OVERVIEW
Too Late To Short, Too Early To Long

We’re seeing quite a split between large-cap stocks and smaller growth names right now. The Nasdaq dropped by 1.1% recently, while the Russell 2000, which tracks smaller companies, actually went up by 1.25%. It’s a pretty clear sign that the market rotation that has been happening for a while still isn’t over.

A lot of mainstream news outlets are jumping on this, suggesting it could be the start of a bigger downturn. They’re pointing to Tesla’s earnings miss and the mixed reaction to Alphabet’s earnings as signs that consumers are struggling with high borrowing costs, which could lead to a broader market sell-off.

We think that’s a huge overreaction. Market rotation can be tricky to grasp but in simple terms, when interest rates are high, smaller companies that rely on borrowing tend to get hit harder because they face higher costs. Larger companies, which are usually more stable and less dependent on borrowing, can handle these conditions better.

When rates are low and borrowing is cheaper, it's typically the high-growth, speculative stocks that shine. So what we’re seeing now fits with this pattern. It’s a natural part of the market cycle and doesn’t necessarily mean a major downturn is on the horizon.

If you’re focusing solely on trading mega cap technology stocks right now, you will be in for a rough ride. That’s far from the best approach in the current market climate. Instead, you should be following where the money is flowing, and right now, that’s into small and midcap stocks, not the large-cap or mega cap tech giants.

Nasdaq

We touched on this yesterday, and the pattern is still playing out. The QQQ wasn’t likely to stabilize until it tested the weekly 20-EMA at $457, and that’s exactly what we’re seeing. The Nasdaq has dipped again, though it did see a minor bounce at the 20-EMA, providing some temporary relief. Despite this, the bounce hasn’t been strong enough to suggest a solid reversal yet.

At the moment, the QQQ is showing a pre-market gap up, but we’re not entirely convinced by this movement. For today, it would be ideal for the QQQ to consolidate sideways and form a flag pattern. This would be preferable to a further decline, which could signal a bear flag and more downside pressure.

Essentially, this sideways action could give the Nasdaq some breathing room, allowing large caps to reset and giving sellers a chance to calm down. However, it's important to keep in mind that focusing on large-cap or mega cap stocks right now might not be the best strategy. The real opportunity is still the small and midcaps, where the money is currently flowing and where opportunities will be coming in the next week.

S&P Midcap 400

The midcaps have been trading sideways recently, but they found some support at the daily 20-EMA, which sparked a notable intraday rally. This rally pushed the MDY to test the range it’s been establishing since its initial move higher.

In yesterday’s session, the daily 10-EMA held up, which is a positive sign. However, the candlestick pattern indicates significant profit-taking in the MDY as it attempts to break out once again. Despite this, there’s still strength in the sector. While the MDY isn’t in a short-term uptrend at the moment, the increasing volume and the fact that many midcaps are in the process of rebasing suggest that there’s potential for another leg up.

Given these conditions, we’re optimistic that the MDY could experience further gains in the next week or so.

Russell 2000

Small caps are looking strong right now, with their daily 10-EMA showing solid support and price action tightening as volatility contracts. We’re quite bullish on small caps—if you haven't picked up on that already… This daily flag pattern we’re seeing is precisely what we hoped for.

While there aren’t a ton of standout small-cap setups at the moment, the current pause and sideways movement of the IWM (Russell 2000 ETF) is actually a positive sign. It’s giving stocks the time they need to rebase and develop secondary volatility contraction patterns (VCP) and daily bull flags.

DAILY FOCUS
Keep Scanning For Small Cap Set-Ups

Today’s focus shouldn’t be on adding new positions. We still believe that small and midcaps need more sideways consolidation before they set up for the next move. Instead, you should concentrate on running your scans and updating your watchlists with high-quality growth stocks. Look for those that are either forming new bases or those that have already had strong runs but might be a bit extended right now and could be gearing up for a pullback and rebase.

Remember, trading is about analyzing and researching the market. The real money is made by being patient and waiting for the right setups rather than rushing into trades. Don’t fall into the trap of impatience—take this time to prepare and position yourself for future opportunities.

One thing to mention is, if for whatever reason we start seeing the IWM and MDY breakdown and lose their current flag formations then this will be a big concern. As of now, we don’t see this as likely and we believe there is a green light for continuing to focus on growth names.

WATCHLIST
Our Two Favourite Stocks

KOSS: Koss Corporation

• Koss is a prime example of a stock that's incredibly explosive, even though it might not be a fundamental leader. It’s definitely one to watch if you're into momentum trading.

• We’ve discussed 3-day burst setups before—these involve very volatile stocks that can make massive moves, like +100-200%, in just a few days. Because of their poor fundamentals, we usually only trade their initial rally and take profits quickly.

• Koss is showing some tight consolidation right now, which is a good sign. With the IWM also tightening up and potentially gearing up for another rally, Koss has a high chance of making another significant move.

• For context, the last time Koss had a big move, it surged +140% in a single day. So, if you’re tracking momentum stocks, Koss is definitely one to keep on your radar.

HEPS: D- Market Electronic Services & Trading

• HEPS is a standout small-cap growth stock with impressive revenue and gross profit growth. It’s also made one of the most significant absolute moves in the past month.

• Right now, HEPS is forming a flag pattern in conjunction with the IWM, and we’re observing a textbook contraction in volatility. This setup is promising, but for it to play out as expected, HEPS needs to maintain its current pattern.

• Specifically, we need to see HEPS continue trading sideways and, importantly, hold the daily 10-EMA today. If it manages to do this, it could set up for a potential long position early next week, perhaps on Tuesday or Wednesday. So, keep a close eye on how it behaves around these levels.