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We Are A Little Worried

Swingly Exposure Status: Risk Off

OVERVIEW
Bearish Breadth Divergence

McClellan Summation Index (credit: stockcharts)

One of the most valuable skills any swing trader must possess is the ability to interpret momentum, sentiment, and most importantly, sense a shift in behavior and trends. Over the past several sessions, since Nvidia absorbed much of the market's liquidity, we've observed a continuous negative trend in market breadth, with three out of every four stocks failing to make new relative highs. Almost all stocks that have set up and broken higher in the last week, regardless of market conditions, have struggled to push above their ranges.

The McClellan Summation Index (NASI) is a market breadth indicator derived from the cumulative values of the McClellan Oscillator, which measures the net difference between advancing and declining stocks on the Nasdaq Composite. A rising NASI suggests bullish market conditions with broad-based strength, while a falling NASI indicates bearish conditions and market weakness. In the past week or so, the NASI has peaked and has since been in retreat, indicating a decline in market breadth, and is currently testing its rising 10-EMA. Additionally, the Moving Average Convergence Divergence (MACD), which also depicts momentum, has started to curl to the downside in accordance with the NASI.

What does this mean?

So far, this has resulted in a highly selective rally. Fortunately, our portfolio includes some of the few leading stocks that are making new highs, primarily $NVD3, a triple-leveraged Nvidia ETF, which is helping to drive our performance.

This indicates it's time to reassess exposure level. A negative breadth, where the majority of stocks are struggling to make new highs, undermines a healthy uptrend. In such conditions, it's challenging to justify taking on new long positions when over 75% of stocks are underperforming.

Nasdaq

QQQ VRVP Daily Chart

The Nasdaq's recent surge is largely driven by Nvidia. This is evident given that the QQQ is a capitalization-weighted index, and Nvidia, one of its largest components, has seen the most significant percentage increase over the past week compared to other companies.

The QQQ continues to rise on decreasing volume, consistently trending above its 10-day EMA and reaching new all-time highs almost every session since the VCP break in early May. The Visible Range Volume Profile (VRVP) remains bullish, with predominantly buying volume at increasingly higher share prices.

QQQ Hourly Chart

In the last three trading sessions, however, we have observed the Nasdaq stalling as it approaches the psychological resistance level of $460, where it faced rejection on Thursday. During yesterday’s session, the final hourly candle indicated a breakout attempt in the power hour (the last hour of trading). However, in after-hours and pre-market trading this morning, the QQQ faced rejection again.

S&P Midcap 400

MDY VRVP Daily Chart

The midcaps are exhibiting a multi-week Volatility Contraction Pattern (VCP) on the weekly chart, appearing quite vulnerable. Firstly, the MDY was rejected for the second time at the falling 10-EMA and additionally dropped below the daily 20-EMA late on Tuesday, with minimal support from buyers to counter this rejection.

The Visible Range Volume Profile (VRVP) reveals an even more concerning scenario. Below the current share price of $541, there is a significant volume gap extending down to the Point of Control (POC) at $530, coinciding with an unfilled gap from the early May breakout that initiated the recent rally.

We really need to see support at the daily 50-EMA to prevent any breakdown below at least $539. Without this support, the MDY is likely to enter a freefall, erasing all progress made over the past month.

Russell 2000

IWM VRVP Daily Chart

The small caps appear weak, though not as weak as the midcaps. There was a clear rejection at the Point of Control (POC) late last week, and yesterday saw the declining resistance line at $207 cut off any attempt to break above a now two-week declining level of resistance.

The IWM found support as it attempted to undercut its daily 20-EMA yesterday, which is a positive sign. However, it has firmly gapped below this zone in premarket trading and is now testing the daily 50-EMA.

It is crucial that, similar to the midcaps, the 50-EMA holds. If this support is undercut, there will likely be a significant sharp pullback down to $199 to fill the gap..

DAILY FOCUS
Sit On Your Hands- Wait

The market indeed appears vulnerable, and our strategy for the day will be to maintain the status quo. We already hold several quality stocks that are performing well, keeping our account at all-time highs, and we intend to continue holding these positions. Today, we won't be initiating any new stock purchases unless there's an unexpected surge in demand that significantly improves breadth, such as seeing the IWM, MDY, and QQQ all break above their declining levels of resistance simultaneously, although such an event seems rather unlikely.

The market operates in cycles, and at this juncture, it's sensible to maintain open exposure in the quality stocks you should own by now. This is a time to exercise patience and allow these trades to unfold naturally. Rather than staying in cash and attempting to time entries, it's more beneficial to remain invested and let the market cycles work in our favour.

If you missed stocks such as NVDA, COIN, CLSK, SMCI, MSTR, etc you must evaluate your process.

WATCHLIST
The Leaders

NVDA: NVIDIA Corporation

NVDA Daily Chart

  • A company worth more than the United Kingdom is going parabolic.

  • Nvidia continues to make unbelievable gains, with incredibly high buying pressure driving the stock to gain almost $600 billion in market capitalisation within a week of trading.

  • We anticipate a pullback soon as NVDA is significantly extended above the 10-EMA. However, given the level of institutional sponsorship, the timing and extent of such a pullback remain uncertain.

  • We are eyeing a secondary add spot on a potential pullback.

COIN: Coinbase Global, Inc

COIN Daily Chart

  • COIN appears incredibly strong, especially with BTC and ETH both soaring. Shares of Coinbase are poised to continue their upward momentum.

  • The stock demonstrates relative strength compared to the equities market and is outperforming major cryptocurrencies due to its higher ADR% (Average Daily Range).

  • We augmented our long position yesterday, initially established at $223. With both volume and price on the rise, we anticipate COIN has substantial potential to surpass $300 in the near future.

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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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