That Was Painful

Swingly Exposure Status: Risk Off

OVERVIEW
Did Nvidia Tank The Market?

Thursday's session was potentially one of the most shocking days of 2024 and one of the worst in the markets since March 2023.

On one hand, we saw Nvidia, the leader in the AI & Technology sector, surge over 9%, pushing its market cap above $2.5 trillion. Meanwhile, almost every other stock in the market was in the red, with major indices including the Nasdaq and S&P 500 selling off drastically throughout the session.

The events of the day are challenging to explain accurately. However, it seems likely that a significant number of investors were taking profits and/or liquidating shares in almost all other stocks, cycling their capital into Nvidia. This shift resulted in over 80 million Nvidia shares being traded, translating to a dollar volume of over $83 billion.

The general expert opinion is that yesterday's sell-off marks the beginning of a short-term correction, signaled by what many are calling a near-term “top.” The market appeared extended after the early May breakout rally, and Nvidia’s earnings underscored this underlying weakness and lack of market-wide participation in the rally.

We are of two minds. While it is evident, as we discussed previously, that mid and small-cap stocks were significantly weaker and the rally's breadth was limited to a select few large-cap stocks, we are cautious about becoming too bearish too quickly based on a single day’s performance.

Perspective Matters

A large number of stocks with prior breakouts found support at their key daily moving averages, and we are not going to panic or manually override our stops solely due to yesterday’s action.

Additionally, all of the major indices are trending above their weekly 10-EMAs, indicating that a normal -2% pullback can occur, especially within uptrends.

We are not dismissing the fact that it was a painful and concerning day. However, the best approach is to step aside and wait for more confirmation to determine whether this truly marks the beginning of a deeper pullback or if it was simply a one-day sell-off.

Nasdaq

QQQ VRVP Daily Chart

The QQQ retraced just under 2% from its opening price on the highest selling volume seen in a month. The visible range volume profile (VRVP) at the $460 level is overwhelmingly bearish—no surprises there. However, the QQQ found support and held its rising daily 10-EMA with no real difficulty.

We anticipated the retracement to fill the pre-market gap, as is typical when a major index gaps up significantly like the QQQ did yesterday. Therefore, the weakness in the open wasn’t too surprising to us.

Currently, we're at a major point of support between $452-$455, which previously acted as a significant area for demand. Maintaining this zone is crucial. If we see a breach below $450 on strong volume, coupled with the loss of the daily 10-EMA, it would confirm the bear thesis in action. This zone represents a significant volume pocket, heightening its importance.

S&P Midcap 400

MDY VRVP Daily Chart

The midcaps are indeed showing significant weakness.

The MDY has broken below both the daily 10 and 20-EMAs and is currently finding some support at the weekly 10-EMA and daily 50-EMA. However, the point of control (POC) remains almost 2% below the current share price, aligning with an unfilled gap between $530-$535, which suggests a potential to get filled.

What's more concerning with the MDY is the lack of substantial support between its daily 50-EMA and the POC. This raises the probability of seeing the discussed gap filled, which would effectively erase all the progress the MDY has made in the last month.

MDY Weekly Chart

The weekly chart is displaying a significant flag pattern and a potential VCP (Volatility Contraction Pattern), with $557 emerging as a distinct top that has been rejected on four separate occasions. An intriguing observation is the comparatively low volume this week in relation to previous weeks, adding an element of interest to the current market dynamics.

We're eagerly awaiting today’s session to see how it shapes the weekly close and provides further insights into the evolving market sentiment.

Russell 2000

IWM VRVP Daily Chart

The small caps are exhibiting a pattern similar to the MDY's current trajectory. Yesterday's activity resulted in a significant break below the point of control (POC) and the quickest daily EMAs. However, support was discovered at the rising daily 50-EMA, which coincides with the weekly 10-EMA as well.

An unfilled gap still exists, suggesting that the IWM may be inclined to reach $199 to fill it before making further progress to the upside. This gap presents a potential target for the market's movement in the near term.

IWM Weekly Chart

The weekly chart for the Russell 2000 provides valuable insight into the long-term range-bound action since entering a significant sideways consolidation stage in late 2023.

Once more, we're awaiting confirmation on whether the weekly 10-EMA can be sustained today. Ultimately, this could serve as a springboard to finally break out of the prolonged and challenging multi-month Volatility Contraction Pattern (VCP) for good. This pivotal moment could signal a significant shift in the market's dynamics.

DAILY FOCUS
Stay In cash- Wait & Observe

The market is indeed at a potential tipping point, and accurately predicting whether yesterday marked the beginning of another pullback or merely a bear trap is challenging. As a trader, your primary objective isn’t to forecast market movements but to align yourself with the prevailing momentum.

Given the current uncertainty, where the market could move up, down, or in circles, the prudent approach is to stand aside. We won't be initiating any new positions and will instead maintain our current holdings, adhering to predetermined stops. We'll closely monitor market behavior today to inform our future decisions, remaining flexible and ready to act accordingly.

WATCHLIST
Nothing To Declare

SEZL: Sezzle Inc

SEZL Daily Chart

  • There aren't many setups forming due to the sell-off yesterday, which caused most stocks to lose their bases.

  • Sezzle, a growth stock we're currently holding from its earnings EP, is the only real setup we're seeing as the stock is flagging once again.

  • While we're not overly confident in expecting a significant breakout to the upside, the fact that Sezzle is holding its EMAs is very promising.

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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