has taken a hit, with many of the leading mega and large-cap stocks experiencing profit-taking as money rotates into smaller growth names.

The two main culprits for today’s major tech gap down in premarket are Tesla and Alphabet (Google’s parent company). Both saw significant sell-offs after their earnings reports didn’t quite live up to expectations.

Tesla (TSLA)

Tesla’s earnings report really missed the mark, causing a big negative reaction from investors. Their revenue and profit margins were below what analysts expected, with profits dropping 45 percent in the second quarter, hitting a five-year low. As the biggest electric vehicle maker in the world, Tesla is dealing with slower sales, higher costs from employee layoffs, and big investments in AI infrastructure. While the AI stuff is exciting, it wasn’t enough to meet the high market expectations.

Alphabet (GOOGL)

Alphabet didn’t actually miss its earnings expectations. They reported earnings per share of $1.89, slightly above the expected $1.84. Revenue was $84.74 billion, beating the anticipated $84.19 billion.

Wall Street was also watching these numbers:

• YouTube ad revenue was $8.66 billion, which was below the expected $8.93 billion.

• Google Cloud revenue hit $10.35 billion, better than the forecasted $10.20 billion.

• Traffic acquisition costs (TAC) were $13.39 billion, lower than the expected $13.54 billion.

Overall, Alphabet's revenue grew by 14% year over year, thanks to strong performance in search and cloud. The cloud segment, in particular, surpassed $10 billion in quarterly revenue and hit $1 billion in operating profit for the first time.

Broader Market Implications

The sell-offs in Tesla and Alphabet really underscore the current vulnerability of tech stocks, particularly large and mega-cap ones. We’re seeing other former leaders like Nvidia, Super Micro Computers, AMD, and Meta getting hit hard today, with the Nasdaq taking a dive. Even Spotify which posted earnings yesterday saw a pretty big beat down.

Normally, you wouldn’t expect such established names to struggle, especially in Alphabet's case, where they actually beat earnings expectations. This situation highlights why, for the past two weeks, we’ve emphasized the importance of investing in small and mid-cap stocks that were previously underperforming. If you take away one key lesson from today’s report, it’s this: don’t get swayed by the news—follow the price. Wherever the money flows, that’s where you should be.

Nasdaq

The Nasdaq is really taking a hit in pre-market trading, gapping down below the key point of control at $480, which it barely managed to hold yesterday. It's now trading around $475. The low volume from yesterday is actually a silver lining; it suggests that while sellers were active, there wasn't a strong bearish consensus among market participants. Instead, buyers were relatively passive, simply holding onto their shares as the Nasdaq bounced above the daily 50-EMA.

Today, it’s crucial for the Nasdaq to respect the daily 50-EMA at $472. This level needs to attract significant demand, similar to how it did on Monday. If it fails to hold, we could see more pain in big tech stocks, especially given the notable volume gap on the visible range volume profile extending down to $464.

S&P Midcap 400

The midcaps are looking very strong and continue to outperform the QQQ, with Tuesday’s session closing firmly in the green on substantial volume. The daily 10-EMA acted as support once again, just as it did after Monday's test.

As we discussed yesterday, it was crucial for the daily 10-EMA to hold as a demand level, and that's exactly what happened. Buyers stepped in and pushed the price higher as the session approached the close. Even on a portfolio level, our midcap stocks are performing exceptionally well.

Technically, we’re seeing the potential formation of a bull flag or a volatility contraction pattern (VCP) on the daily chart. We’d welcome further sideways consolidation around the daily 10-EMA, as it could set the stage for continued bullish momentum.

Russell 2000

The small caps are looking even more promising, with a high-volume mini range break yesterday pushing the IWM to near-term highs as it approaches the $230 mark. Ideally, we'd like to see the IWM consolidate sideways for a few more days. This would help to build a more robust secondary volatility contraction pattern (VCP) following the previous leg up. Such consolidation would also give other small-cap stocks that are currently a bit extended the opportunity to rebase and set up for the next move.

DAILY FOCUS
If It’s Small Or Mid, Go Big

The small and mid-cap markets are stronger than they’ve been in the last two years. The last time we saw a rally of this magnitude was when GameStop and AMC were breaking out and going wild. Now is the time to focus on beaten-down micro, small, and mid-cap stocks where we’re seeing volatility contraction patterns (VCPs) forming on the daily chart. We’ve started looking for short, 3-day momentum burst trades, which we only pursue in optimal conditions, and we believe we’re reaching that stage.

While it’s important to stay cautious, you should feel confident in ramping up your activity now. Create a watchlist of the best high ADR% setups in the market, even if they aren’t the strongest fundamentally, and keep an eye on them for high-volume daily breakouts.

Note

Although we’re now targeting 3-day momentum burst trades involving higher volatility stocks, remember that we have extensive experience with these. These trades aren’t typical; they can produce +100% moves in a few days but also come with the risk of major gap downs. That’s why we trade them ultra-short-term. If you’re not comfortable with these higher-risk names, don’t worry—there will be plenty of opportunities in conventional breakout swing trades.

WATCHLIST
These Stocks Might Double

KOSS: Koss Corporation

• KOSS is a prime example of the momentum burst trades we’re eyeing. Despite its small market cap of less than $100M, the stock has surged more than 500% in recent weeks.

• The stock does not have amazing fundamentals and this is why we prefer to size up on the first day and then close the majority of the position within the first 2-3 days.

• We’re closely monitoring KOSS for a breakout above $9.20 today, which would trigger a long position for us.

HEPS: D-Market Electronic Services & Trading

• HEPS is another standout, showing a textbook volatility contraction pattern (VCP) after its impressive +100% run over the last two weeks.

• Fundamentally, HEPS is stronger compared to KOSS, and the linearity of its prior moves indicates institutional sponsorship.

• We’d consider entering a full or possibly oversized long position on a high-volume breakout above $3.60. However, ideally, we’d like to see HEPS trade sideways to tighten up the bull flag. It would also be beneficial if the IWM were to form a similar flag pattern as volatility contracts.