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Thursday Was A Bear Trap?

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OVERVIEW
Market Still Looks Strong

Percentage of Stocks Above Daily 20 & 50 EMA

Thursday’s session saw the first negative spike in market breadth for the stocks trading above both the daily 20-EMA (top chart) and 50-EMA (bottom chart) in the last month. This occurrence is common in uptrends, especially when volatility is high. Pullbacks to the rising daily 10-EMA on the major indices (particularly SPY and QQQ) can cause weaker stocks to subsequently depreciate below their daily 20 or 50-EMAs, especially if they were lagging behind the leaders.

Thursday’s session demonstrated this dynamic. In fact, Thursday was actually a blessing in disguise if you managed your risk well and didn’t panic sell your positions out of fear. If a stock which you were looking at and had in your watchlist or open exposure on saw a real signfifcant sell-off breaking all technical support levels on that day then this stock had no real demand behind it and was going to fail in the future and any upward moves wouldn’t have had any real follow through behind them.

If you notice the way the leaders are acting, almost all of them are still holding above their fastest daily 10-EMA if they had already broken out of their volatility contraction patterns (VCPS), for example:

COIN: Coinbase Global, Inc

COIN Daily Chart

MSTR: MicroStrategy Incorporated

MSTR Daily Chart

We would like to focus your attention on the last two trading sessions for both COIN and MSTR. Notice how on Thursday, both stocks experienced a bearish engulfing candle, erasing several days of progress. However, on Friday, both stocks saw the exact inverse—a bullish engulfing candle on high volume, demonstrating exceptional demand that completely reversed Thursday’s price action.

This indicates that buyers are aggressively stepping in to accumulate shares whenever the stock dips, especially on a pullback to the rising daily 10-EMA. This is a key indicator for gauging whether the long trade you are in has a high expectancy of continued follow-through and whether the buying momentum is strong.

What does this mean?

Simply put, we don’t believe the rally is “over” or anything of the sort. Friday was a strong recovery day for almost all the leading growth stocks we are watching, and we still believe this is the early stage of an advanced uptrend that has yet to reach its climax.

Looking at the breadth analysis we touched on earlier, this highlights the importance of being selective in what you decide to trade. A large number of stocks were in bases, and the last two sessions separated those with actual demand from those experiencing sympathy momentum.

Nasdaq

QQQ VRVP Daily Chart

The Nasdaq had a strong recovery on Friday, with demand kicking in at the daily 10-EMA. The Visible Range Volume Profile (VRVP) shows mostly buying volume on the dip to $451, where the QQQ subsequently bounced higher.

There was a clear rejection at the psychological level of $460 on the day Nvidia posted earnings, resulting in an overwhelmingly bearish day that likely caused significant panic for inexperienced traders. As we mentioned on our Twitter, where we provide intraday updates, Nvidia’s strong earnings beat resulted in a market-wide sell-off. This was likely because it drained a large amount of liquidity from the market, as investors sold positions in other stocks to buy shares in NVDA, which saw $80 billion of dollar volume in a single session.

Another explanation for the market behavior is that when a security is trading at all-time highs, it lacks any technical overhead resistance. Traders typically use historical supply and demand zones to identify levels for buying or selling, but these zones don't exist at all-time highs. As a result, psychological levels such as $460 or the upcoming $500 become key points where traders might take profits.

We are looking to see the QQQ hold above the daily 10-EMA and start to break above $460 this week, which we deem to be a higher probability scenario than any further consolidation or continued pullback. This will likely coincide with a breakout in several leading stocks, some of which we discussed above, providing traders with opportunities to add exposure or enter low-risk long positions.

We already own COIN and MSTR, which we analysed above, and thus we will look to add to our long positions in these stocks.

S&P Midcap 400

MDY VRVP Daily Chart

The midcaps are in a multi-week Volatility Contraction Pattern (VCP) visible on the weekly chart and are currently trading below their Point of Control (POC) at $546. Friday was a strong day, allowing the MDY to reclaim +1.06% of lost ground and close above its daily 20-EMA, though it remains in a pivotal spot.

Firstly, the midcaps are still trading below both their POC and daily 10-EMA. The Visible Range Volume Profile (VRVP) analysis highlights greater selling pressure as the MDY trades between $547 and $555. A strong shift in underlying investor sentiment within the midcap space is required to see buyers finally push the MDY above the $556 resistance level from mid-March.

We need to see the POC be taken over this week, which would significantly increase our confidence in reaching all-time highs in the MDY in the coming weeks.

Given how the QQQ is trading and the volume of setups that exist, we remain optimistic that the midcaps will perform well.

Russell 2000

IWM VRVP Daily Chart

The small caps are looking healthier than the MDY, although still very much in the same situation. Demand kicked in, allowing half of the lost ground on Thursday to be reclaimed. However, there is still work to be done.

The IWM rests below its POC, which acted as intraday resistance on Friday. Although it held above the daily 20-EMA, the volume for the day was rather low, falling short of what we hoped would be a much stronger recovery.

We need to see the IWM push above $206, ideally, on high volume and find support at its POC; otherwise, this would be rather alarming. A break above this level should allow for a swift move back up to $208, given the low volume cluster seen on the VRVP.

Given the large upward volume (blue) below the POC, we are optimistic and suspect the IWM will close the week higher than today’s share price.

DAILY FOCUS
Calm & Collected

The market still looks strong, and given the action in leading stocks, we believe there is no reason to be alarmed. Friday was a strong session, and we expect to see more of the same bullish action for the remainder of this week.

We have allocated a moderate risk status as we want to see whether the market can fully reclaim all of its lost ground from what we suspect was a bear trap on Thursday. This would involve the QQQ, MDY, and IWM all trading higher, with the QQQ at all-time highs and both the MDY and IWM firmly above their POC and daily 10-EMAs on strong market participation.

We will look for secondary entries on stocks we already have long exposure to, especially those exhibiting the greatest relative strength to the market. We won’t be looking for many new trades due to the high number of setups in stocks we already have exposure to.

If we see the market pull-back, we will not add exposure and instead stay risk off for the day.

WATCHLIST
Potential Set-Ups

CIFR: Cipher Mining Inc

CIFR Daily Chart

  • Almost all BTC-related stocks, including COIN, MSTR, CLSK, MARA, and IREN, have been performing very strongly in the last week, breaking higher in accordance with BTC breaking new ground.

  • CIFR is forming a Volatility Contraction Pattern (VCP) and held up above its rising support level during Thursday’s sell-off.

  • The company boasts strong fundamentals and is highly volatile, potentially offering gains of +50-100% over a short period of time.

  • This is certainly a more speculative trade, given how small caps have been trading. However, if the IWM can push higher, CIFR will likely follow suit, as have other stocks in its sector.

TSLA: Tesla, Inc

TSLA Daily Chart

  • Tesla continues to trade within its Volatility Contraction Pattern (VCP) after experiencing a failed breakout on Tuesday, which stopped us out.

  • The stock has faced challenges in recent months, but the fundamental story behind TSLA is improving, particularly after implementing job cuts, which unfortunately can improve businesses' bottom lines.

  • TSLA will present a strong long trade opportunity upon a break above $181.50. Such a move would signify a significant shift in multi-month momentum, potentially marking the beginning of a brand new stage 2 uptrend.

  • This could prove to be very profitable, as stage 2 uptrends typically offer several secondary and tertiary opportunities to scale up exposure with minimal risk.

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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