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From Contraction Comes Expansion
Exposure Status: Moderate Risk
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OVERVIEW
A Wobble In The Bull Thesis
Yesterday’s session was quite a ride. Things kicked off strong with many stocks breaking out and extending their gains, showing solid bullish momentum right out of the gate. But as the day wore on, the mood shifted. All three indices lost steam after hitting fresh all-time highs on Wednesday. This wasn’t due to any bad news or fundamental reasons, which is why it’s worth paying attention to. It’s normal to see a bit of a breather after a strong rally, and there’s no need to panic just yet. Remember, after big moves, the market often needs to catch its breath.
Today is shaping up to be a critical day for the market, with two key events that could stir up some volatility. First, we have the GDP growth rate report. This number tells us how fast the economy is expanding. If the GDP growth beats expectations, it’s a good sign that the economy is still strong, which typically supports higher stock prices. But if the number disappoints, it could signal that the economy is starting to slow down, which might cause a pullback as investors adjust their expectations.
Later this afternoon, all eyes will be on Fed Chair Powell’s speech. This is crucial because we recently saw a major rate cut—50 basis points—the first in four years. That’s a big deal. The market is anxious to hear what Powell has to say about future rate cuts. If he suggests more cuts are on the table, it could be bullish for stocks, as it shows the Fed is ready to keep the economy supported. However, if he focuses on risks like a slowing labor market or hints at pausing rate cuts, it could unsettle investors, especially with concerns about a potential recession by mid-2025.
The Fed is in a tough spot right now, and so is the market. Yesterday’s pause likely reflects investors holding back, waiting to see how today’s events unfold before making big moves. The labor market has been cooling, and fears of a recession are bubbling up, so every data point and word from Powell will be closely analyzed.
It’s a delicate balance: the Fed needs to ease enough to support growth without letting inflation get out of hand again. But they also need to avoid spooking investors who are already jittery about whether the U.S. economy could crash due to poor monetary policy decisions. It feels like a lose-lose situation right now. The market is walking a tightrope, and today’s events could set the tone for what’s to come.
So, what does all of this mean for today’s session?
Stay cautious and keep an eye on how the market reacts—it’s a sensitive environment, and things could swing either way. That said, we still seem to be in firmly bullish territory, given the high efficacy rate of breakouts we’re seeing and the strong performance in growth sectors like Technology and the small-to-midcap space.
The market is currently gapping up significantly pre-market, which is always nice to see. However, it also makes us vulnerable to a potential fade at the open. A strong gap up can sometimes lead to profit-taking and a quick pullback, so it’s important to stay nimble. Realistically, today could be quite volatile, with a lot of up-and-down action. Keep your wits about you and be prepared for some choppiness as the market digests all the new information.
Nasdaq
QQQ VRVP Daily Chart
The Nasdaq is still trending sideways on low volume, consolidating around its daily 10-EMA and a significant supply level that has acted as resistance just below $490.
This five-day-long contraction is bullish—end of story. It signals that buyers and sellers are equally aggressive, but with many of the large technology stocks tracked by the QQQ rallying on impressive volume, it’s hard to argue that this is a bad sign or that a meltdown is imminent.
The Nasdaq remains comfortably above its point of control (POC) at $475. Any attempt to approach either the POC or the 10-EMA has been met with strong demand—a clear characteristic of a bullish market.
S&P Midcap 400
MDY VRVP Daily Chart
The midcaps took a hit yesterday, causing a bit of a scare as they dipped below their point of control (POC) level at $570, where they had been consolidating, and closed just barely above the rising daily 10-EMA.
Although it wasn’t a bullish day, it wasn’t necessarily bearish either. Let’s break it down. The MDY is still in a comfortable uptrend in the medium term. Today will be crucial for confirming whether the expected thesis—a strong period ahead for smaller-cap stocks (both small and midcaps)—will hold true, which is typical in a low-interest-rate environment.
The low volume indicates that buyers weren’t present to defend any levels, allowing sellers to take control with minimal resistance. This explains the drop to the 10-EMA without significant demand stepping in to cushion the fall. So, while yesterday’s action wasn’t ideal, it’s not a game-changer just yet.
Keep an eye on today’s session for more clarity on the midcap trend and we’ll be back tomorrow to evaluate.
Russell 2000
IWM VRVP Daily Chart
Small caps had the roughest time, enduring a significant five-day sell-off. They not only lost their point of control (POC) but also dropped below the rising 10-EMA, barely holding above the rising 20-EMA. This isn’t a good sign.
We really expected the 10-EMA to act as support, but it completely failed to do so, which is concerning. It seems likely that money is rotating into large technology stocks, as they’re performing well, and the QQQ reflects that strength.
Keep an eye on today’s session. We need to see a quick reclaim of the 10-EMA and a continued move higher, confirmed by an intraday retest, for the bullish thesis to remain intact. If small caps fail to regain this level, it could signal another tough period ahead for these stocks and raise serious concerns about the strength of this segment.
DAILY FOCUS
Are The Tides Changing?
Today is shaping up to be crucial as we determine whether we’re genuinely on the cusp of the expected expansion in the coming months or if we’re simply being teased before facing more challenges. Large technology stocks are performing well, along with other sectors, but the areas we anticipated to see expansion are lagging. This could suggest that the big players—institutional investors who ultimately drive the market—may not be as bullish as we initially thought.
We have the GDP growth rate report and Fed Chair Powell’s speech today, which could serve as the catalysts we’ve been waiting for to provide the market with the confidence it needs to rally. Who knows what the outcome will be?
Currently, we have a solid list of strong stocks in our portfolio, and we’re seeing healthy profits. There’s no reason to sell anything just yet. We’ll be moderately risk-on today, meaning we’ll take a step back to protect our existing positions before opening any new naked risk in the market. Waiting for Powell’s speech to pass might be the smart move, as intraday volatility could be quite high.
Remember, as traders, our main job is to manage our risks and protect against worst-case scenarios. Stay patient, stay stoic, and always safeguard your principal capital.
WATCHLIST
From Contraction Comes Expansion
MU: Micron Technology, Inc.
MU Daily Chart
Micron (MU) had a standout day yesterday, surging around 10% in after-hours trading following an impressive earnings report that surprised to the upside.
Earnings per share came in at $1.18, beating estimates by $0.06, while adjusted gross margins also surpassed expectations at 36.5%. The guidance was equally strong, with the company forecasting Q1 revenue between $8.5 billion and $8.9 billion, well above the estimated $8.32 billion. Additionally, the Q1 adjusted earnings per share forecast exceeded expectations, signaling that chip demand remains high.
This performance serves as another lead indicator that large AI-related stocks are in a good position, attracting significant investment.
Today, we’ll be looking for an entry on MU, targeting its earnings-based episodic pivot using the 5-minute opening range high as our entry point—as always with a half sized risk due to Fed speech this afternoon.
GEVO: Gevo, Inc.
GEVO Daily Chart
GEVO has set up one of the most impressive and textbook scenarios in the fast-moving renewable chemicals sector.
With an average daily range (ADR) of 15%, this stock has the potential for rapid rallies of 100-200% in just a day or two. The recent volatility contraction in both trading range and volume, along with the rising 10-EMA after a substantial over 100% move, positions GEVO as one of the top stocks on our watchlist.
Given the stock's high volatility and inherent overnight risk, we would look to take profits relatively quickly. However, a breakout on high relative volume—especially in reaction to the GDP rate or Fed speech—could lead to significant gains and rapidly boost your account growth.
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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