OVERVIEW
The Era Of Small Caps Continues

Last week was relatively calm in the markets, but we continued to see a trend of selling off big tech stocks, with funds rotating away from the Nasdaq and into more speculative sectors. Some major companies like Spotify, Alphabet, and McDonald's had their earnings reports, which weren't too bad, but their stocks still reacted negatively. This suggests that the sell-off in large-cap stocks may not be over yet, and we might see more weakness in this area.

We will be seeing over one-third of the S&P 500's earnings reported this week. This is largely because Microsoft will report on Tuesday afternoon, Meta on Wednesday after the market closes, and Apple and Amazon on Thursday post-market. These four companies make up nearly 20% of the S&P 500 index, so any significant moves in their stock prices will have a big impact and drag down the general sentiment of the market.

After last week's disappointing earnings led to a sharp drop in tech stocks and the S&P 500's worst day since December 2022, the markets are likely to be on edge this week. While this might not affect small and midcap stocks in the Russell 2000 and S&P Midcap 400 as much, the overall pressure is likely to continue.

If this week's tech earnings show any weakness, it could definitely exaggerate the issues we saw last week. There's been a lot of excitement about AI, which has caused a bit of a bubble among the big players in the space. This is probably why the sell-off has been so intense recently in the SPY and QQQ, with stocks like Nvidia experiencing a serious breakdown and mean reversion.

What does this mean for growth stocks?

We're still very bullish on the more speculative parts of the market. Anything micro to mid-cap is likely to stay resilient and shouldn't be too impacted by the large-cap sell-off. This is because the money isn't leaving the equities market altogether—evident from the declining 10-year treasury bond yield—it's just being redirected to other areas. This gives us an added layer of confidence. Now is the time to actively scan the markets and take risks on long trades, especially on stocks that have been severely beaten down over the last two years.

Nasdaq

The Nasdaq continues to take a beating, and it looks even worse when you see how low the green day volumes are compared to the massive red day candles, which have dropped the QQQ by 10% in just two weeks.

We previously mentioned that reclaiming the daily 50-EMA was crucial to avoid a further decline to the daily 200-EMA. Unfortunately, there was almost no buying pressure to defend the $470 level. Instead, we saw a significant drop, leading to a slight bounce at the $462 demand zone. This zone is the last line of defense on both the daily and weekly charts, and on the weekly, it aligns with the 20-EMA, which has been respected so far.

For big tech to recover, it's critical that the QQQ holds the $462 level and the weekly 20-EMA. This is especially clear when you look at the weekly chart. The point of control (POC) is at the $440 level, which aligns with the daily 200-EMA and marks the next significant support area. If we don't see consolidation or buying pressure soon, $440 will be the next stopping point for the QQQ.

Watch these week’s big tech earnings closely as if they are poor, a nice short opportunity on the QQQ will be very attractive with a target of $440-$435.

S&P Midcap 400

The midcaps are looking increasingly promising each day. They’ve recently broken out of the descending daily range established since their high on July 16th and are now gapping up in pre-market trading, which suggests the breakout could continue.

The secondary flag that the MDY formed after its initial breakout from a multi-month range is a classic volatility contraction pattern. This confirms that midcaps are now in a stage 2 uptrend. The daily 20-EMA has provided solid support, leading to a surge in buying pressure.

We’re even more excited about the potential for midcaps this week, as many are likely to rise alongside the MDY. This sets the stage for more opportunities and emerging setups in the market.

Russell 2000

The IWM also saw a rise on Friday, just managing to break above its recent range and test its previous highs. However, we're not entirely convinced about the strength of this breakout, given the lower volume on Friday. Typically, we'd expect the security to tighten its volatility contraction pattern (VCP) while forming its daily flag before a more pronounced high-volume breakout—similar to what we saw on the initial breakout candle from July 11th.

There’s a chance we could see the increased volume we were hoping to see on Friday come in today, especially since the Russell 2000 is gapping up. That would be ideal for confirming the breakout. If the volume doesn’t pick up, we might see some more sideways consolidation, with the IWM potentially revisiting its range before setting up for a breakout in the coming sessions.

DAILY FOCUS
Small Cap Summer Is In Play

Every trader right now is asking the same question: which small-cap stocks are the most volatile, the most beaten down, and poised for a huge rally when they break out?

If you’re not thrilled about finding the answer to this, you might be in the wrong game. We’re in a rare opportunity where the failure rate of small and micro-cap stocks is low, and everyone’s targeting them, which ramps up their volume on breakouts and adds more fuel to the fire.

Our trading desk’s strategy for the near future is to focus less on fundamentals and more on technicals. In times like these, the charts will tell you everything you need to know. We’ll be trading short-term momentum plays and building up positions with size.

That said, this doesn’t mean we’re abandoning risk management. Instead, it means being confident in your analysis. When you spot a stock that excites you, trust your instincts. These stocks come with high risk and high reward, but if you stay disciplined and focused on making the right entries, you can manage that risk and see gains like you won’t believe.

WATCHLIST
Our Favourite Momentum Movers

KOSS: Koss Corporation

• KOSS continues to tighten up after its incredible +200% rally over just two days. Given its recent explosive move, we’re keeping a close eye on it to see if it can pull off another breakout.

• We’re planning to trade this as a short-term swing over 2-3 days, but only if the breakout happens, considering the stock’s high volatility. This approach offers the potential for rapid gains with relatively low downside risk.

• Since KOSS can be very choppy, we’ll be increasing our position size on the initial day to 2R. To manage risk, we’ll close out half of the position the same day, protecting ourselves against any potential after-hours gaps down.

HEPS: D-Market Electronic Services & Trading

• HEPS is another standout with genuine fundamental growth. It’s demonstrated a steady rally, consistently respecting the daily 10, 20, and 50-EMAs, which indicates significant institutional backing.

• We’re excited about the flag pattern it's forming and the drying up of volume, which suggests a potential breakout today or tomorrow.

• We plan to enter HEPS with a sizable position, around 1.5-2R, given the favorable macro conditions and the strong likelihood of a high-efficacy breakout.

PRCH: Porch Group, Inc

• PRCH was a big winner for us a few months ago, but it has since been beaten down significantly.

• The stock is now showing signs of a resurgence ahead of its earnings report in early August. It’s forming a flag pattern on the daily chart that could lead to a substantial rally, potentially breaking above its descending 200-EMA and moving back toward the $5 level it traded at a few months ago.

• While the current volume pattern isn’t particularly impressive—we’d ideally like to see stronger demand pushing the stock into this flag—if we see high volume on a breakout, we’ll be looking for an entry.