OVERVIEW
Don’t Get Caught in Analysis Paralysis

Yesterday was a tough day for the Nasdaq—it had its worst performance since early 2022. We're witnessing a shift in the market as investors move their focus from large tech stocks to smaller and midcap growth stocks. The buzz is around potential interest rate cuts, which could benefit these smaller companies that rely on low borrowing costs.

It's worth noting the stark contrast between the Nasdaq and the Russell 2000. While tech stocks are at a two-year performance low, small growth stocks are reaching a two-year performance high. This split is crucial for your trading strategy and something we've highlighted before.

One common pitfall for traders is getting bogged down by over-analyzing every market move. It’s easy to become fixated on the reasons behind a stock or index's movements. Even with our experience, diving too deep into every detail can be tempting. But remember, the real focus should be on what matters most—price and volume. Don’t let the noise distract you. Stick to the fundamentals and the data that drive market movements.

As for whether this dip signals the start of a major bear market (unlikely) or if mainstream media's warnings are just fear-mongering (often the case), don’t be swayed. The truth lies in the price and volume—price is your primary indicator, and volume shows whether a move is likely to continue. Base your decisions on these core fundamentals.

Macro-induced volatility

We haven’t yet addressed the impact of recent macro events on the equities market—specifically, the significant volatility stemming from the near-assassination of former President Donald Trump and the recent transition of power from President Joe Biden to Vice President Kamala Harris.

While the stock market is closely tied to the economy, it’s not the same thing. For example, during the COVID-19 pandemic, the economy was struggling, but the stock market surged to new highs—one of the strongest rallies in decades. Given the recent political turbulence, it’s no surprise that we’re seeing increased volatility. Major institutions are adjusting their positions based on anticipated political outcomes, contributing to the current uncertainty. In less than two weeks, these dramatic events have created a climate of significant uncertainty for the future of the United States- the stock market hates uncertainty.

Red days are good

Use sell-offs as a chance to review your watchlist of stocks. Ask yourself these critical questions to identify potential opportunities:

• Which stocks are showing the greatest relative strength? Look for stocks that are holding up well compared to others in the same industry group, sector and also capitalization group. These will be more resilient and will present you with the strongest buying opportunities as the market stabilizes.

• Which stocks are showing the lowest relative strength? Identify stocks that are underperforming. This helps in making informed decisions the stocks that you should comppletly avoid and if you hold them in your portfolio, you should look for potential exits or adjustments moving forward as they have now demonstrated their weakness.

• Which sectors and capitalization groups are leading during the sell-off? Some sectors or market caps may perform better than others during market declines. Understanding which ones are leading can guide you toward sectors that are heading for future strength.

Learn to use red days and periods of weakness as a tool to flush out the good from the bad. Whenever everything is breaking higher it’s really difficult to tell which stocks are actually moving because they deserve to move higher (actual fundamental growth) as opposed to sympathy moves from sector and industry wide excitement.

Nasdaq

The Nasdaq experienced its highest level of daily selling volume in months and completely failed to attract demand yesterday, both at its point of control (POC) at $482 and the daily 50-EMA, which acted as resistance throughout the day.

We aren’t surprised by this outcome. In fact, we anticipated weakness in the Nasdaq following the disappointing earnings reactions from Tesla and Alphabet. This is precisely why we’ve been avoiding positions in big tech stocks for the past few weeks.

Since reaching all-time highs three weeks ago, the QQQ has been trending downward, reflecting a period of mean reversion. The Nasdaq has lost the weekly 10-EMA and is now approaching the weekly 20-EMA at $456, which is expected to be tested in the upcoming sessions.

Ideally, we would see demand step in at this level. However, if the 20-EMA fails to hold, we could see a sharp decline to $440. This level aligns with the QQQ’s weekly point of control (POC) and would be concerning, as it would erase all the gains achieved since April 2024.

Whichever way you look at it, buying big tech right now is not the smart move.

S&P Midcap 400

The midcaps lost their daily 10-EMA yesterday, accompanied by high selling volume. For now, this isn’t overly concerning as the daily 20-EMA is providing support. However, the $547 level must hold as demand to prevent a potential breakdown. If the daily 20-EMA is lost, it could invalidate the prior breakout rally.

Given the inherent volatility of midcaps, some wild movements following a significant rally are expected. Therefore, while we don’t see an immediate cause for concern, we recommend avoiding new risk today. The midcaps need to demonstrate their strength by breaking out of the daily range before we consider re-entering long positions.

Russell 2000

The small caps are showing the strongest performance among the three groups. It’s evident that a bull flag or volatility contraction pattern (VCP) is forming on the daily timeframe. We’re observing a decline in volume with the price range narrowing, similar to a compressed spring.

We’re watching for the daily 10-EMA to be tested today and act as support, allowing the IWM to continue its sideways consolidation. This pattern, which we’ve anticipated since the big move up, indicates that both buyers and sellers are comfortable with this new price range.

DAILY FOCUS
Let The Market Prove Itself

The market has been highly volatile over the past week, with clear rotations occurring and a lack of actionable setups, particularly as many strong small and midcaps have already extended. As a result, we’re adopting a risk-off stance today.

The optimal time to buy breakouts and go long is just before a major index rally. Since we've recently experienced such a rally, finding compelling entry points immediately afterward is challenging. A+ stocks need time to consolidate and form secondary patterns like bull flags or VCPs.

However, today is not a day to be idle. It’s an ideal opportunity to assess which stocks are truly worth your attention. Use this pullback to conduct a thorough market scan, focusing on the strongest stocks that meet the criteria we outlined:

• Which stocks are showing the greatest relative strength? 

• Which stocks are showing the lowest relative strength?

• Which sectors and capitalization groups are leading during the sell-off? 

WATCHLIST
The Leaders

WGS: GeneDx Holdings Corp.

• WGS, a notable name in the medical sector, has demonstrated impressive momentum over the past few months, especially following its earnings-driven episodic pivot in late April.

• The company has shown fundamental improvements in operating income and gross profit, which has garnered significant market interest.

• GeneDx has provided several solid breakout opportunities and is now forming a flag pattern as it approaches its upcoming earnings report.

• While we don’t see a clear entry point today—given the stock needs to consolidate further—we recommend adding WGS to your watchlist. It has the potential to make a strong move following its earnings announcement.